Region will ‘fall short on refinery capacity’

While US$40 billion is already set aside for refinery investments up to 2025, region needs $20bn to meet future demand.

Above, the Shuaiba oil refinery south of Kuwait City. Yasser Al Zayyat / AFP

Refiners in the Middle East need another US$20 billion of investment to meet future demand for crude products from customers in Asia and Africa.

About $40bn has been set aside for regional refinery investments between now and 2025, according to the US-based oil consultancy IHS. But another $20bn will be necessary to meet demand, said Sandeep Sayal, the managing director of downstream energy research at IHS.

“There’s demand that’s growing past 2022 so there’s supply that has to be built,” he said.

Mr Sayal said that the downstream demand is growing over the next five years by about 1 million barrels per day (bpd). Regional production totals 7.5 million bpd and will increase to 9.1 million bpd by 2021.

Mark Chevalier, the director of refining and products markets at IHS, said that the major activity in the region in the next five to eight years will be in Saudi Arabia, followed by Oman and Kuwait.

“There’s certainly potential beyond that time and a lot more needed, and the UAE could be a part of that effort,” he said.

The $20bn Sadara Chemical plant came online this year after the joint venture between Saudi Aramco and Dow Chemical was established five years ago.

It is the world’s largest chemical complex ever built in a single phase, including 26 integrated manufacturing plants and the capacity to produce 3 million tonnes annually of diversified chemicals and plastics.

In the UAE, the Abu Dhabi Oil Refining Company, known as Takreer, spent $10bn on the Ruwais expansion project to double refining capacity. The facility produces distillates such as naphtha, gasoline and fuel oil.

Mr Chevalier said the region had a competitive position with regards to access to key markets.

“There’s a lot of demand growing on both sides of the Middle East in Asia and Africa, with plenty of export opportunities coming up,” he said. “We do not expect a lot of refining capacity to be built in Africa so that will need to be satisfied via imports.”

He also said that while India and other Asian countries are expected to build refineries, those markets will still need imports that could be met by Gulf producers.

Edward Bell, a commodities analyst at Emirates NBD, said there had been a great deal of pressure to build refineries to maximise diesel and gas oil production but the outlook for the fuel is far less certain than a few years ago.

“Retail fuels are doing far better in the centres of demand growth, such as China, India and even in the GCC, which is notoriously gasoline short, while diesel demand is slumping,” he said. “That may not be a permanent dynamic, but the potential for gasoline demand is currently looking far stronger than many had assumed a few years ago.”

He said there was growing competition from the Chinese market. China is now exporting refined products, which more than doubled last year compared with the previous year, showed figures from the US Energy Information Administration.

Mr Bell said GCC refineries were at risk of contributing to a glut of products, which will move the crude oil imbalance downstream.

“Local GCC demand can go a long way to soak up some of the additional capacity that is being built in the region but even so, it does look like out to 2020 that we’re going to be in a reasonably loose refined product balance,” he said.

Downstream players will meet in the capital this week for the Abu Dhabi International Downstream Summit, which begins today, to discuss the market dynamics amid a slowdown in US shale gas production and Chinese petrochemical demand, global fuel standards and streamlining activities.

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