Uncertain outlook for GCC refining sector

Uncertain outlook for GCC refining sector

With plans for greenfield projects and refinery expansions entering a critical phase, the GCC (Gulf Cooperation Council) countries of Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) are leading the drive in the Middle East with 1.5mn b/d of new refining capacity expected online by 2021. According to a new report from APICORP, as the region exports more refined products, particularly to Europe, these refinery additions will have a clear impact on global trade flows. In times of rising global capacity and improving fuel standards, GCC refineries are faced with more intense competition and a more uncertain outlook.

The GCC refining sector has seen tremendous growth over the past few years. During a period of high oil prices, governments have prioritised the expansion of the downstream sector and made substantial investments to tackle increasing domestic demand and diversify away from crude to more specialised product exports.

The completion of the two Saudi refineries Yasref and Satorp in 2014 and the expansion of the Ruwais facility in the UAE added approximately 1.2mn b/d of new and cleaner refining capacity. Of the recent 1.2mn b/d of additional capacity, diesel represents over half, while gasoline and jet fuel output stood at around 350,000 b/d and 140,000 b/d. This has had a measurable impact on trade flows, particularly in the diesel market.

Shifting trade flows

Built with an eye on supplying the growing Asian market, the new refineries have contributed to turning the GCC into a net exporter of refined products in 2016. Diesel exports reached over 500,000 b/d in 2016, up from 310,000 b/d in 2015. The slowdown in economic activity and the limited price reforms that were introduced in early 2016 have already impacted demand growth in the region, with diesel demand in Saudi Arabia hit particularly hard.

Further price reform will likely have a more significant impact on domestic demand, possibly freeing up more refined products for exports.

Second wave of expansion

Despite the oil price collapse since mid-2014, the region is still seeing significant investments in its refining sector. GCC countries are expected to add further capacity by 2021, totalling 1.5mn b/d. The region will continue its expansion plans with the 600,000 b/d Al Zour refinery in Kuwait and the 400,000 b/d Jazan project in Saudi Arabia being the major additions. The rest of the additions will come from the 230,000 b/d Duqm refinery – a joint venture between Oman Oil Company and Abu Dhabi’s International Petroleum Investment Company (now merged with Mubadala) – and the Sohar expansion in Oman.

In addition to increasing refining capacity, countries in the region are following the worldwide trend towards cleaner fuels. GCC refineries are investing heavily to meet European standards of low sulphur and cleaner fuels, including Euro 4 and Euro 5. The refineries that came online more recently as well as the ones scheduled to become operational in the next few years are more complex and include capabilities such as hydrocracking, hydrotreating, and catalytic cracking to maximise high quality gasoline and diesel.

Uncertain longer-term outlook

In the medium term, there are plans to further increase refining capacity, but the outlook beyond 2021 is less certain. The Al-Zour project in Kuwait as well as the Sitra expansion programme faced financing challenges which caused delay for several years, before finally reaching financial closure. With US exports of distillates surging to record levels, Russia upgrading its refineries to produce more distillates, and Indian refineries ramping up their production, the competition in the products market, particularly in the diesel segment, has become more intense. However, GCC export-oriented refineries might stand to benefit from the recent International Maritime Organisation rules which would alter demand patterns as fuel oil is replaced by diesel in 2020.