The challenge of marrying refinery and product tanker fleet developments

The global oil industry is in such a state of flux at the moment that it is difficult to determine with any degree of accuracy what the crude oil and product tanker trades will look like five years hence. The fundamental changes taking place in the market, in turn, make it difficult for tanker owners to pin down their fleet development plans and for oil companies to gauge their refinery requirements. The current volatile nature of the tanker market is a sign of not only the times but also what lies ahead.

Many factors are contributing to the uncertain outlook, not least the high price of oil; the extent to which natural gas, gas by-products and biofuels will capture energy market share; the stumbling economies of the major industrialised nations; rising standards of fuel economy; and the growing production of oil in the US.

The reduced demand for US oil imports has been a major game changer. Until the past few years the movement of oil to the US was a central plank of the international tanker market. However, the discovery of shale gas and oil in the US and the development of the means to extract these resources, have helped redraw the map of global oil movements.

In the US the recent reversal of the northbound flow of oil from the US Gulf to the Cushing, Oklahoma oil distribution centre and the construction of new pipelines from various Texas shale oil plays are creating opportunities for Gulf refineries to step up their despatch of outbound cargoes to world markets. Against this background, European refineries are struggling to compete with their counterparts in the Middle East, the US and India in terms of either scale or access to cheap feed-stocks.

Elsewhere, China, the second largest consumer of oil products and the fastest growing of the world’s leading economies, is determined to maintain its self-sufficiency in refining capacity and, if possible, strengthen its petroleum product export capabilities.

At first glance, the expansion of export-oriented refinery capacity in the Middle East and India should mean longer haul movements of petroleum products and support a healthier product tanker market. However, this development is offset by the robust level of refinery construction and upgrade projects elsewhere in the world.

Some industry watchers are predicting that such projects could add 8.5 million barrels per day (bpd) to the world refinery capacity slate over the 2013-17 period. However, they forecast that the growth in demand will only require 65% of that total. Such an oversupply would lead to a general drop in utilisation rates to a point that is unsustainable for the refining industry. Margins would fall across the board and the most vulnerable facilities would disappear.

If some measure of global equilibrium is to be maintained, older, less-efficient refineries will need to be shut down. Europe and the industrialised nations of Asia are the areas envisaged for such closures and planners are talking about the loss of about 10% of the existing capacity in each of these regions. How will all of these developments impact the product tanker trades?
In the Middle East the focus is on Saudi Arabia, the world’s biggest oil exporter, where three Worldscale refineries, each with a 400,000 bpd capacity, are being built. These facilities, when fully operational in 2017, will have the ability to process 10% of Saudi’s crude oil production capacity of 12.5 million bpd.

Saudi Arabia has traditionally adjusted its crude oil output to compensate for variations in crude production in other parts of the world and thus help minimise the impact of oil price fluctuations on the world economy. In recent years Saudi Arabia has not had to increase production much beyond the 10 million bpd level to achieve this aim. Rising US and Iraqi output volumes have assisted in controlling global oil prices.

The extent to which the output from the new Saudi refineries finds its way into the world market will be watched closely. The Gulf nation has had to contend with an increasing refined product import bill in recent years as domestic demand has grown. However, the attractiveness of using its home refineries to meet local needs has to be offset against the increased export revenues that petroleum products and their petrochemical derivatives will bring compared to crude oil.

Neighbouring India has a particular interest in the Saudi refinery projects. The sub-continent’s refineries, which are currently running flat out, have the capacity to produce 3.8 million bpd of refined products but domestic demand is only 2.9 million bpd. The country’s private refineries earn handsome revenues in the international marketplace and would face competition from any increase in the volume of Saudi product exports.

China, Asia’s largest oil market, has a substantial and growing refining capacity and the country’s processing plants are now turning out products at the rate of 10.2 million bpd. Consumption of gasoline and aviation kerosene is growing at a faster rate than that for other products, reflecting the increasing mobility of Chinese society.

The continued expansion of China’s refining industry in 2012 resulted in a decrease in its petroleum product traffic. Refined product imports dropped by 17% compared to 2011, to the 350,000 bpd mark, while exports shrank by 3%, to the 600,000 bpd level.

In the US there is 9 million bpd of refinery capacity along the Gulf coast and this stands poised to process the growing volumes of light, sweet crude oil beginning to flow southwards through new and expanded pipelines from inland shale oil wells.

The growth in the demand for gasoline and diesel fuel in the US has slowed to virtually nil and refiners are looking to overseas markets for their output. Customers in Europe and Latin America are their main targets. US refiners on the Gulf coast, as they ease their dependence on expensive overseas crude and begin to process larger quantities of cheaper domestic shale oil, are reporting stronger profits.

The prospect of growing volumes of competitively priced imported products from the US Gulf has prompted some Latin American oil companies to postpone both the construction of planned new local refineries and the expansion of several existing installations. It has also spurred European refiners to consider early closure of their older, less-efficient facilities.
As a result of the shale oil revolution, US crude oil production is set to grow by 900,000 bpd in 2013, to reach the record level of 7.3 million bpd. US producers are barred by law, without presidential authorisation, from exporting crude oil but there are no such restrictions on refined products. US refiners exported petroleum products at the rate of 3 million bpd in 2012.

The demand for oil products in Europe is dropping by 1 or 2% a year, putting further pressure on the region’s refiners and their margins. Eight European refineries have either shut down or cut capacity in the past five years. Another four are said to be at risk of imminent closure.
The UK, for example, now has only 1.7 million bpd of capacity available at seven refineries. The country already relies on significant levels of imports to cover for product shortfalls and when refineries are down for scheduled maintenance, such volumes only increase.

Product tanker owners stand poised to meet the challenges posed by these global refinery developments and shifting trade patterns. The workhorses of this fleet, the medium range (MR) product tankers carrying 45,000 tonnes of cargo, are likely to be the busiest vessels, due to their sheer versatility.

The daily returns for MR tankers are set to grow by close to 50% over the next two years as tonnage demand keeps pace with supply, and even exceeds it at times. Over this period the new regional trading profiles will be emerging and product tanker owners will begin to get a clearer idea of how the requirements for their shipping services are evolving.
The more optimistic forecasters state that the global trade in refined products in 2015 will reach the 900 million tonnes mark (mt), up from approximately 825 mt in 2011. Product tanker owners and operators of oil refineries will be pinning their hopes on these upbeat views.

Irrespective of how the trade patterns actually evolve, however, the challenges associated with today’s oil market make it an interesting time to be participating in the shipping and refining of petroleum products.
Source: BIMCO