Asian refineries face critical winter season

Asian refineries face critical winter season

SINGAPORE (Reuters): Singapore refiners, entering the most critical winter season for years, are braced for more bearish news in the wake of the regional economic crash, analysts and industry sources said.

The twin prospects of a mild winter and an economic slowdown in Southeast Asia are expected to result in lower demand for oil products during what is normally the peak demand season, they said.

The fourth and first quarters are traditionally the most profitable period for oil companies because of rising demand for heating oil, such as diesel, kerosene and fuel oil, from the northern hemisphere.

But this year South Korea, Japan and China are slowing imports because of bigger domestic refining capacity, high stocks and expectations for below average temperatures.

"The market is headed for an unusually warm northern hemisphere winter on the back of El Nino," said James Brown, analyst at Merrill Lynch, referring to the unusual weather pattern.

As a result all these factors, Brown said Merrill Lynch had cut its 1997 growth forecast for oil product consumption in the Asia-Pacific region by 100,000 barrel-per-day (bpd) to 700,000- bpd.

Asia-Pacific demand for 1997 was estimated at 18.45 million bpd before the revision, compared to a regional refining capacity of 18.1 million bpd.

However, Brown said the fallout in the oil sector from the economic chaos in Southeast Asia will be limited by the economies of the really big consumers--China, India and Japan--which have been relatively unscathed from the turmoil.

"India, China and Japan are the engine for Asian growth and I do not see a downturn for these countries," he said.

"The downturn is affecting the ASEAN nations, and is not going to have huge effect on regional demand."

Analysts East-West Center based in Hawaii said at worst, the economic turmoil could reduce oil product demand growth to 3.1 percent. At best, it would reduce growth to 3.9 percent from a previous forecast of 4 percent.

The Association of Southeast Asian Nations (ASEAN) groups ten southeast Asian countries including Thailand, Philippines, Malaysia and Indonesia, which have been badly affected by a currency and equity crisis.

The industry will watch Singapore's 1.3 million-bpd refinery sector for signs of how the oil market is coping with a mild winter and economic slowdown.

The Singapore refining sector relies on exports to keep going and so makes an excellent barometer for the state of the regional refining business.

In the third quarter, the island's four refineries saw profit margins for basic refining range between a loss of 50 cents and a profit of 50 cents per barrel -- levels considered too low to support future investment.

But analysts said they estimated margins were at the lower end of the range, or below, through the third quarter because refineries were selling kerosene and gas oil at huge price discounts to entice buyers.

In addition, the refiners were forced to cut output between five and 20 percent on at least three separate occasions in 1997 to improve economics.

Currently, Shell Singapore is operating its 435,000-bpd refinery about 15,000-bpd below capacity.

The prolonged down turn in prices has forced refineries to review operations and trim any fat.

Last week, Shell Singapore said it would cut refinery staff 25 percent in the next few years.

In January, Caltex Petroleum Corp, equally owned by Texaco Inc Chevron Corp said it was cutting staff in Singapore 15 percent.