IRPC '17: WoodMac Director sees demand pull shifting from China to India

By Adrienne Blume, Executive Editor

NEW DELHI, INDIA—Sushant Gupta, Research Director of Asia-Pacific Refining for Wood Mackenzie, opened the plenary session of IRPC 2017 with a global view of the future of the refining and petrochemicals sectors.

From 2011–2015, global oil demand expanded by approximately 6 MMbpd, but growth of just 4.5 MMbpd is projected for the 2016–2020 period. Through 2025, only 3 MMbpd of growth is anticipated. "This is a remarkable change for the refining industry," Mr. Gupta said.

The substitution of gas for coal in the power sector is being seen in India and elsewhere. Also, LNG is coming into the bunkering sector as a substitute for diesel, gas oil and fuel oil, to meet tightening International Maritime Organization (IMO) regulations, he noted.

Trends in Asia-Pacific supply and demand. The "center of gravity" is shifting from China to India in terms of demand growth, Mr. Gupta said. Chinese demand growth was at center stage over the last 20 years, but over the next 20 years, 65% of new demand growth is expected to come from India and Southeast Asia.

This shift means that new capacity builds will be concentrated in India and Southeast Asia, Mr. Gupta said. Much of this capacity will be focused on producing gasoline. Demand for gasoline is growing much faster than demand for gas oil in Southeast Asia.

Global capacity expansions will see big CDU boost. The Director noted that global capacity additions will outpace demand growth. However, he also acknowledged that the global refining system is becoming more complex with additional upgrades.

With respect to specific processing modes, Mr. Gupta shared projected worldwide capacity increases for crude distillation of 4,922 Mbpd, for hydrocracking of 1,187 Mbpd, for coking of 985 Mbpd and for fluid catalytic cracking of 991 Mbpd. These expansions are anticipated to take place between 2017 and 2022. The majority of the crude distillation capacity boost will be concentrated in the Middle East (2,080 Mbpd) and Asia-Pacific (1,721 Mbpd).

Sushant Gupta, Research Director of Asia-Pacific Refining for Wood Mackenzie
Sushant Gupta, Research Director of Asia-Pacific Refining for Wood Mackenzie

Regional refineries are also targeting the flexibility to process a wide range of crude oils. North American exports of both heavy and light crudes are expected to account for 25% of incremental crude imports into Asia-Pacific, Mr. Gupta noted.

India, SE Asia must take lead in refining. "The question is: Who will build this capacity?" Mr. Gupta posited. "It's not going to be China." Rather, India and Southeast Asia are required to take the lead in Asia's future refining capacity, the Director said.

However, even with projected capacity additions, Asia-Pacific is anticipated to see a gasoline shortage by 2020. "Asia will need to import gasoline from somewhere," Mr. Gupta said. The Middle East and Europe are the most likely candidates to supply the needed fuel supplies.

Refinery integration with chemicals is another increasingly important trend. Weaker gasoline offers an opportunity to capture integration synergies with chemicals, Mr. Gupta said. Meanwhile, a tight middle distillate market is expected to emerge globally, accompanied by the eventual decrease of Asia's middle distillate surplus.

Implications of IMO regulations. Mr. Gupta next spoke about the cost of compliance of International Maritime Organization (IMO) regulations. "A key question is: Whose problem is it?" the Director posed. "Refiners say it's the shippers' problem, and shippers say it's the refiners' problem. So, who will make the investments?"

Gas oil with a sulfur content of 0.5% must be provided. "In its current shape and form, we believe the [global] refining industry is challenged to supply the entire demand growth for [maritime] gas oil, but they will not be able to," the Director said.

Financial incentives will exist for refiners to invest in the upgrade of fuel oil, but these investments are uncertain because shippers may opt to install scrubbers instead. "The key dilemma," Mr. Gupta said, "is refinery investments versus scrubber investments."

Refiners will face considerable challenges in generating additional marine gas oil and managing surplus fuel oil and gasoline during the transition years of the IMO fuel regulations, he noted.

Mr. Gupta also acknowledged that increased refinery crude runs will be needed to produce more marine gas oil, and that refining margins must be positive for refiners to process more crude. "So, because of these [IMO] regulations, refiners will run more crude, and the forecast is for positive margins for refiners by 2020," Mr. Gupta said.

"In the next six months to a year, we will start hearing about refiner plans to make upgrades to accommodate IMO regulations."

Turning challenges into opportunities. The global refining industry is challenged in many ways, but understanding these implications could help transform them into opportunities, Mr. Gupta said.

Asia will likely face deficits of transportations fuels, mainly gasoline. As a result, a substantial increase in West-to-East trade of gasoline is expected.

Key focuses for Asia-Pacific refiners will be crude costs, particularly in terms of flexibility to process a wide range of crude oils; considering spot crude purchases versus term purchases; capturing integration synergies with chemicals; and establishing a robust IMO strategy to face potential disruptions in fuels production and demand.

IRPC 2017 is taking place at the Taj Palace in New Delhi from April 18–20.

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