Sulphur 413 Jul-Aug 2024
31 July 2024
New Asian refining capacity
REFINING
New Asian refining capacity
The refining industry continues to pivot towards Asia, with knock-on effects for sulphur output.
The refining industry, the source of half of the world’s elemental sulphur, continues to grapple with a variety of changes. In the OECD countries of Europe, North America and East Asia, plateauing or falling demand due to improved fuel efficiency of vehicles and the continuing spread of battery and hybrid powered cars are reducing demand, while the sanctions following the Ukrainian invasion has radically disrupted flows of both crude and refined products; Russia was not only a major supplier of crude oil to Europe but also diesel. At the same time, Asia continues to build large integrated refineries to deal with rising fuel demand from increasing vehicle ownership and use and the replacement of imported refined products with domestically produced ones.
Overall oil demand continues to rise, but the rate of increase is slowing rapidly after the rebound following the disruption of the covid pandemic, and are forecast to plateau as the world reaches the peak of oil demand around the end of the decade. In its May 2024 Oil Market Outlook, the International Energy Agency forecast that global oil demand is set to rise by 1.1 million bbl/d in 2024, and 1.2 million bbl/d in 2025. Supply rises only by 580,000 bbl/d. with non-OPEC output increases of 1.4 million bbl/d balanced partially by 840,000 bbl/d of OPEC+ output cuts. Oil output continues to rise in the US, Guyana, Canada and Brazil. Prices have held relatively steady over the past year. Benchmark oil prices corrected sharply lower over the course of April and early May, as concerns over the health of the global economy and oil demand fuelled a sell-off. Reports of progress towards a truce in Gaza also weighed on oil prices, although geopolitical tensions remain high. Brent crude futures traded at around $83/ bbl, down somewhat in spite of signs of tightness in the crude oil market.
Refining
Global refinery margins are currently at around two year lows, particularly in Europe, but also the US and Singapore. However, annual growth in refinery activity is forecast to accelerate from just above zero in 1Q24 to 500,000 bbl/d in Q2 and to 1.8 million bbl/d b/d in the second half of 2024. Refinery throughputs passed a low point for the year at 81.4 million bbl/d in February, with crude processing increasing to reach a summer peak of around 85.6 million bbl/d in August. Much of the increase in processing will be a recovery in refining rates in the US and Europe, although European refiners face longer term problems including declining regional demand, the loss of access to Russian crude, less flexible operations and lack of petrochemical integration, as well as high costs for utilities.
Most of the increase in refining activity is coming from outside the OECD. The Middle East is forecast to increase crude runs by 650,000 bbl/d this year, the largest gain of any single region, driven mainly by the continuing ramp up of operations at the 650,000 bbl/d Al Zour refinery in Kuwait towards full production. Saudi Arabian output is also up around 300,000 bbl/d year on year due to the completion of planned maintenance work.
Elsewhere, India and China have benefited from heavily discounted Russian crude supplies, leading to an increase in refinery activity of around 100,000 bbl/d in 1Q 2024. Overall, new refining capacity in Africa, the Middle East and Asia will underpin annual gains of 1.2 million bbl/d.
China
China has been the major driver of new refining capacity over the past decade. China’s annual oil refining capacity rose to 936 million t/a (18.7 million bbl/d) in 2023, making it the largest refining sector in the world in terms of capacity, according to official figures. China’s oil consumption was about 756 million t/a (15.1 million bbl/d) last year, and its crude oil processing was 738 million t/a (14.8 million bbl/d), both reaching record highs. However, this was the tail end of the years of record breaking growth in the Chinese economy. As the rate of GDP growth has slowed to 6%, and possibly 4-5% in 2024-25, combined with the rapid domestic uptake of oil-substituting technologies such as electric vehicles (EVs) and high-speed rail China’s share of global oil demand growth is likely to fall to around one third. As a result, refining capacity growth has slowed, as seen in Table 1.
China’s refining capacity is expected to rise by 2.7% this year to 961 million t/a (19.2 million bbl/d), but this continues to run significantly in excess of demand. This means that China needs to maintain large export volumes in order to balance the domestic market, and overcapacity continues to dog the industry. New refining capacity includes a 400,000 bbl/d refinery in Shandong province operated by Yulong Petrochemical, the start-up of which has now been pushed back to 2025, and 200,000 bbl/d at Sinopec’s Zhenhai Petrochemical and Refining, where a new ethylene plant is scheduled to be operational by the end of 2024. Production also continues to ramp up at Guangdong Petrochemical, which started up last year. Saudi Aramco is investing in a new 200,000 bbl/d refinery at Liaoning.
