November 20, 2019

Asia Pacific Refining 2019 Roundup

Stratas Advisors

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The refining industry in the Asia Pacific region is on track to add about 1.61 million barrels per day (bpd) of CDU capacity in 2019, far exceeding incremental oil demand growth of about 440 mbpd for the same year. Total capacity additions exclude various small-scale refinery upgrades in China. Four major refineries with a combined CDU capacity of 1.26 million bpd have been completed this year. The remainder come from CDU capacity expansion in India.

The four major refineries are deeply integrated with petrochemical production units. Two major crude-oil-to-chemicals (COTC) projects with a combined CDU capacity of 800 million bpd were commissioned between May and July of 2019 in China. Malaysia’s Petronas started trials at the 300 million bpd RAPID refinery in Pengerang in 1Q 2019. Hengyi Petrochemical of Brunei started its 160 million bpd refinery in 3Q 2019 and began full-spec production of olefins and aromatics this month. In India the expansion of the Bina Refinery, operated by Bharat Oman Refineries, was completed in 3Q 2019 with total CDU capacity expanded from 120 million bpd to 156 million bpd. 

New refining capacities come online at a time when oil-product markets are oversupplied with rising exports from the US, Middle East and China, putting downward pressure on product crack spreads and refining margins. There has been growing competition among key exporters for refined product markets across the Asia Pacific region. Australia, Vietnam, Indonesia and some smaller oil markets, including Cambodia, Myanmar, Bangladesh, Pakistan and Sri Lanka, are key battle grounds for export-oriented refiners.

In 2019, one of the key developments is the startup of COTC projects in China. China’s COTC projects have been making headlines in recent years because new privately owned refineries are larger in size and are extensively integrated with petrochemical plants. These refineries have the ability to directly compete with the state-owned refineries, and they threaten the existence of small independent refineries. Two other COTC projects are in developmental stages in China. All COTC projects are designed to maximize petrochemical production. Given China’s current oil product surplus, this essentially means that China’s CDU capacity additions are driven mainly by its objective of achieving self-sufficiency in petrochemical supply rather than oil products. Therefore, any incremental petrochemical capacity additions are leading to increased oil product surplus. Furthermore, China’s refining industry is becoming increasingly complex and export-oriented compared to a decade ago, when the country struggled to boost refining capacities for domestic consumption. 


Integrated Refining Projects Completed in 2019 and Planned COTC Projects


Source: Stratas Advisors

Looking forward, a large share of refining capacity additions in Asia will come mainly from China in 2020 and beyond. The largest share of refining capacity surplus will be concentrated in China. In 2018, China surpassed the US in terms of surplus CDU capacity. Stratas Advisors thinks that China’s spare CDU capacity will continue to increase unless the government scales back new refinery investments in light of slower oil product demand growth. China’s oil product exports, especially gasoline and diesel, will continue to rise along with other petrochemical products. This will put regional refineries at risk.

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The rise of export-oriented refineries in China, combined with surplus capacity, has contributed to the supply overhang in oil product markets. Asia’s markets have been awash with ample supplies this year. Gasoline exports from China and South Korea have been rising much faster compared to exports from India and Japan. Growing domestic demand in India has cut surplus gasoline available for exports. China’s gasoline exports grew about 16.3% in 2018, and diesel exports are expected to post double-digit growth in 2019. Incremental gasoline and diesel supplies, combined with strengthening crude oil prices, are putting downward pressure on refining margins. Recent refining capacity additions in China, Brunei, Vietnam and Malaysia may further exacerbate the refining profitability. In 2020, complex refineries are expected to count on IMO compliant Very Low Sulfur Fuel Oil (VLSFO) as a key source of profits given currently higher crack spreads and an anticipated spike in demand in 2020 and beyond.

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Insight Chart 3 San

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