Asia refineries will stay competitive

Asia refineries will stay competitive

SINGAPORE (Reuter): Asia's oil refineries will remain
competitive in the long run despite rising capacity as demand for
environmentally-friendly oil products outstrips supplies, the
Honolulu-based think tank East-West Center said.

"Limited refining complexity, together with rising demand for
middle distillates, contributes to continuing product imbalances
in the region," Sara Banaszak and Fereidun Fesharaki said in the
center's report on Asian refining.

"By 2005, nearly 45 percent of Asian demand will be for
kerojet and gas oil (diesel), causing continuing product
imbalances," said the report received in Singapore on Wednesday.

Along with strong demand growth, increasingly strict oil
product specifications will have also a major impact on refining
profit margins, they said.

India aims to lower diesel sulphur content to 0.25 percent by
1999, while Taiwan and Thailand seek to reduce it to 0.05 percent
by 1999. Japan will use 0.05 percent sulphur diesel in October
followed by South Korea next year.

Japan, New Zealand, South Korea and Thailand now use entirely
unleaded gasoline, while Taiwan is phasing out lead rapidly.
Malaysia plans to be 100 percent unleaded by 2000 while India and
China plans to do so by 2000.

Part of the demand for low sulphur diesel can be met by
Taiwan's Formosa Plastic Group's refinery due to start by 1999
with a 240,000 barrel-per-day (bpd) diesel output and another
130,000-bpd by 2000.

The report said the delay in adding new capacities between
1997 and 1999 could help refining margins recover in the medium
term. It said crude refining capacity would rise more slowly over
the next two years than in the last two years.

Planned crude refining additions in 1997 amount to 577,000
bpd, or a 3.2-percent growth, compared with 1.2 million bpd in
1996. In 1998, the additions would dip to a low of 344,000 bpd or
1.9 percent against demand growth of 4.2 percent.

In 1999 and 2000, capacity increases will recover to 3.4
percent a year, or 660,000 bpd, which will still be less than the
4.2-percent demand growth.

"However, new capacity currently planned for 2000 and beyond
will shrink the gap between the region's demand for oil products
and its basic crude distillation capacity," the report said.

Projected capacity additions after 2000, which would see a
4.6-percent growth or about 1.2 million bpd, could outpace demand
of 3.5 percent, although these projects are not yet under
construction and many may never be built, it said.

Whether they are built would depend on political stability,
subsidies on domestic prices and difficulties in attracting
foreign investments, the report said.

By 2005, Asia's refining capacity could match demand at
slightly more over 25 million bpd, or even surpass it, following
a rise in basic capacity of more than five million bpd.

Asia now has more crude distillation capacity than North
America but only half its complex refining capabilities such as
catalytic crackers, hydrocracking and naphtha treatment.

Even the region's cracking capacity is aimed at maximizing
gasoline production, "a poor fit to demand in a region where
diesel consumption dominates", the report said.

The proposed construction of secondary processing units in
Asia will also shrink the gap with North America and overtake
Western Europe, it said.

The report said that to enjoy profits beyond 2000, oil
companies in Asia needed to focus on upgrading existing
refineries, rather than build new plants "until they received
adequate incentives".

Based on Arab Light crude, the long-term outlook for cracking
or secondary processing margins was around $7 per barrel,
compared with $6 in the first quarter of 1997, it said.

It said the increases in basic and complex refining capacities
would not eliminate product imports to Asia.

"Globalized markets and depressed transportation costs are
encouraging product trade to meet Asian demand," it said.

"This adds to pressure on merchant refineries. In fact, the
Asian refining industry may well experience a set of
globalization shocks, which could ease over time as players learn
and adjust to the global market place."