Home / ANALYSIS / Cover story: IMO Sulphur Cap on Marine Fuels - Advantage Middle East

Cover story: IMO Sulphur Cap on Marine Fuels - Advantage Middle East

by Martin Menachery on Aug 20, 2017

Mirko Rubeis, partner & managing director, The Boston Consulting Group, Dubai.
Mirko Rubeis, partner & managing director, The Boston Consulting Group, Dubai.

Eighty percent of the worldwide new refining capacity in the next few years is coming up in Asia and the Middle East. De facto, the Middle East is currently a big exporter of refined products, particularly of distillates.

In Asia, additions to refining capacity are still going on, whereas in the Middle East, growth in refining capacity is slowing down, with the completion of the already planned projects, but without new large refineries being announced.

“The key to success for big refined product exporters is scale, complexity, and location. The investments in the recent years have definitely strengthened scale and complexity, providing the ability to produce the right products for the right markets, efficiently. The region being strategically located remains an intrinsic strength for the Middle East,” says Mirko Rubeis, partner and managing director, The Boston Consulting Group, Dubai.

Structurally, the Middle Eastern refining industry, with the additions of new refining capacities, is large and complex. A large part of the Middle Eastern refining capacity is geared towards distillates.“Overall, there has

been an improvement in the competitiveness of the Middle East refining sector over the years. The competitiveness of the assets has been complemented with the increased awareness that trading capabilities are crucial when exporting large volumes of refined products” observes Rubeis.

Wave of restructuring in mature markets

The refining industry in mature markets has been going through a wave of restructuring for the last few years. For example, if you look at the European markets, from 2009 to 2016, refining capacity of 2.4 million barrels per day (mmbpd) has been shut down. And, probably refining capacity of another couple of mmbpd in Europe is at risk, as of now, due to strong competition from the US, Asia and Middle East refiners, besides more stringent regulations.

Not all this capacity at risk will be eventually shut down; but, definitely it is going through real challenges in terms of margins, demand-supply uncertainties, new investments needed, technology upgradations and environmental regulations.

To these challenges, the refining industry is responding in different ways – there are closures, conversions to terminals, investments in upgrading to hydrocrackers, conversions to specialties like base oils, etc.

As a case in point, Europe, for example, is responding to these challenges, whereby some refineries earmarked for closure have converted to bio-refineries, producing biofuels such as HVO, i.e., hydrogenated vegetable oils.  This response in Europe, is largely due to the new prescriptive regulations that 10 percent of the fuels will have to contain biofuels by 2020.

Having a supply chain of biofuels can prove to be a successful initiative for a European refiner. Players such as Neste and     ENI have already significantly invested in this direction.

Enhancing Asian refining capacity

Asia was traditionally considered as a major outlet for big refinery product exporters. But, this scenario is changing drastically. Major economies in Asia are progressively reducing their volume of refined product imports and are increasing local refining capacity in a big way.

China is on the path of a progressively planned self-sufficient future in refined products. In India, there is a major momentum in adding new refining capacity and consolidating its status of a major exporter of distillates. Indonesia and Vietnam are the other major importing markets in Asia for refined products, which have ambitious plans to expand and upgrade their refining systems and infrastructure.

“Asia is still short of self-sufficiency in refined products; but, is poised to increase refining capacity, narrowing the supply gap as time progresses. Many of the major countries in Asia are aiming at self-sufficiency in refined products in the long term. The addition of refining capacity in Asia is not only driven by stand-alone economics, but also by security of supply, or self-sufficiency aspirations,” comments Rubeis.

So, basically the export refiners will have to eventually look also for other outlets for their surplus refining capacity. If a big refiner wants to place diesel in the export market, the competition is very high because there are exporters from many countries, for example, Russia, India, the Middle East and the US. Another important aspect to consider here is that there are now stringent environmental specifications in key export markets, notably Europe, for example in terms of sulphur content.


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