With a host of new-build refineries – largely in developing countries – planned to start operations between now and 2020 as a host of construction projects set in motion years ago come to fruition, the market is set for a turbulent period, with overcapacity and lower margins potentially leading to closures and cancellations. GlobalData surveys the outlook.
Global crude oil distillation unit (CDU) refining capacity is planned to increase strongly over the next four years, registering total growth of 18.5%. Major new refineries are expected to start operations, resulting in overcapacity, and lower use figures and margins for refiners. This will likely result in reduction of capacities, delays and cancellations of planned refineries.
Four new refinery projects have been announced in the past six months, these being Algeciras, Mangistau, Sapugaskanda II and Yeghvard. No refineries were cancelled during the period.
Developing developments
Much of the growth is being driven by developing markets. In this respect, China and India lead the global CDU-capacity growth. A total of $60 billion is expected to be spent in both the countries to increase their capacity by 3,060mmbd over the next four years.
In Africa, $73 billion in capex is estimated in Nigeria and Angola to increase CDU capacity by 3,142mmbd. Economic and security concerns present a threat to the completion of planned refineries in the region.
Meanwhile, in the Middle East, operators continue to add refining capacity, with Iraq and Saudi Arabia leading the way. A total of eight countries are estimated to see a spend of about $74 billion to increase regional CDU capacity by 3,373mmbd.
Countries such as Brazil, Venezuela and Ecuador in South America are expected to spend more than $30 billion to construct five refineries in the region by 2020. Petroleo Brasileiro has the largest project, with $15 billion set aside for the Rio de Janeiro III.
The impact of decreasing demand and less-competitive older refineries in Western Europe being closed is countered by investment in Russia, which sees the European region’s CDU capacity increasing marginally from 21.7mmbd in 2015 to 22.5mmbd by 2020.
Top of the capex charts
Nhon Hoi, Rio de Janeiro III, Al-Zour and Pengerang will be the top refineries in the world in terms of capex spending for the 2016-20 forecast period. Nhon Hoi is expected to have a total capex of $16.5 billion, while Rio de Janeiro III will have a spend of $15.3 billion. Al-Zour and Pengerang are expected to have a capex spend of $14.4 billion each.
Merapoh, Lagos I and Al-Zour are expected to be the top three refineries in the world in terms of capacity for the forecast period. The capacities of the three refineries will be 800, 650 and 615mmbd respectively.
The four new projects announced since November are discussed in greater depth below.
Algeciras
The Spanish and Iranian Governments are in discussion over the possible construction of a refinery in Algeciras, Spain. It would be the first among the many deals planned between the two countries since the lifting of the EU sanctions on Iran in January. Spain was one of the major importers of Iranian crude prior to the imposition of the sanctions.
The CDU capacity of the refinery would be 120mmbd with a capex budget of $2 billion and an estimated start date of 2021. National Iranian Oil Refining and Distribution Company (NIORDC) could form a joint venture with Spain’s Magtel for the refinery. Due to its recent announcement however, information about operator and specific ownership stakes have yet to be confirmed.
Mangistau
Iran, China and Kazakhstan are planning to build a refinery in Mangistau Oblast, in the west of Kazakhstan. The refinery plans to start operations in 2020. It is expected to be constructed with a total capex of $6 billion.
The proposed hydroskimming refinery is expected to produce jet fuel and high-octane gasoline – a commodity that Kazakhstan currently imports from Russia.
It would also help Iran to resume oil swaps with Kazakhstan. The products from the Mangistau refinery will be exported to the northern ports of Iran in exchange for Iranian crude. The benefit to China would be the access to Persian Gulf crude for Chinese companies.
For this refinery, information about capacity, operator, equity companies and specific ownership stakes are not yet available.
Sapugaskanda II
The Sapugaskanda Oil Refinery Expansion and Modernisation (SOREM) project, or Sapugaskanda II, is a planned as an expansion of the existing Sapugaskanda refinery in Sri Lanka. The hydroskimming refinery will be established in Sri Lanka’s Western Province.
Lanka IOC has a 100% equity stake and will be the operator of the refinery. The capacity should be 120mmbd and it is expected to be constructed with a capex investment of $3.6 billion. The refinery is forecast to start operations in 2020.
The Sapugaskanda I refinery, which was established in 1969, lacks modern equipment, leading to poor yields. It is also expensive to operate as it mainly produces low-value products. Sapugaskanda II is expected to help Lanka IOC overcome these types of refinery margin losses through the extraction and refining of high-value products, and by providing for the country’s growing domestic demand.
Yeghvard
ArmOil Company is expected to invest about $35 million in the construction of a small refinery in Yeghvard, in the Kotayk region of Armenia. The expected capacity of the refinery is presently unknown, but ArmOil will be its operator, and the proposed topping refinery is expected to begin operations later this year.
The construction will include an oil products storage facility as well as a laboratory. The plan is to construct and complete these elements first, with the refinery itself to follow after this.
A sum of about 102 million dram, equivalent to appromixately $211,000, is expected to be spent on buying the equipment required for the project.
The Armenian Government awarded a three-year VAT exemption to ArmOil in order to help the company expand its output and modernise its production facilities. The proposed refinery would benefit from this VAT exemption.
There were no previously announced refinery projects cancelled over the past six months.