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Asian Refining Growning
Asian Refining Growning
of Asian refining
Prepared for Petrotech-2016
12th International Oil & Gas Conference and Exhibition
December 2016
Authored by:
Navtez Bal
Arjun Chopra
Cherry Ding
Tim Fitzgibbon
Patrick Green
Alan Martin
Nipun Rastogi
Anantharaman Shankar
Sarabjit Singh
Artika Thakur
Copyright 2016, by McKinsey & Company, Inc.
The growing prominence of
Asian refining
December 2016
Authored by:
Navtez Bal
Arjun Chopra
Cherry Ding
Tim Fitzgibbon
Patrick Green
Alan Martin
Nipun Rastogi
Anantharaman Shankar
Sarabjit Singh
Artika Thakur
Acknowledgements
We would like to thank the Steering Committee of Petrotech 2016 for giving us the
opportunity to share our perspectives. This report draws extensively on the work of Energy
Insights, which combines McKinseys global energy expertise and proprietary data and tools
with a specialized team to deliver timely analysis and customized information to clients. We
thank Cherry Ding, Agnieszka Kloskowska and Ananthraman Shankar for their guidance.
This report also synthesizes our learnings from proprietary research and the cumulative
experience of McKinsey experts worldwide. The research and examples cited are meant to
be illustrative and not exhaustive.
We acknowledge the counsel of our senior expertsTim Fitzgibbon from the Houston
office and Patrick Green along with Alan Martin from the London office. We are also thankful
to Sarabjit Singh, an engagement manager from the Singapore office, and Arjun Chopra, a
senior research analyst from the Gurgaon office.
This report would not have been possible without the dedicated efforts of the McKinsey
teamAbhishek Agarwal, Nitesh Jain, Puja Jain, Aakash Jhaveri, Nipun Rastogi and
Artika Thakur.
We thank Noorain Nadim, Punita Singh, Parameshwari Sircar and Malini Sood from the
Client Communications team for their editorial support, and Fatema Nulwala, Ava Tata and
Natasha Wig for their inputs on external communication. We are also grateful to Manali Raul,
Pradeep Singh Rawat, Vineet Thakur and Royston Wilson for their support on design and
visual aids.
The volume and variety of crude flows to Asia have increased. Going forward, a large
proportion of products from the Middle East is likely to target the Southeast Asian market,
adding to the growing oversupply of oil to the region. Growth in North American supply is
expected to resume, redirecting crude volumes from the Atlantic Basin to Asian markets
where demand is expected to remain relatively strong. In addition, increasing supply
competitiveness in Asia could provide Asian refiners with a more diverse mix of crude
supplies and increased opportunity for price optimization.
Product flows to Asia are expected to increase. Lower demand in North America along with
strong refinery utilization could push the region to a net long position, with growing flows to
Asia. In addition, growing oversupply of distillates (diesel and jet/kerosene) in North America,
the Middle East, and the Former Soviet Union (FSU) countries could lead to increasing
product flows to Europe and Asia.
With the growth rate of refining capacity being more than 50 percent greater than the growth
rate of oil demand, there could be excess supply of refining, which is expected to continue
to increase. This is likely to put downward pressure on utilization and margins in the three
hubs (North America, Europe and Asia) up to 2020. In 2021, the global implementation of
Marine Pollution (MARPOL) Annex VI is expected to lead to tighter restrictions on quality
specifications for bunker fuels. As a result, demand for distillates is expected to grow, and
utilization and margins are projected to increase.
To offset the effects of a decrease in utilization and margins, refiners can adopt several
strategies. Asian refiners, in particular, can take advantage of the increased diversity in
crude slates and focus on crude optimization to increase profitability. Other possible
options include increasing operational efficiencies, creating flexibility in the refining network,
continuing to enhance the inland distribution and retail network and exploring opportunities
in downward integration into specialty-grade petrochemicals.
Gasoline demand accelerated in 2015 across many Asian countries, particularly China and
India, with both posting an increase of 15 percent over 2014.2 In China, auto sales reached
record levels in 2015, driving gasoline demand. In India, the removal of diesel subsidies in
2014 stimulated the purchase of gasoline vehicles over their diesel variants, and lower fuel
prices contributed to the increase in gasoline sales.3 The impact of low prices on discretionary
consumption and fuel demand growth was also seen in the case of jet fuel. China, which
accounts for roughly a third of regional jet fuel demand, saw an increase in demand by about
100 thousand barrels/day in 2015.4 Also, Chinese air traffic demand showed the highest
increase in recent years as airlines passed on lower fuel costs to consumers.
