Demand Growth Lifts 2011 Prospects for Refiners and Refinery Service and Equipment Companies

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Petroleum refiners have had a difficult 2010, but "I expect 2011 to improve, and 2012-15 will be a heyday for refining," said Chris Paschall, Industrial Info Resources' vice president of global research for the Petroleum Refining Industry, at the company's 2011 Industrial Market Outlook in Baton Rouge.

One reason for Paschall's optimism: 59 projects with combined total investment values of $6.7 billion have been restarted at U.S. and Canadian refineries since January 2009. These projects had all previously been delayed or postponed. Another reason is that the number of construction starts at U.S. and Canadian refineries through October jumped sharply over their respective year-earlier numbers. A third reason that 2011 will be a better year than 2010? Distillate margins are currently about $14 per barrel, and high margins for distillate could trigger the release of new construction funds to expand refining capacity.

Gasoline margins, by contrast, have exceeded $10 per barrel for only two months so far in 2010. Typically the margins have been about $5 per barrel, Paschall noted.

Thin refining margins for gasoline are the result of weak demand and the arrival of 3 million barrels per day (BBL/d) of new refining capacity around the world in 2008-09, Paschall said. "About half of that new capacity was gasoline. Adding new capacity to a market with weak demand and high crude oil storage levels is why margins have been so weak this year." Another 900,000 barrels of refining capacity is scheduled to come online in 2011, he said, but global demand growth is expected to soak up a lot of that new capacity, resulting in higher margins.

In the U.S. this year, demand for distillate, which is used as a fuel for transportation and industrial boilers, has risen by an average of 3% each month, compared to demand in the year-earlier months. But the demand growth for this product category has been somewhat choppy in 2010. In August, demand for distillate rose 12.34%, compared to August 2009. But in January 2010, demand was down 10%, compared to demand in January 2009. Paschall told attendees here that the overall trend for distillate is positive: In 2008 and 2009, demand for distillate fell for 23 out of 24 months, but in 2010, demand for distillate has increased in six out of eight months.

Demand for gasoline is another matter. Paschall said that monthly demand has increased for five out of eight months in 2010, but the increases are all under 2%. In the three months in which demand declined compared to the year-earlier month, the monthly drops also were about 2%.

"Stabilization of demand for gasoline is needed for refining margins to improve," Paschall said. But 2011 project spending plans from petroleum refiners suggest that the market is turning a corner.

Industrial Info is tracking a total of 600 U.S. and Canadian refinery construction projects with a total investment value of $14.6 billion that are scheduled to kick off in 2011. The most active regions in the U.S. are the Midwest, where work is scheduled to begin next year on a 400,000-BBL/d grassroot refinery worth $10 billion, and the Southwest, where 260 projects valued at $2.7 billion are scheduled to break ground next year. In Canada, IIR is tracking 78 construction projects valued at $5.6 billion that are scheduled to begin next year.

By contrast, North American refinery project spending for all of calendar year 2010 is scheduled to total $5.1 billion, Paschall noted. Not all projects will begin as planned, he said, but even so, project spending by refiners next year looks to be much more robust than project spending this year.

"In 2009 and 2010, refiners have been doing projects that they had to do, not the projects they wanted to do," observed Frank Reina, Industrial Info's director of research for North American petroleum refining. "These were largely environmental compliance projects--removing benzene and complying with MSAT II levels. But we expect that to change in 2011 and 2012, as more refinery project spending will be spent on adding incremental processing capacity."

Reina said that some refiners are making, or are considering making, changes to their operations that would enable them to process more sour crude oil, which has a higher sulfur content compared to sweetcrude oil. "The price discount for sour crude is quite significant, which is driving a certain portion of refiner capital spending," he said.

Paschal noted a lower percentage of refinery unit turnaround projects have been placed on hold or cancelled this year, compared to earlier years. In 2008, for example, about 32% of all turnaround projects were delayed or postponed, but that number fell to 23% in 2009, and has fallen further still to 16% in 2010.

As IIR continues to expand its research staff globally, the number and value of Petroleum Refinery projects it is tracking around the world continues to rise, Paschall told attendees. As of November, IIR's global coverage of this industry included 13,975 units at 688 refineries around the world, which have aggregate refining capacity of 87.2 million BBL/d.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.