Middle East refiners make up the core of this activity. Even a cursory glance at last week's Special Report (MEED 2:6:06, pages 45-65) reveals the sheer scale of investment taking place in the region. Saudi Aramco alone is pursuing more than $30,000 million worth of projects, from greenfield and brownfield refineries now under development in the kingdom to proposed capacity expansions in the US, Asia and the Far East.

Put in a global context, however, the future of these refineries can look a little uncertain. As a recent report by UK-based Wood Mackenzie points out, the Gulf has huge strategic advantages over its competitors, including cheap reserves and low production costs, and the flexibility to tailor new export capacity to the specific fuel needs of different regions, including new fuels legislation. Pitted against these benefits, however, is the region's dependence on foreign expertise to implement projects and its reliance on distant markets.

The regional industry also faces competition from the vast quantity of planned refining projects that have been unveiled elsewhere in the world. By the end of January 2006, approximately 500 new projects had been announced, according to Wood Mackenzie. Of these, some 66 are new-build refineries, with no doubt more being considered in-house.

What no-one in the industry disputes is that new refining capacity is needed, and needed now. Spare global capacity has been declining steadily for more than a decade, and has

nosedived in the last three years. At its peak in the 1980s, spare capacity came close to

19 million barrels a day (b/d) this is now down to less than 3 million b/d.

In the short term, the situation seems dire. Recent bottlenecks in the US downstream sector have been compounded by seasonal maintenance work as well as tough new environmental legislation (see box). The European industry is already bound by strict regulations, and although it still has a substantial refining industry, it has 'a burgeoning surplus of gasoline and an increasing deficit of middle distillates', says the report. 'There is a chronic imbalance between the supply and demand of individual products.'

As a result, most new refining capacity will have to be built in the Middle East, India and China. But the long-term future of these projects is by no means secure. If all 500 projects came on stream as planned over the next decade, this would lead to an increase of about 18 million b/d in crude distillation capacity substantially more than oil demand growth forecasts of 15 million b/d in the next 10 years. The concern is that a surge in excess capacity, coupled with any short-term slowdown in growth, could lead to a repeat of 1997/98, when a combination of the Asian economic crisis and a burst of new projects coming on stream pushed refining margins through the floor.

In practice, however, these fears are probably exaggerated. Of the 500 announced investments identified and then ranked by Wood Mackenzie, many are unlikely to see the light of day. Projects, particularly greenfield projects, will inevitably be culled due to weak financial and technical support or poor alignment with intended markets examples include export-oriented refineries in Africa targeting the US. Of the 18 million b/d in incremental capacity on the drawing board, probably only 8 million b/d is realistic, says the report. The lesson for Middle East

producers is to keep one eye on regional projects

markets beyond their own, but to take

advantage of current market conditions to beat competitors to the post.