Asia 2012 refining profits to fall

Asian refiners could earn as much as 20 percent less in 2012 from processing a barrel of crude into fuel than this year's average, as they get pinched between new additions to capacity and expectations of slowing global demand growth.
Reduced earnings may mean complex refineries that are able to process cheaper heavier crudes into cleaner burning fuels will benefit at the cost of older, simpler plants that need more expensive higher quality oil to make such products. Tighter margins for the simpler plants could force them to cut output.
A prolonged decline may also bring delays to expansion plans, threatening to squeeze supply in years to come.
Industry executives are already cautioning against expansion of plants, particularly those exporting their output, in a sign the outlook is turning bleak. Some may get into petrochemicals to offset reduced earnings as refining margins slide.
"The refinery business is not a piece of cake anymore," Bhavana Suphavilai, president, PTT Energy Solutions, said at the Singapore International Energy Week.
"The trend, moving forward, will be for refiners to look for partnerships with petrochemical companies."
China and India were exceptions since they were adding refinery capacity in a bid to become self-sufficient, she added.
Asian refining margins measured against Brent crude may be around $7 to $8 a barrel compared with around $8 to $10 this year, says Sonia Song, HSBC's Asia head for oil and gas research. This is based on estimates that the average price of Brent crude is around $90 a barrel in 2012 and $110 this year.
Energy consultancy JBC Energy expects margins against Dubai crude to be down to an average of $4.00 a barrel next year from $6.00 a barrel this year.
For now, the industry is banking on China's gasoil demand to help support margins. Rising local consumption in the world's second-biggest economy is restricting exports, partly helping to push diesel cracks, or profits from producing the fuel, to $24 a barrel in April, the highest since 2008.
"Gasoil will remain the margin driver in Asia next year," said Vienna-based David Wech of JBC Energy. "China is expected to be the single largest contributor to global gasoil demand growth."
Gasoil is part of a group of refined products known as middle distillates, which accounts for around 30-40 percent of a refinery's output and is generally the most profitable segment.
Supplies of most other fuels such as gasoline, naphtha or fuel oil are expected to be ample, offering limited support to overall refining margins.
REFINING MARGINS
"Gasoline does not have as much upside as diesel because of the surplus in the Atlantic Basin," said Wood Mackenzie analyst Sushant Gupta. "That would have some bearing on the crack spreads."
Several events helped keep refining margins firm this year -including reduction in exports from China and Japan to outages at two major refineries in the region.
Those margins will come under pressure as refiners expand in 2012. Asia is expected to add 900,000 bpd of refining capacity, mainly in China, next year and 100,000 bpd in the Middle East, according to Zhang Liutong, a Singapore-based senior analyst at FACTS Global Energy.
"In 2011, not much net refining capacity was added, with estimates at around 430,000 bpd in Asia and 110,000 bpd in the Middle East against relatively strong demand," Zhang said.
"As capacity additions are projected to slightly outpace demand east of Suez in 2012, refining margins are likely to ease from 2011."
Wech of JBC is also expecting capacity addition of about 840,000 bpd next year.
"In 2010, Asian refining capacity rose by 3 percent year-on-year to reach almost 28.2 million bpd. In 2011, there was a relative slowdown in capacity additions, with growth seen at 2 percent year-on-year," said Wech.
"Next year, we anticipate Asian capacity to increase by 2.9 percent to hit 29.56 million bpd compared to global refining capacity expansion of 1.7 percent."
DEMAND OUTLOOK
A weakening global economic outlook will also weigh on margins, analysts said.
The International Energy Agency, an adviser to 28 industrialized countries, last month cut its global fuel demand growth forecast for 2011 by five percent, or 50,000 barrels per day, to 990,000 bpd. Next year, the IEA said, world oil consumption will expand by 1.25 million bpd, or 160,000 bpd less than previously expected.
Oil producing group OPEC cut its global oil demand growth forecast for a fourth consecutive month, citing an economic downturn in developed countries and efforts by China and India to curb fuel consumption.
China's oil demand growth next year is unlikely to revisit the blistering pace of 2010 but is expected to come in at around 6 percent, similar to 2011.
Asian refining margins benefitted from a series of supply shocks this year. China, a top exporter to the region, stalled shipments late in 2010 to meet a spike in domestic demand triggered by a power shortage that prompted the use of diesel in small generators.
While the market was still recovering from the disruption to Chinese exports, the March earthquake in Japan crippled refineries there and cut supplies from Asia's second-biggest exporter of the fuel.
At the end of July, Taiwan's Formosa refinery, Asia's fifth-largest, was shut after a fire, and another fire in late September at Royal Dutch Shell's (RDSa.L) Singapore facility forced the closure of the company's biggest oil processing plant, capable of processing half a million barrels of oil per day.
Source: Reuters