Analysis: The shrinking case for another mega-refinery in Asia

Singapore — Asia has been the last bastion of building mega oil refineries for years, but overcapacity in the near term and the decarbonization of transportation fuels in the longer term have raised questions over the need for more large-scale refining projects.

China and the Middle East are still adding new capacity that will come online in the next three to four years. But most of these projects were approved when the global economic outlook was still robust, and the roster of new project approvals looks bleak.

As oil majors diversify into the power sector and upstream reserves are targeted by investors for "stranded asset" risk, any long-life hydrocarbon investment will only attract more scrutiny -- and an oil refinery has a life span of 40-50 years.

The main challenge comes from projections of oil demand growth peaking by 2030, with everyone from oil company chiefs to sector analysts putting peak demand at between 115 million-125 million b/d, compared with current levels of 100 million b/d.

So why invest in a 40-year asset when oil demand will peak in 10 years?

New refinery investments will have to find their niche, or unique selling proposition, to be viable and attract funding from financial institutions like banks, which have started to raise eyebrows at new greenfield proposals.

"There will be no more refineries built on a standalone basis. But anything integrated with petchems still has a chance," Fereidun Fesharaki, chairman of consulting firm FGE, said at an oil conference earlier this year.

He said an international bank approached for a refinery loan would respond saying: "Please don't waste your time; we are not going to lend you any money."

The case for a new refinery now has to be ironclad, such as integration with downstream petrochemicals, superior refining economics, a captive market or a major upgrade to boost margins ahead of regulations like IMO 2020.

"We continue to see selective investment by owners to increase the capacity or capability of existing refineries, but less so on new refineries," according to James Lowrey, head of resources, energy and infrastructure at Australia and New Zealand Banking Group.

Lowrey said the bank was seeing either specific investment in capacity or functionality at existing refineries, in order to meet new market demand, or else larger refineries with economies of scale.

"In terms of financing, sentiment and appetite is reasonable for greenfield projects, but only where very clear comparative and competitive advantages are present," Lowrey said.

"What has changed over the past few years is financiers have become more cautious in their assessment of such projects given the volatility of refining margins over the past five years or so, and the losses incurred on certain projects completed in the past 10 years," he added.

ONE LAST REFINERY CYCLE

Countries like Vietnam, Philippines and Indonesia, which face fuel shortages and import gasoline and diesel from trading hubs like Singapore, have struggled to build new refineries for years.

Now, policymakers faced with the global energy transition are asking whether the billions of dollars are better justified in bolstering critical infrastructure like power networks or on food security instead.

Even in Australia, which has shut many of its refineries, triggering energy security concerns, building a new oil refinery is largely out of the question.

Meanwhile, China's overcapacity is spilling onto global markets. The International Energy Agency expects global gross capacity additions of 10 million b/d between 2019 and 2024, out of which nearly a fifth comes from China's new wave of integrated petrochemical refineries alone.

One of last regions still building mega-refineries is India.

India's current refining capacity stands at 247 million mt/year and it is adding 113 million mt/year in brownfield expansions by 2030 and 78 million mt/year of new capacity. It is planning a 60 million mt complex on the west coast that has drawn Saudi interest.

In fact, downstream investments by Middle East oil producers, to maintain a captive market for their crude, are one of the last major drivers of new refining projects, perhaps replacing oil majors.

"In growing emerging economies it is inevitable that we will see modern new refineries built while in developed economies we are likely to see continued consolidation," Chris Midgely, head of S&P Global Platts Analytics said, adding that the refining industry has longevity but over time newer integrated refineries will be needed in places like Africa or Indonesia.

"However these will become more limited as we are likely to see trading hubs continue to optimise product flow. EVs and [fuel] efficiency will see oil demand plateau during the next decade but even the most aggressive outlook for demand destruction still has over 80 million b/d of demand in 2040," Midgely said.

"However, I believe we will start to see some companies (including international oil companies) looking to reduce exposure to refining as they focus more on renewables but I believe we have one more cycle left in refining," he added.

-- Eric Yep, eric.yep@spglobal.com

-- Edited by James Leech, james.leech@spglobal.com