Middle East refinery output set for more gains in 2024 despite growing pains

The Middle East, flush with new refinery capacity just when Europe needs to replace flows from Russia, is heading for even more growth in 2024 as the national oil companies in the region seek to secure outlets for their crude, analysts say.

The region has a 47% share of diesel shipments to Europe this year, the leading supplier and up from 41% in 2022, S&P Global Commodities at Sea data showed. Kuwait's Al-Zour started test runs in 2020 and was initially expected to come online by the end of 2021, but that was delayed to 2022. The plant is designed to process various types of Kuwaiti crude, including Kuwait Heavy Crude. The Duqm refinery starting up in Oman operates the same way, with its shareholders Kuwait and Oman feeding their crudes into the refinery.

"From a refining point of view, 2023 was a milestone year for the Middle East with refined product production topping 8.9 million b/d in Q3 of this year, most likely a new record high," said Seth Clare, principal research analyst at S&P Global Commodity Insights. "We expect Middle East refinery output to continue rising in 2024 and 2025."

This year's strong refinery production was partly thanks to ramping up at Al-Zour, Clare said. "Among all products, jet fuel/kerosene production appears to have posted the strongest year on year growth in 2023, a trend supported by robust middle distillate crack spreads throughout the year."

In Europe, the Middle East has successfully replaced Russia as the principal exporter since the Ukraine-Russia conflict began. Platts, part of S&P Global Commodity Insights, assessed the 10 ppm CIF Mediterranean cargoes at a record high of $1,440.75/mt on June 15, 2022. Platts last assessed Mediterranean diesel cargoes at $783/mt Dec. 12, evidence of the market rebalancing following the supply disruption.

Oil product sanctions from the EU and G7 took effect from Feb. 5 but many companies in Europe were self-sanctioning Russian material due to reputation risk since the conflict broke out.

Middle East refinery openings from Jizan and Duqm have helped to increase diesel supplies globally, just as a number of refineries shut in the US and Europe during the coronavirus pandemic.

Looking at the crack swaps for European diesel, the diesel premium has softened. Platts assessed the frontline Brent crack month-one at $22.98/b Dec. 12, its lowest value since July 18.

Unlike recent years when greenfield refineries started in Saudi Arabia, Kuwait, Iraq and Oman, upcoming expansions are adding more capacity to existing plants.

The 610,000 b/d Al-Zour refinery in Kuwait faced several disruptions, most recently a malfunction in one of the main valves and a fire in November, causing a "near-complete halt" of production, the company said. The Duqm refinery in Oman was supposed to be in full startup mode in July but market sources said it will likely be months later.

"We predict the Middle East will increase supplies to Europe as their new refineries including Al-Zour and Duqm ramp up," Eleanor Budds, research and analysis director at S&P Global Commodity Insights, said. "I don't see the Al-Zour incidents as an indicator of unreliability. New refineries have historically taken time to ramp up from commissioning to full capacity in nine months up to three years in some examples. This is why our European balances forecast a gradual loosening of the diesel market as supplies increase."

Iraq's Basra refinery is expected to be expanded by 70,000 b/d, with a fourth CDU added by the second quarter of 2024, on top of the existing capacity of 210,000 b/d, according to Palash Jain, senior Middle East downstream analyst at FGE. The Satorp refinery in Saudi Arabia owned by TotalEnergies and Aramco is scheduled for a debottleneck to increase capacity by 20,000 b/d, on top of the existing capacity of 460,000 b/d, he said. TotalEnergies and Aramco declined to comment.

The capacity of Bahrain's Sitra refinery is being expanded by 42% to 380,000 b/d by the end of 2024, from 267,000 b/d currently, Jain said. The project known as the Bapco Modernization Program is expected to be completed by the end of 2024, he said.

Operating rates at Oman's Duqm, Kuwait's Al-Zour and Iraq's Karbala are also expected to increase in 2024, he said.