Demand growth for diesel/gasoil has shifted gears since 2012 on weaker industrial demand
in Asia. This trend was most evident in China. Demand growth was 1 percent in 2015,
compared to double-digit growth before 2012. Growth in India was also more muted as a
result of the cancellation of diesel retail subsidies in 2014. Korea was the only bright spot for
diesel/gasoil in Asia as government subsidies for taxis spurred domestic demand.
1, 2, 3, 4 JODI
1 Gasoline, jet/kerosene, diesel/gasoil demand in China, Taiwan, India, Indonesia, Japan, South Korea, Philippines, Thailand
SOURCE: JODI
Exhibit 2
1 Includes Australia, Brunei, China, India, Indonesia, Japan, Korea, Malysia, Myanmar, New Zealand, Papua New Guinea, Philippines, Taiwan,
Thailand and Singapore
SOURCE: JODI
Exhibit 3
SOURCE: JODI
Exhibit 4
115
110
105
100
95
90
2015 2020 2025 2030
In the high-demand case, global oil demand growth is expected to rise 1 percent per year
over the next five years, compared to 0.7 percent in the low-demand case. Most of this
growth is expected to come from gasoline and middle distillates, and is projected to be
reflected in higher transport fuel growth of 1.2 percent per year compared to 0.9 percent per
year in the low-demand case over the next five years (Exhibit 5). Asia may remain the leading
consumer, with GDP growth in India and China expected to be higher at 7.2 percent and 5.9
percent respectively between 2015 and 2030.6
CAGR -0.3% 0.2% -0.2% 0.7% 1.9% 0.4% 1.8% 0.7% 0.5%
Transport -0.4% 0.2% 0.1% 0.5% 2.6% 0.5% 2.5% 0.9% 1.1%
fuels
CAGR 3
CAGR -0.2% 0.6% 0.3% 1.1% 1.9% 0.6% 2.3% 1.0% 1.5%
Transport -0.1% 0.5% 0.4% 0.6% 2.6% 0.7% 2.9% 1.2% 1.9%
fuels
CAGR 3
Growth in distillation capacity is expected to accelerate after 2020 to 0.7 percent per annum,
with most of the new builds concentrated in Asia. The outlook assumes additional capacity
investments may be needed in Asia, primarily in china and India, where overtime markets
could witness growing shortages of light products over time. To meet the growing product
shortages starting 2021 to 2030, the outlook could build an additional capacity addition of
260 kbd in china and 1200 kbd in India (Exhibit 6).
Exhibit 6
ex-FSU
global
NA
Total
global
NA
Total
2015
Latin
2020
2015
Latin
2020
FSU
AG
FSU
AG
Asia
Pacific
Europe
Asia
Pacific
Europe
Africa
America
Africa
America
Exhibit 7
ex-FSU
NA
Total
Total
global
NA
Total
Latin
Latin
2015
2020
2015
2020
FSU
Asia
Pacific
FSU
Asia
Pacific
Europe
ME
Europe
ME
America
Africa
America
Africa
1 Conversion units represents the sum of cokers, thermal crackers, visbreakers, FCCs, RCCs and hydrocrackers
Exhibit 8
14
Middle East 3%
13
12
Asia 1%
3
West Africa -7%
2
Latin America 15%
FSU 10%
1
Other 11%
0
2010 10 11 13 14 2015
1 Includes consumption of domestic crude by Asian refineries and crude oil imports by the following crude oil-importing countries in Asia:
China, India, Japan, South Korea, Singapore, Thailand, Taiwan, Australia, Indonesia, Malaysia, Philippines, Pakistan and New Zealand
Exhibit 9
Russia
Europe
North
Middle Northeast
America
East Asia
Latin
America
A large portion of the additional exports is projected to flow to Southeast Asia, the closest
market to the Middle East with significant demand growth for refined products and swing
refining capacity (Exhibit 10). Net import growth is expected to be 1.6 million barrels/day,
pushing Asian utilization down to 70 percent by 2025.1
Exhibit 10
Europe
Northeast
Middle East S Asia Asia
Southeast Asia
West Africa
Australia/
New Zealand
Exhibit 11
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Exhibit 12
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Low-demand case: Strong growth in product demand in Asia could keep utilization in
this region high. USGC may see consistently high utilization as it is expected to supply
product export markets as far as Asia in the outer years. Falling demand for transport
fuels could push down European utilization after 2028.2
High-demand case: The expansions expected through 2020 are anticipated to meet
the growing product demand. By 2021, however, several countries could see increasing
shortages of light products and consequently would require new capacity investments,
which are built into the high-demand case. Factoring in this 1.4 Mbd of additional refining
capacity, demand growth in light products (1.2 percent annually) is expected to rise
faster than the growth in refining capacity (0.7 percent annually) in the high-demand
case. This could keep utilization at historically high levels.3
90 90
85
85
80
75 80
70
75
65
60 70
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
1 PADD 3
2 Singapore, Malaysia, Korea, Taiwan
3 Belgium, Netherlands, Norway, UK, France, Italy, Spain, Greece
Low-demand case: In the short term, margins in all regions are expected to fall until 2020
in line with growing refining overcapacity globally and a tightening resid market. Global
implementation of MARPOL in 202021 could support margins by USD 1 to 2/bbl in USGC
and Europe where additional demand for distillates for replacing fuel oil in bunkers could
provide an uplift to utilization. Continued exports of USGC products could keep prices of
US light products at an export netback relationship to NWE, and the margins trend could
be in line with Europe over time. Falling utilization and margins in Europe after 2028 could
have some impact on USGC, whereas Asian margins could continue to increase on robust
demand growth and rising crude prices.
