REFINING:What the market wants

07 October 2005
The Jamnagar refinery in the western Indian state of Gujarat is already considered to be the world's largest grassroots refinery, and work is under way by employees of the US' Bechtel on front-end engineering and design (FEED) work to double capacity. Costing $4,000 million, the 1.2 million-barrel-a-day (b/d) facility is being designed to process a variety of crudes. The final products will be in line with ever-tightening international specifications for oil products.

'The [refining] industry is going through rapid changes and the demand will be for ultra-low sulphur derivatives. The diesalisation of Europe has also set new parameters,' said PMS Prasad, president and chief executive officer (petroleum business) of Reliance Industries, the refinery operator.

Unfortunately for consumers, the Jamnagar expansion is an exception. With historic low returns and tight US regulations, the refinery sector has attracted meagre investments in recent years. But with global demand for refined products projected to increase by 40 per cent in the next two decades and refining margins showing clear signs of a major pick-up, a new thinking is gaining ground. 'We are moving from a vicious to a virtuous circle. Refining margins are expected to increase to $7.10 [a barrel in 2004-07] from the previous $3.40 [a barrel during 2000-03],' he said.

The Gulf states have responded with new investments aimed at the addition of 2.1 million b/d of new capacity. The most advanced scheme is the grassroots 615,000-b/d refinery at Al-Zour in southern Kuwait, where a prequalification exercise is under way for engineering, procurement and construction (EPC) contractors. Further south, Saudi Aramco is evaluating a feasibility study submitted recently to build two new refineries at Yanbu and Jubail, each with capacities of 400,000-420,000 b/d. Refinery work is also at various stages of implementation in Qatar, Iran and Iraq.

Global demand

Despite all these efforts, however, the planned investments are unlikely to meet global demands. In addition, the Saudi and Kuwait projects - which together will account for 71 per cent of the total new capacity planned in the region - are designed to process heavy crudes, meaning that demand for low-sulphur derivatives will not be satisfied.

'There will be a need to upgrade the existing refineries,' said Waleed al-Hashash, assistant managing director (marketing) at Kuwait Petroleum Corporation. 'The demand for low-sulphur products will rise exponentially and we will need sophisticated kits.' There has been investment in cleaner fuel refining capacity - the UAE and Kuwait have initiated programmes to modernise their refineries, including the construction of green diesel processing facilities. But these efforts are mostly aimed at meeting domestic demands. The Middle East has yet to step up to the refining challenge, and even when it does the results will not be visible for several years to come.

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