Chronically weak financial performance in the refining sector is accelerating the shift in ownership away from Independent Oil Companies towards National Oil Companies as never before. For years, IOCs have been under pressure from their shareholders to improve returns in the downstream and the weak economic environment has exacerbated the pressures in recent years. Many NOCs, in contrast, have the flexibility to take a longer term, more strategic approach and are in fact doing so.
NOCs Dominate New Builds
Worldwide, Evaluate Energy has identified 7.5 million b/d of new refinery plant under construction worldwide, a further 3 million b/d at the design/engineering stage and an additional 4.7 million b/d that are still in the planning stage. Almost 50% of the newly planned refineries are the brainchilds of just 10 companies – all National oil companies or NOCs. (see Figure 1).
Unsurprisingly, Chinese companies Sinopec and PetroChina dominate the new projects, with plans for 1.5 and 1.3 million b/d of new capacity respectively, boosting their capacity by 40% over the next 5 years. Less than half of these plants are currently under construction, raising doubts as to whether Chinese capacity increases will keep pace with internal growth for refined product. IEA demand forecasts show China’s product demand growing by 700,000 b/d this year and 400,000 b/d in 2011, suggesting that the new products may only just keep pace with demand and lead to pressure to increase product flows to China from refineries in the region and beyond.
CNPC has a further 3 new projects on the go in Chad (the 50,000 b/d N’Djamena refinery which is under construction), Niger (the 20,000 b/d planned Zinder refinery) and Costa Rica (the 35,000 b/d Limon refinery, still in the planning stage).
Saudi Aramco meanwhile has plans to increase its capacity by almost 60% or 1.4 million b/d with projects at Yanbu, Ras Tanura, Jazan, a JV with Total S.A (NYSE:TOT) at Jubail and an expansion at the Motiva refinery at Port Arthur. PdVSA has plans for refineries at Cabruta, Caripito, Zulia and Santa Ines, though all of these except the Santa Ines are still at the planning stage. The Venezuelan state company also has a 40% interest in a JV with PetroChina to construct a 400,000 b/d plant at Jieyang in China.
Weak Financial Performance
For the Majors and US-based refiner-marketers, earnings dropped precipitously in 2009 and although showing signs of a return in 2010, are nowhere near the levels achieved in 2008. (See Figure 1). The US group includes 14 companies, including pure refiner-marketers such as Tesoro and Valero as well as integrated companies like Marathon and ConocoPhillips. In contrast, European companies (including Repsol-YPF, ENI, OMV and Statoil) have been recovering fairly steadily and in South America (represented here by Petrobras and YPF in Argentina) the pattern has been mixed. Evaluate Energy adjusts refining earnings for non-recurring items to reveal the real underlying trends. 2010 numbers are based on annualised 1st half data.
US-refiners slashed $1 billion, equivalent to a third of their capital spending in 2009 and continued this year with 40% capital spending reductions in the first half of 2010. European refiners responded in like fashion, also trimming their capital expenditures by a third in 2009, and further reductions have been made in the first half of this year. Interestingly, despite the lacklustre performance of the sector, the Majors did not substantially cut capital spending in refining and marketing in 2009.
The Majors – (Slow) Exit Stage Left
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If the Majors haven’t figured big in the refinery deals being done this year, it probably isn’t through lack of trying.
As a group, the Majors are being increasingly marginalised in the refining business. Back in 1984, the Majors accounted for one-third of world refining capacity. Today they account for less than 20%. Tomorrow it will be even less as new refinery projects, financed and owned by others, especially NOCs, come onstream. The Majors are noticeably absent from the list of owners of new projects on the drawing board. Our analysis is based on a comparison of the original component companies of the Majors with their current incarnations. The 1984 numbers include, for BP (NYSE:BP), Arco and Amoco; for Total, Elf and Petrofina; for Chevron, Gulf, Texaco and Unocal; and for Exxon, Mobil.
