Industry Trend Analysis - Upgrades Key To Remaining Competitive - FEB 2018

BMI View: Refining upgrades to minimise residual fuel production and maximise higher value products will be essential to maintaining competitiveness in the European refining sector , as global competition rises over the coming five years .

Refinery upgrade projects continue to progress across Western Europe as companies to leverage the stronger margins of recent years to reinvest in improving refining efficiency. Planned upgrades are predominantly targeting heavy residue upgrading through cokers and visbreaking units to convert residual oil from the distillation process into middle distillate products such as diesel and jet fuel. In addition, solvent deasphalters and hydrotreaters are being constructed to increase specialist product output, such as lubricants, greases and wax.

Efficiency Improving
Planned Refinery Upgrades
Source: Company Updates

These changes will reduce residual fuel output where margins will be further pressured in the run up to the 2020 IMO regulation restricting ships to lower sulphur fuels ( see 'IMO Sulphur Cap: Implications For Shipping Demand & Refining', March 21). The new processing units will result in the production of more diesel, jet fuel/kerosene and specialist products, delivering higher value, in-demand products.

Moving Up The Barrel
Residual Fuel & Middle Distillate* Production In Belgium, Poland & Spain (000b/d)
* diesel, gasoil, jet and kerosene. f = BMI forecast. Source: JODI, BMI

This will be essential to remaining competitive as global refining capacity grows faster than global fuels demand growth through 2021 ( see ' Middle East To Drive Global Fuels Glut ' , August 2017). Refining expansions across Asia will increasingly serve domestic needs, driving new fuels export capacity in the Middle East into European markets. At the same time, competitive US production and softening demand for fuels in Europe will add further pressure to less efficient refining operations in Europe.

Western Refiners Under Pressure
North America & Western Europe Annual Net Fuels Consumption Forecasts
e/f = BMI estimate/forecast. Source: BMI, Naitonal sources

As oil prices trend upward over the coming five years, those refineries in Europe able to be more flexible with crude feedstock sources and nimble in reaction to product margins will be more profitable. Less efficient and less flexible refineries, some of which have only remained operational due to the lower crude prices and stronger margins of the last few years, may be forced to shut down.