Weak refining margins affect oil industry

By Puja Rajeev

SINGAPORE (Dow Jones): Weak simple refining margins have intensified industry-wide competition in Asia and could force smaller refineries to shut down in the next year, according to industry analysts and experts.

In Singapore, simple refining margins -- the difference between product price and crude price -- are negative for the sixth month running. While improvement is expected on seasonal fourth quarter demand, margins are unlikely to clamber out of the red this year, analysts say.

Huge new refineries in Taiwan and India will increase crude demand and price while pressuring the products market. Recent mergers in the oil industry are creating monoliths capable of working on lower cost, and could marginalize smaller, less efficient units, analysts say.

Average July margins are a dismal minus-96 cents a barrel, little changed from June levels.

The second quarter refining margin average of minus-93 cents a barrel was Singapore's worst in more than a decade, according to James Brown, an analyst with Merrill Lynch.

Complex margins -- the difference between lighter crude products and heavier products that serve as feedstock -have shown resilience, with the average rising 30 cents/bbl from June, helping modern and complex refineries, a Singapore refiner said.

Modern refineries that are geared towards maximizing lighter products can benefit from higher complex margins. They also have more flexibility in altering product mix depending on cost of feedstock and product price, making them more efficient than their older counterparts.

"New refineries will certainly continue to keep pressure on margins and little recovery is seen in 1999. Even though demand is picking up, two huge refineries in the market will take their toll on margins," according to an oil industry consultant, Huge New Refineries Bad News For Small Operators.

India's 540,000 barrel-a-day Reliance Petroleum Ltd. refinery, which started operation this month, will provide India 12 million tons of gasoil that domestic users used to import from Asian refiners.

The start-up of 150,000 b/d of Taiwan's 450,000 b/d Formosa Plastics Corp. refinery later this year will add further to the glut of oil products, they say.

The new refineries will push smaller units into closure, and coerce larger, more efficient units into lower operation rates to minimize losses, a Singapore-based analyst said.

A relative price comparison shows that Dubai crude prices are 85 percent higher from the year's start, while gasoil prices are only 36 percent higher and fuel oil prices are 62 percent higher. The only product keeping pace with crude gains is naphtha, which has risen 81 percent from the start of the year.

With gas oil and fuel oil forming 70 percent-80 percent of Asian refinery outputs, margins are hardly going to recover on the strength of light distillates alone, analysts say.

September Dubai crude prices are estimated at US$18.26-$18.31 a barrel, free on board Persian Gulf basis.

Refinery utilization rates in Japan have been below capacity for years, analysts say. Low capacity utilization more recently has spread to Singapore and Thailand.

Singapore refiners are estimated to be operating at 60 percent of 1.2 million barrels-a-day capacity in July, down from 70 percent in June and near-optimal rates in the first quarter.

Singapore Refining Co. -- a joint venture between Singapore Petroleum Co., BP Amoco PLC and Caltex Corp. -- likely will mothball its 18,000 b/d mild hydrocracker unit this year, company sources say.

According to Chief Executive Tony Anderson, the unit will be shut down indefinitely from Aug. 1. The refinery is operating at 68 percent of its 285,000 b/d capacity, sources said.

Esso Singapore Pte. Ltd., a unit of Exxon Corp., also is mulling the shutdown of its 230,000 b/d refinery at Ayer Chawan, following a merger agreement between Exxon and Mobil Corp. earlier this year, industry experts say.

Esso is operating its refinery at 65 percent of nameplate capacity. Mobil is operating its 300,000 b/d refinery at 50 percent, according to experts.

Combined capacity of 530,000 b/d "is way too large" for current demand to absorb, according to the Singapore refiner.

He said it would be more economical to close down one refinery and operate the other at maximum capacity, than to operate both refineries far below capacity.

Esso officials were unavailable for comment.

The trend could carry on in other Asian countries, analysts say.

Earlier this year the Chinese government ordered 60 small refineries with average capacity of 200,000 metric tons a year to shut down by July 31. An additional 50-60 refineries are expected to shut later this year, according to industry experts.

In Thailand, an operational merger between Rayong Refinery Co. and Star Petroleum Refining Co. expected Aug. 1 will create Thailand's largest refinery at 305,000 b/d, giving the new company, Alliance Refining Co., about 36 percent of Thailand's 855,000 b/d refining capacity.

Rayong is co-owned by Royal Dutch/Shell Group and the Petroleum Authority of Thailand. Star is a joint venture between Caltex and PTT.

Experts suggest the alliance between two relatively new refineries could augur ill for less efficient and older units such as Bangchak Petroleum PCL's 120,000 b/d refinery and Thai Petrochemical Industry's 65,000 b/d refinery.

According to a Rayong Refinery source, the company makes $1- $1.50/bbl on top of Singapore complex margins and 30-40 cents/bbl on top of Singapore simple margins for products sold in Thailand.

The average sales margin in the last 10 days has been $2/bbl for complex products and flat to positive 10 cents/bbl for simple products, he said.

Thai margins typically are priced off Singapore refining margins.