High-demand case: The margin outlook for the next five years is similar to that of the
low-demand case. In 2021, however, when the implementation of MARPOL is expected
to achieve its full impact and when it is projected to push the resid markets to substitution-
based pricing for resid, margins in Asia are expected to jump by USD 7/bbl compared to the
low-demand case.
24 24
History Forecast History Forecast
20 20
16 16
12 12
8 8
4 4
0 0
20162
20162
2010
2012
2014
2018
2020
2022
2024
2026
2028
2030
2010
2012
2014
2018
2020
2022
2024
2026
2028
2030
-4 -4
-8 -8
Market assessment: With more options resulting from a more varied set of sources,
refiners may need to understand pricing dynamics beyond the local region. This could be
particularly important when negotiating longer-term agreements
Optimization: The planning optimization function could need to cast a wider net not only
in considering crude types, but also in determining intermediate purchases and sales.
Optimization over multiple time horizons may become more critical as refiners regularly
consider crudes with very different transit times
Operational flexibility: Operationally, some refiners may gain significant value through
proficiency in managing more frequent and more dramatic crude slate changes to fully
capture all the opportunities provided by the market. This may require excellence in
logistics and operations scheduling and best-in-class management of crude transitions
Exhibit 15
Crude-exporting countries
1
Expanding footprint in Asia
Large exporters of crude like Saudi Arabia, Kuwait and Iran are facing growing
competition in international markets due to the all-time high production of crude oil
Possible outlook
Players like Saudi Aramco and Kuwait Petroleum that have sufficient capacity to meet
domestic demand are redirecting investments to other markets that are still building
capacity (like Indonesia and Vietnam) to potentially secure long-term crude offtake by
these markets
Players in crude-exporting countries (like Iran) that do not have sufficient capacity to
meet domestic demand are still looking to make domestic investments (Exhibit 16)
Exhibit 16
Saudi
Saudi Aramco 2,9251 6.7
Arabia
Kuwait National
Kuwait Petroleum 1,015 6.4
Company
Abu Dhabi
UAE National Oil 500 4.0
Company
SOURCE: Saudi Aramco corporate website press releases, strategy presentations; Press search
Countries like India and China have developed sufficient capacity for meeting domestic
demand (Exhibit 17)
Possible outlook
State-owned companies in these markets are focused on domestic demand, and are
investing in complexity to increase profitability
P
rivate players are also investing in complexity to increase competitiveness in export
markets
Exhibit 17
IOCL is expanding and optimizing its refining and marketing operations to meet growing
domestic demand and to sustain its position as the market leader.
