Feature: Middle East set for biggest refinery push as export ambitions grow

The Middle East, with vast and cheap crude reserves, is pushing ahead with refinery expansions even as a transition to cleaner fuels curbs local demand, setting the stage for a surge in oil products exports from the region.

Refinery capacity could increase 1.8 million b/d by 2025 from 2019, with increases in Bahrain, Iraq, Kuwait, Oman, Saudi Arabia and the UAE, according to S&P Global Platts Analytics.

Most refineries in the region are fully or partly owned by national oil companies and have access to cheap crude oil.

"One consequence is that exports of products will spike from 2021 onwards if mega refineries will be commissioned on schedule and the demand recovery is still weak," said Zhuwei Wang, lead Middle East analyst at Platts Analytics.

Demand for all products fell in the Middle East in 2020 except for direct burn of crude for power generation, following several years of sluggish growth in oil demand as more sectors transitioned to clean fuels and renewables, Wang said.

Gasoil exports will climb starting next year mostly from Saudi Arabia and Kuwait, while competition for sales in Europe and Africa will heat up between the Middle East and the former Soviet Union, Europe and Asia, he said.

New capacity

The region will add 2.7 million b/d of refining capacity by 2030 and 3.2 million b/d by 2040, the most of any area in the world while North America, Japan and Korea and Russia shrink, the International Energy Agency said recently its World Energy Outlook 2020 report.

The increase in capacity is needed as some countries in the region, like Iraq, remain a sizable importer of refined products.

The need for new capacity is also backed by a steady increase in Mideast oil demand. Demand in the region was expected to climb 13% this decade, according to the IEA.

Iraq has a project on tap to add 70,000 b/d of capacity in Basrah next year, while Kuwait adds 615,000 b/d of capacity at the new Al-Zour refinery and Saudi Aramco opens the new Jizan refinery with 400,000 b/d of capacity, according to Facts Global Energy (FGE).

Export-oriented

Refineries in the region are typically geared to high-margin middle distillates products such as jet fuel, the hardest hit transportation fuel from the coronavirus pandemic.

Europe is one of the main export markets for Middle East jet fuel and several refineries there have reported negative margins, especially in the third quarter.

"Lower demand for the region's jet surplus in Europe as well as very weak jet fuel and diesel cracks in general are putting pressure on refining margins and refinery runs," FGE Middle East energy analyst Iman Nasseri said.

Any new refinery in Saudi Arabia or the UAE would be considered as an export refinery, he said, while Iraq was hoping to expand its refining capacity to eliminate its growing import requirements for transportation fuels.

Africa, possibly the largest growth area for oil besides India, is likely to be a key export destination for Middle East oil products.

The region is already importing diesel, gasoil and gasoline from the Middle East, and flows are likely to grow steadily on this route

"We do not find any new greenfield refinery justified in terms of refinery margins in general, unless there are factors outside normal conditions that may make the project economically justified or perhaps local market requirement that may push (government funded) projects forward," Nasseri said.

Brent and Dubai cracking margins fell in Q3 to the lowest in a decade, as several refiners in Europe reported negative margins.

With demand for middle distillates in the doldrums, gasoline and naphtha will need to support refinery economics, the IEA said in its October monthly report.

In Asia and the US, refinery yields are skewed toward light distillates or balanced, but it is a major issue in Europe where middle distillate yields are 1.5 times higher than light distillate yields.

Middle East utilization rates have lagged all regions since about August 2018, according to OPEC's 2020 World Oil Outlook, released early October.

"Current utilization rates in the Middle East are low, at 80%-81% on average across the region, though on their [way to] recovery from record low of around 75% in April-May," Nasseri said.

"This is certainly due to the state of oil market, especially the oversupplied middle distillate markets globally." The region's average utilization rate usually ranges from 90%-96%, or 93% on average, he said.

But as oil demand in the region rebounds, Middle Eastern refineries might be in a better place to raise runs next year.

Upcoming refinery projects in Middle East

Source: S&P Global Platts Analytics, FGE