World oil demand rose by 3.2 per cent to about 82 million barrels a day (b/d) in 2004 and is expected to rise to 84 million b/d this year, a 2.4 per cent increase on 2004. With crude demand on the up, the need for more refined products is rising too. In the US, for example, strong economic growth is fuelling demand for gasoline, while Asian countries, led by China, are absorbing everything the industry has to offer.

This is good news for refiners. The growing need for petroleum products, particularly lighter, high-quality fuels, in the past two years has led to a rise in prices and a significant improvement in refineries' economics. 'Refining margins are higher than in recent years,' Lawrence Anness, director at the UK office of the US' Solomon Associates, said at a conference in Dubai in February. 'In Western Europe [gross margins have risen] from about $3.80 a barrel in 2002 to about $8.80 a barrel in 2004, in the Gulf from $1.35 a barrel in 2002 to about $4.80 a barrel last year.'

Prices have been bolstered by a dearth of new refining capacity, which has led to a squeeze on existing capacity as demand has risen. Last year, worldwide refining capacity rose by about 350,000 b/d to more than 82 million b/d. But according to Vienna-based PVM Oil Associates, spare refining capacity has still dropped significantly in the past two years.

Spare capacity among the key refiners in 15 EU nations plus Norway, Japan, South Korea, China, Singapore and the US dropped from nearly 7 million b/d in early 2002 to just above 2 million b/d by the end of September 2004 - despite higher refinery utilisation rates.

For Middle East and North Africa refiners, which at about 7.2 million b/d have an 8.5 per cent share of the world's total capacity, rising demand presents opportunities as well as challenges. On the one hand, they are trying to satisfy rising domestic demand. In Dubai, for example, motor gas demand is rising by 10-15 per cent a year, while gasoline demand in Iran is rising by 9 per cent. On the other, they are looking to grow their export share.

The Asia-Pacific region, which is already a key export market for Middle East refiners, will grow further in importance, with China in particular offering vast potential. The country is already a net exporter of naphtha, jet kerosene, gas/diesel oil and fuel oil, and has also started to import gasoline. In 2015, gasoline imports alone are expected to reach 367 million barrels from only 15 million barrels in 2003, according to Satvinder Roopra, vice-president at the downstream oil desk of the US' Wood Mackenzie.

Improvements

Managing demand is not the only issue facing refiners. Due to their age, the region's refineries, some of which were built as long ago as 1909, generally lack technical sophistication. If they are to compete globally, they have to improve their product specifications to meet stricter environmental standards that are being introduced in the US, Europe and - increasingly - Asia and the Middle East itself. Since the beginning of the year, Europe has required sulphur content in gasoline and diesel fuel to be lowered to no more than 50 parts per million (ppm). In the US, sulphur levels will have to drop to 30 ppm in gasoline and 15 ppm in diesel from 2006. China too is considering imposing tighter sulphur limits.

Sulphur levels in diesel from the Middle East, however, are largely above the international norms at 350-2,000 ppm or more, according to Solomon Associates. At pres