IRPC ’15: Middle East downstream works to capitalize on European, Asian shortages

By Ben DuBose
Online Editor

ABU DHABI -- Downstream producers in the Middle East could find rising exports through the end of the decade, as shortfalls in the regions of Europe and the Asia-Pacific could offer new opportunities.

"For the downstream industry, there is a lot of potential moving forward, said Louis Besland, managing director at global consultancy ALIXPARTNERS. He spoke at Monday's business day at the sixth-annual International Refining & Petrochemical Conference, held through Wednesday at the Jumeirah at Etihad Towers.

"Even if some projects are delayed now, the market is such that they will come back," he added.

Besland offered a breakdown of the expected surplus or deficits of major refined products, such as gasoline and diesel, by 2020.

The Middle East has an enormous surplus in both, with an extra 25 MMtpy of gasoline surplus per year and 26 MMtpy of middle distillates per year. On the other hand, Europe is at a deficit of 2 MMtpy in middle distillates, while the Asia-Pacific finds itself at a whopping 20 MMtpy deficit in middle and 2 MMtpy in gasoline.

The problem for the Middle East however, could be increased in competition from the US and Canada. About 85% of the growth in global oil production in the past five years has come from the US and Canada, creating excess supply. In theory, that supply could have been absorbed by Asia, but the growth in Asia, and particularly China, was not as strong as expected, Besland said.

This has created an extended period of excess supply around the globe, amplified by a strong dollar and geopolitical issues.

With the advent of US shale, the oil market went from a period of undersupply as recently as 2012 and 2013 to being oversupplied in 2014 and 2015. That has led to a period of increased competition for those export opportunities that do exist, and that competition could be here for some time, given the current environment for oil prices.

Besland said that over the medium-term, he expects average crude prices to hover in a band between $50/bbl and $70/bbl, rather than the $120/bbl.

“From a rational perspective, growth in Asia is not as strong as expected and doesn’t show uplift potential in short-term, except maybe India,” said Besland. “China is not growing fast enough. It’s growing, but not fast enough.”

But even with that period of lower oil prices, he doesn’t expect global oil supply to come down all that much.

“At $60/bbl, you have more than 70% of the US players that are breakeven or above breakeven,” Besland said. “Every day, more of them can produce at below 60 or 70.”

This theoretically could be a boom for refiners, given lower feedstock costs to produce their products. However, the picture isn’t as rosy as it may seem, given that the reduction in upstream investment costs is trickling down the energy latter to downstream projects, including those in the Middle East.

“We do think there might be some delays in investment, especially those investments done with international players that are squeezed with their cash,” said Besland. “We have seen some projects in the region stopped not just for project reasons, but due to the squeeze that international players have on their side.”

Global spending on capital expentitures (CAPEX) is down 19% from 2014 to 2015 after going through a period of continuous growth at roughly 10% per year between 2010 and 2013, he noted.

“We believe the players need to reduce CAPEX, not on an absolute basis, but reduce how much they spend to get the same output,” said Besland. “We need better discipline in project management and to take a hard look at operations and support function efficiencies. The key will be to take out costs and not just delay projects.”

Nonetheless, many of these cutbacks will likely occur on the upstream side. For the downstream, growth is still occurring each year, led by the Middle East, Africa and Asia-Pacific sectors, while North America, Europe and Russia lag behind.

But the challenge for producers in the Middle East isn’t just satisfying their own demand. It’s taking advantage of the global market in regions like North America and Asia, and for that, the competition for that limited demand remains on going and in full force.

“Given the competition with the US and the low-price feedstock, there will be higher competition to export to Europe,” said Besland. “The industry [in the Middle East] will need to be even more competitive going forward in terms of operations, as well as throughout the supply chain and services.”

IRPC 2015 continues through Wednesday at the Jumeirah at Etihad Towers in Abu Dhabi.

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