There are also closures, however. China has set a minimum size for new oil refineries of 10 million t/a (200,000 bbl/d), and will ban small crude processors that claim to be chemicals or bitumen producers under a plan by the National Development and Reform Commission (NDRC) to rationalise Chinese refining capacity and improve efficiency. The plan caps total refining capacity at 1 billion t/a by 2025, and is also likely to lead to much tighter scrutiny of plans for new refineries, with an emphasis on brownfield expansions at existing sites operated by major players such as Sinopec, CNPC (PetroChina) and CNOOC, and integration into petrochemicals production. PetroChina closed a 120,000 bbl/d distillation unit at Dalian in October 2023. Overall around 55% of refineries are forecast to be over the 200,000 bbl/d cap by 2025, and the NDRC continues to try and close China’s large collection of small, so-called ‘teapot’ refineries of 40,000 bbl/d and under. China has about 34 refineries of 200,000 bbl/d or more, with combined processing capacity of 480 million t/a (9.6 million bbl/d), according to Sinopec.
Chinese refinery throughput is expected to reach 752 million t/a (15.1 million bbl/d) this year, up 1.8% year on year, and equivalent to a capacity utilisation rate of 78%. In addition to the expansions already mentioned, a further five refineries with a total refining capacity of 1.2 million bbl/d are due to come on stream by 2030, including the 300,000 bbl/d Huajin Aramco Petrochemical Company in Liaoning province in the northeast, and the 320,000 bbl/d Sinopec Gulei refinery. The Caofeidian V refinery, with a capacity of 400,000 bbl/d is due to start up in 2029. Operated by Hebei Xinhua Petrochemical Co, it is a coking refinery with integrated petrochemical production.
South Asia
Outside of China, the other major growth area for new capacity is in South Asia, particularly India. India added 39 million t/a (780,000 bbl/d) of refining capacity over the past decade, but is poised to add another 57 million t/a (1.1 million bbl/d) before 2030, according to the government, most of it via expansions at existing sites. India’s refining capacity reached 254 million t/a in 2023, just over 5 million bbl/d, and in the 2023 financial year Indian refineries processed 5.13 million bbl/d of crude oil. India’s oil consumption is rising as its economy expands at around 7% per annum, with booming construction and manufacturing sectors. Cheap Russian oil has also helped boost margins.
At present there are 37 million t/a of refinery projects under construction/ development. Indian Oil Corp.’s Panipat refinery in Haryana state is adding 200,000 bbl/d of crude distillation unit (CDU) capacity this year as part of an expansion, and Hindustan Petroleum Corp.’s new Barmer refinery in the northwestern state of Rajasthan will add 180,000 bbl/d next year. Smaller expansions are being conducted at the Visakhapatnam and Gujarat refineries, and the Barauni plant at Begusarai city in Bihar state. Other new projects include Chennai Petroleum Corporation Limited (CPCL) – a subsidiary of state oil giant the Indian Oil Corporation (IOC) – which is aiming to complete the construction of a 180,000 bbl/d refinery by the end of 2027, Nayara Energy’s Vadinar Refinery expansion, which includes 515,000 bbl/d of crude distillation capacity, and IOC’s Panipat expansion projects, with another 200,000 bbl/d of capacity.
Pakistan also has major plans for refinery expansions, including the 300,000 bbl/d Gwadar refinery, owned by the Pakistan State Oil Co., which is being backed by both Chinese and Saudi investment money. Pakistan Refinery Ltd is also doubling its capacity from 50,000 bbl/d to 100,000 bbl/d.
Chinese money is also flowing into Sri Lanka, where Sinopec is close to completing a feasibility study on two refinery projects. Sri Lanka currently has only one ageing 38,000 bbl/d refinery, but Sinopec is looking at the options of either a single 160,000 bbl/d refinery or two 100,000 bbl/d facilities at the port of Hambantota, which itself has been developed with Chinese money as part of the ‘Belt and Road’ initiative.
On top of these, there are a number of other refinery projects elsewhere in Asia. In Indonesia, Pertamina’s Balikpapan refinery expansion is expected to increase capacity from 260,000 bbl/d to 360,000 bbl/d this year.
The last refining boom?
While there are a number of new refineries under construction in Asia, most industry commentators expect this to be the last major boom in refining capacity. McKinsey forecasts that global refining capacity will increase by 5.1 million bbl/d between 2023 and 2028, but this increase includes 1.4 million bbl/d of announced capacity rationalisations, 90% of which are in OECD markets such as Europe and North America, with conversions to biorefineries and petrochemical production as well as the closure of older, simpler and less flexible refinery capacity. By 2030 as oil demand peaks, new capacity is likely to balance closures.
The impact on the sulphur industry will be profound. New refining capacity will add 4 million t/a of sulphur production from 2023 to 2028. In China in particular it will help drive increasing self sufficiency in sulphur and lower imports. But in the longer term we may simply see oil-based sulphur production gradually shifting from US and Europe to Asia, but remaining at a relatively steady output level.
