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Analysis: Southeast Asian refiners pump billions into new capacity amid tough markets

Southeast Asia's key national oil companies are pumping billions intoexpanding downstream refining assets to meet energy security targets, despitetough margins and an increasingly challenging refinery landscape, seniorexecutives said Thursday.

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New refining investments by state-run majors like Malaysia's PetroliamNasional Berhad or Petronas, Indonesia's Pertamina and Thailand's PTT willboost crude oil flows to the region, driven by transportation fuel demand anddemographics.

Global crude distillation unit capacity expanded by over 1 million b/d in2017, more than 0.8 million b/d in 2018, and is expected to grow by 7.7million b/d through to 2021, led by China and the Middle East, Adi Imsirovic,global head of oil and products at Gazprom Marketing and Trading, said.

He said excess global refining capacity may now rise to over 5.0 millionb/d in 2021.

"Nearly two-thirds of global spare capacity is now found in non-OECDcountries, where refineries are under-utilized," Imsirovic said at the S&PGlobal Platts Asia Refining conference in Singapore.

Capacity additions in Southeast Asian countries like Thailand, Indonesia,Malaysia and Vietnam, in particular are characterized by the "utility model"where investments are made according to planned demand while returns aremanaged by the state, he said.

This is different from the merchant model in refining hubs likeSingapore, South Korea and Japan, where investments are driven by exportdemand and refining margin economics.

Consequently Southeast Asian refiners suffer from a lack of funds asforeign or local investors prefer guaranteed returns, which are difficultwhen state subsidies give rise to artificial demand that can fluctuateaccording to government policy.

NEW WAVE OF SOUTHEAST ASIAN REFINING CAPACITY

A new wave of Southeast Asian oil refining capacity will be led byPetronas and Saudi Aramco's $7 billion Refinery and PetrochemicalIntegrated Development or RAPID project in southern Malaysia, with acapacity of 300,000 b/d and expected to start in 2019.

Southeast Asian refiners face multiple challenges of balancing regionalproduct supply, changes in fuel specifications and the need to captureprofitable refining margins at the same time, Zabidi Ahmad, ManagingDirector & CEO of Petronas Penapisan (Terengganu) Sdn Bhd, said.

Petronas Penapisan (Terengganu) operates Petronas' flagship KertihRefinery in Malaysia.

The RAPID refinery complex is designed to meet both domestic demand andexport markets, and has been located strategically in the Malacca Straitsin proximity to Singapore's refining hub.

"Despite a challenging refining landscape, Southeast Asia representsexcellent market opportunity," Ahmad said, adding that Petronas has beendriving down cost through efficiency and digitalization.

However, progress in neighboring Indonesia has been a lot slower, withstate-run Pertamina struggling to add new refining capacity due to indecisionand a lack of funds.

Indonesia's total refinery capacity was an estimated 1.1 million b/d atthe beginning of 2015, at six major refineries and a few smaller facilities,according to the US Energy Information Administration.

Since the construction of the Balongan refinery in 1994, no newrefineries have been built in Indonesia and Pertamina has struggled to meetdomestic demand, relying heavily on imports from Singapore.

Pertamina still has plans to upgrade four refineries under its RefineryDevelopment Master Plan and build two new grass root refineries, which willdouble its capacity to over 2 million b/d by 2025, Ardhy N Mokobombang, MegaProject Refinery & Petrochemical director, said.

He said the new capacity will cost $60 billion-$70 billion and Pertaminais keen on inviting investors to help fund the expansion.

So far Saudi Arabia's Saudi Aramco has been roped in for the Cilacaprefinery that will be ready by 2023, Russia's Rosneft for the Tubanrefinery expected to complete by 2024, and Oman for the Bontang refineryfor 2025, Mokobombang said.

It remains to be seen how Pertamina will pull off its capacityexpansions.

In Thailand, state-run PTT is pushing for more digitalization, investingin the full LNG supply chain from upstream gas to power plants, participatingin special economic zones and expanding into high-value petrochemicalproduction to stay on top, Chansin Treenuchagron, chief technology andengineering officer, said.

Other major Southeast Asian refinery expansions are in Vietnam, where theNghi Son refinery will help reduce dependence on oil product imports andBrunei's China-backed 175,000 b/d Hengyi refinery planned for 2019.

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

-- Edited by Jonathan Fox, newsdesk@spglobal.com