The Majors (including their original component companies) had 24.5 million b/d of refining capacity in 1984 compared with 17.8 million b/d today while total world refinery capacity has grown from 74.4 million b/d in 1984 to 90.7 million b/d of capacity today. ExxonMobil cut back its refining capacity by much less than other Majors (from 6.4 million b/d, including Mobil, to 5.6 million b/d today, and is currently the largest refiner in the world. (Expect Sinopec to take up this position within the next 5 years). Meanwhile, Chevron (NYSE:CVX) sold off many of the refineries it inherited from its acquisitions and mergers with Gulf, Texaco and Unocal, slashing its capacity from a whopping 6.8 million b/d in 1984 to just 2.2 million b/d today. Looking forward, the Majors’ investment in new refinery plant is primarily focused on technology to cope with extra heavy crudes. Examples are Total’s $1.9 bln deep conversion project at its Port Arthur refinery, BP’s new $3.8 bln coker at its Whiting, Indiana refinery designed to process heavy Canadian crudes, and Chevron’s 3,500 b/d pre-commercial heavy oil conversion plant at Pascagoula.
Closures and Delays
Dismal financial expectations from the sector has of course prompted some new refinery closures and a suspension or delay in some projects but the majority of planned new refinery projects are still going ahead. In March 2010, Qatar Petroleum indefinitely delayed the construction of its $11 billion 250,000 b/d refinery at Al-Shaheen. Total meanwhile announced the closure of two of its French refineries this year. Towards the end of 2010 it was confirmed that Shell’s 122,000 b/d Montreal refinery and the 270,000 b/d Kaohsiung plant in Taiwan would be shut and Lukoil is considering the future of its 75,000 b/d Odessa refinery. In addition to these units, there is about 900,000 b/d of idled refinery capacity worldwide – more than half of it in the United States – that could theoretically be brought back onstream if economic conditions permit.
Mergers and Acquisitions are not playing a big part in China’s refinery capacity expansion plans, but where it does, the Chinese have been paying about three times the going rate. Chinese deal activity in the sector has been limited to PetroChina’s acquisition of Singapore Refining and the proposed formation of a 49% JV with JX Holdings in the 115,000 b/d Osaka refinery in Japan. Evaluate Energy’s analysis of $ paid per equivalent distillation capacity  shows PetroChina paying more than $3,000 per b/d, against a global average of just $1,000 in recent years. PetroChina plans to export refined product to China from the refinery, supplementing its growing finished product import trade with South Korea and Taiwan.
Russian companies have been more active in the deal market in recent years and more price sensitive as well, with Rosneft stepping up to offer to buy a 50% stake in Ruhr Oel from PdVSA in mid-2010 at a relatively low price. This follows a flurry of activity by Lukoil in 2008/9 when it expanded its European refining presence in the Netherlands (taking a 45% share in the company’s 147,000 b/d Rotterdam refinery) and Italy (with the formation of a 49% joint venture with ERG to run the 463,000 b/d ISAB complex).
Bankers Get Interested
In response to a growing perception among traditional refiners that the business may be getting more risky, some bankers are stepping up to the plate in the belief that they can make money where others have failed. US-based PBF Energy is a case in point: Formed in early 2008 as a $2 bln partnership between Petroplus, The Blackstone Group, and First Reserve Corp., PBF has this year acquired from Valero (NYSE:VLO) the 185,000 b/d Paulsboro refinery and the idled 190,000 b/d Delaware refinery and associated storage and pipeline facilities. Just a month after Petroplus pulled out of the partnership, ostensibly to focus on its European operations, PBF announced in October of this year an initiative in which it would sell finished products to Morgan Stanley Capital Group, Morgan Stanley’s principal commodities trading arm while Statoil will supply the crude. At the same time Morgan Stanley will be involved in providing asset-backed loans to PBF. When bankers trade with bankers, expect some new twists.
Evaluate Energy tracks financial and operating performance in the refining and marketing sector as well refinery projects worldwide. For more information visit www.evaluateenergy.com