IOCL is one of Indias largest state- IOCL commissioned its 15 million tonnes per annum
owned companies and operates 11 greenfield refinery at Paradip in February 2016, which has
of the countrys 23 refineries increased the companys total refining capacity to about 70
million tonnes per annum
Unlike private refining companies that
target the export market, IOCLs The company is also exploring brownfield capacity
primary mandate is to serve the expansions at its Barauni, Gujarat, Mathura and Panipat
countrys growing domestic market refineries, additional capacity developments on the west
demand (Indian fuel consumption coast of India, as well as investments in petrochemicals and
grew more than 10 percent in 2015 natural gas verticals
16)
Since crude imports account for more than 90 percent of
Recovering from a loss of over USD 2 IOCLs costs, the company is making efforts to reduce
billion in 201415 as a result of crude these costs by expanding its crude oil basket and
and product inventory losses, IOCL optimizing the proportion of term and spot crudes for price
registered a profit of about USD 1 advantage
billion in the first quarter of 201516
on the back of increasing refining IOCL is focusing on improved customer service at its
margins and full payback of subsidies service stations. The company is strengthening its market
by the government presence by automation of dispensing units. It has
modernized more than 85 percent of eligible A &B site retail
outlets. It aims to achieve 100 percent modernization of the
rest of fuel stations in 2017
SOURCE: IOCL corporate website press releases, strategy presentations; Press search
Strong refining margins and significant recent investments in downstream projects have
helped make recent quarters among the most profitable in the companys history.
Reliance Industries Limited owns the Reliance is currently implementing its largest-ever
worlds biggest refining complex, in investment plan of USD 30 billion for 20142017, with cover
Jamnagar, India plans for four large key projects in refining and
petrochemicals
The company imports more than 1
million barrels of crude per day, Many of these projects will be commissioned soon,
converting it into fuel and petchem including a USD 4.8 billion petcoke gasification project at
products, many of which are meant the companys Jamnagar refinery, which will convert low-
for export markets value petroleum coke into high-value syngas, allowing the
company to replace expensive LNG imports with cheaper
Despite a fall in revenues between petcoke gas
2015 and 2016 (due to lower product
prices), high margins in Reliances At the same time, increasing competition among crude
refining and petrochemical suppliers is giving Reliance more options for crude sourcing
businesses helped the company
achieve its highest quarterly profits in The company has been replacing some of its expensive
eight years in the first quarter of 2016 Latin American crude purchases with cheaper Middle
Eastern crude, and is also looking to increase purchases
from Iran (which used to be Indias second biggest oil
supplier before the imposition of economic sanctions)
SOURCE: Reliance Industries corporate website press releases, strategy presentations; Press search
As a result of overcapacity and low domestic demand, Sinopec has increased its product
exports and plans to invest in upgrading its refineries to produce higher-value products.
Sinopec is an integrated national oil Continued growth in Chinese refining capacity coupled with
company (NOC), and Chinas largest a slowdown in demand has led to Chinese companies
refining player, with 26 refineries and shifting more of their output to export markets, especially
a total capacity of 5 million industrial fuels like diesel and fuel oil; Sinopec, for example,
barrels/day has seen its export quotas (which are issued by the Ministry
of Commerce and the General Administration of Customs)
Between 2014 and 2015, profits from almost double between the first quarter of 2015 and 2016
the companys refining and chemical
businesses grew, but were not To further improve its competitiveness in export markets,
sufficient to offset losses from the company plans to invest about RMB 20 billion in 2016
Sinopecs exploration and production in its mega refineries along the coastline regions; this
(E&P) division, causing overall investment will also help upgrade the quality of refined
operating profits to drop by 22 products to meet rising product standards (National V by
percent to about RMB 57 million in 2018 )
2015
Additional investments are being targeted towards the
While refining capacity in China manufacture of higher-value products, for example, about
continues to grow, domestic demand RMB 11 billion for the Zhongtian Synergetic coal chemical
growth for products has been project, the Jinling propylene oxide and LPG project, and
slowing, driven in part by a slowdown the Maoming ethylene oxide project
in industrial growth
SOURCE: Sinopec corporate website press releases, strategy presentations; Press search
Fast developing markets like Indonesia do not have sufficient capacity to meet rapidly
growing domestic demand
Possible outlook
NOCs in these countries have announced a number of ongoing (and upcoming) projects
to build new capacity and increase self-sufficiency in refining, due to be commissioned
within the next five to 15 years
JV partners are also being sought based on their ability to bring security of crude supply,
given that these markets do not produce sufficient crude to meet domestic demand
(Exhibit 18)
Exhibit 18
Pertamina has ambitious plans to upgrade its refining capacity to meet Indonesias growing
fuel deficit.
