Global capex may dent refining margins

UK energy consultancy expects surplus in a couple of years.

Global refining margins may come under pressure for five years, beginning 2010, as capacity addition is likely to surpass demand for petroleum products.

Global refining capacities increased 205 million metric tonnes per annum (mmtpa) during the period from 2000-01 to 2005-06, to a total 4,360 mmtpa.

Since then, about 700 mmtpa of capacity additions have been announced, of which 370 mmtpa is expected to be added by 2012.

"The amount of capacity coming on stream is likely to result in an excess of refining capacity over demand at least till 2015," said George Bright, chief executive officer, KBC, a UK-based energy consultancy.

India, the fifth largest country with a three per cent share of global refining capacity, has become a net exporter of oil products with production surpassing domestic consumption.

India's refining capacity is set to increase from 145.96 mmtpa to 237.95 mmtpa by 2011-12. A significant share of this 92 mmtpa capacity addition will come from India's largest private sector refiner, Reliance Industries Ltd, which will commission a 29 mmtpa new refinery at Jamnagar this year.

Bright expects global capacity surplus will show as early as in the next couple of years. However, he would not quantify the dent that additional capacities would cause on refining margins.

KBC has several top Indian refiners among its clients.

India's simple refining margin which is indicative of the Asia margin was $7.6 a barrel in March. The margin for complex refining was $10.5 a barrel in the same month.

"The utilisation for the industry is expected to come down from the current 95 per cent to 85 per cent as the capacity expansion surpasses demand," Bright said.

According to Mumbai-based brokerage Asit C Mehta, the demand for petroleum products in India is expected to grow at 3.3 per cent annually, while supply is expected to grow at 7.9 per cent from 2006-07 to 2011-12.

This will result in a net surplus of 60.2 mmt in 2011-12, which would mandate an increase in the export of petroleum products from the 21.5 mmt in 2005-06. "The margins would still not be as bad as it was at the beginning of this decade," the brokerage said.

According to the figures from Edelweiss Securities Ltd, another Mumbai-based brokerage, the margin for an Indian public sector refinery without any import duty differential benefit was as low as $0.88 a barrel and $0.72 a barrel in the financial years 2001 and 2002 respectively. That margin was up to $5.73 a barrel in financial year 2008.