Pertamina is Indonesias only major Pertamina has announced far-reaching plans to upgrade
refiner, operating six refineries with a existing refining capacity and build new capacity over the
total capacity of about 800 thousand next 10 to 15 years
barrels per day (kbpd) (or about 50
percent of the countrys demand); the In November 2015, the company signed a heads of
remainder of the demand is met agreement with Saudi Aramco for the upgrading of its
through imports Cilacap refinery to increase the Nelson Complexity Index
(NCI) from 3 to 9; the two companies had earlier also signed
Many of these refineries were built a memorandum for similar projects in two other refineries in
when Indonesian crude used to be Dumai and Balongan
lighter and sweeter
Pertamina is also leading the development of two new
As the countrys oil fields have refineries in Tuban (to be developed in partnership with a JV
matured, a growing share of partner) and Bontang (planned for development using the
domestic crude has had to be public-private partnership or PPP model)
exported for processing while
Pertamina has had to import crude Pertamina has recently announced plans to partner with
for its own refineries overseas refineries to process its crude entitlement in the
Middle East as a way to reduce the countrys import bill
SOURCE: Pertamina corporate website press releases, strategy presentations; Press search
Markets like Japan, Korea, and Taiwan are facing long-term overcapacity relative to
projected demand (Exhibit 19)
Possible outlook
Companies in these markets are shutting down unprofitable refineries, while exploring
foreign investments in other countries that are still building new refining capacity,
particularly in petrochemical projects
Exhibit 19
South
GS Caltex 775 6.2
Korea
JX Nippon Oil and Energy is Japans In light of overcapacity at home, JX is looking to continue its
largest refining company, having a consolidation journey by merging with TonenGeneral by
total capacity of about 1.5 million April 2017; the merger is targeted to improve profitability by
barrels/day (40 percent of the over USD 800 million annually within five years
countrys refining capacity)
At the same time, the company has expressed its interest in
The company is facing challenging investing in refining and marketing businesses in Southeast
conditions at home, with domestic Asian countries like Vietnam and Indonesia
fuel demand likely to drop by 30
percent between 2015 and 2030 In April 2016, JX purchased an 8 percent stake in Vietnams
state-run company Petrolimex (which holds 55 percent of
JX has been in consolidation mode the retail petroleum market share in Vietnam). JX and
for a few years, having shut down its Petrolimex had also previously signed a memorandum of
180 thousand barrels/day Muroran agreement for a 200 thousand barrel/ day refinery in Van
refinery in 2014 in response to the Phong, expected to come on-stream in 2024
Ministry of Economy, Trade and
Industrys ordinance to increase the JX had also previously partnered with Pertamina to upgrade
cracking-to-crude distillation capacity the companys refinery in Balikpapan, but dropped the plan
ratio from 10 percent to 13 percent or in January 2016 after the two companies failed to agree on
higher by 2014 an investment estimate
SOURCE: JX Nippon corporate website press releases, strategy presentations; Press search
International majors with refining assets in Asia dominate in countries like Singapore and
Australia that do not have strong NOCs
Possible outlook
With many of these refineries being export oriented, development of new refining
capacity in their export markets is leading to growing competition among these players
and to shutdowns of older or less profitable refineries
The impact of refining overcapacity is likely to worsen as more refineries come on-stream
in markets like China, Indonesia, and Vietnam, potentially leading to even more capacity
rationalization in the medium term (Exhibit 20)
Exhibit 20
Major players & Asian footprint Total capacity 1, kbpd Average NCI
Singapore,
ExxonMobil Thailand, Australia, 875 5.8
New Zealand
Singapore, Brunei,
Shell Malaysia, 644 4.5
Philippines
Singapore,
Chevron 300 5.9
Thailand, Australia
1 Represents the equity stake in the refining capacity in different Asian countries
Shell is consolidating its refining asset base in Asia to focus on fewer, more competitive
assets.
Shell has a diverse set of refining Shell is implementing a refining streamlining program,
assets in Japan, Brunei, Malaysia, the having declared in 2014 that in the companys view far too
Philippines, and Singapore; most of many of our competitors, mainly governments actually,
these countries, however, are self- continue to invest in capacity that the market doesnt need
sufficient in refining capacity, setting
the stage for an increasingly In line with this strategy, the company sold 51 percent of its
competitive market for the companys stake in Malaysias Shell Refining Company in 2016 to a
exports in the region unit of Chinas Shandong Hengyuan Petrochemical
Company; more divestitures can be expected as the
In 2015, Shell suffered a setback in company seeks to sell up to USD 30 billion of assets
Bukom Singapore (the companys globally across the value chain
largest refinery worldwide) when a fire
in the crude distillation unit (CDU) At the same time, Shell is investing in upgrading its core
knocked off almost 40 percent of refining assets to make them more competitive; upgradation
refining capacity of the Bukom refinery fluid catalytic cracking (FCC) was
completed in early 2015, boosting production of ethylene by
more than 20 percent
SOURCE: Shell corporate website press releases, strategy presentations; Press search