Five Oil Refining Trends in the Face of Overcapacity

By Guo Zhenji, PetroChina Jilin Petrochemical Co., Ltd.
Research Institute, Zhang Wenbin, PetroChina Jilin Petrochemical Co., Ltd. Refinery

China’s oil refining capacity will increase considerably this year, adding a net 35.00 million t/a. At the same time, the prospects of the global crude oil supply are not favorable for the coming decade. Growth of the global supply is expected to level off after 2020. And if demand keeps growing, the supply will become tight in the 2020s. The development focus of the world’s oil refining industry will continue to shift toward regions with advantages in trade and natural resources. Refining will continue along the path of larger-scale production, industrial clustering, heavier feedstocks, cleaner products and fiercer competition.

Capacity surplus will worsen

China is adding an estimated 46.0 million t/a of oil refining capacity this year and eliminating 11.0 million t/a of outdated capacity. This will leave a national total of 788.0 million t/a at the end of 2017, a YoY increase of 4.6%.
Refinery construction in China today mainly includes a 40.0 million t/a new project of Zhejiang Petrochemical Co., Ltd., a subsidiary of Rise Sun Enterprises Holdings Limited (the biggest refinery yet envisioned in China’s future, with the first phase and the second phase to start production respectively in 2018 and 2020), a 10.0 million t/a integrated project of Sinopec Zhongke Refining & Petrochemical Co., Ltd. (to start production in 2019), a 3.0 million t/a integrated project of CNOOC Taizhou Petrochemical Co., Ltd., a 5.0 million t/a expansion project of PetroChina Huabei Petrochemical Co., Ltd., a 5.0 million t/a expansion project of Shaanxi Yanchang Petroleum Group Refinery and a 3.0 million t/a relocation/expansion project of Sinochem Quanzhou Petrochemical Co., Ltd.

Crude oil demand will peak

Global crude oil consumption last year was 96.6 million barrels per day, an increase of 2.2 million barrels over the previous year. Demand in the world will likely reach 104.0 million barrels per day in 2022. With the progress of alternative energy technologies and the gradual exhaustion of crude oil resources, however, crude oil demand will peak someday.
The prospects of the global crude oil supply are not favorable. Due to the slack prices for three consecutive years, both countries and companies already invest dramatically less in prospecting and developing crude oil resources. As we said, the supply might become tight.
On the other hand, in 2016 China’s demand for oil products shrank for the first time in many years and the supply was in surplus, due to economic transformation and improvements, slowing manufacturers’ growth, oil consumption being replaced by new means of communication, and rapid development of high-speed trains and new-energy automobiles. Apparent consumption was 312.83 million tons, down 1.6% YoY. But the number of passenger buses and the freight volume of the civil aviation industry have grown steadily, helping the consumption of gasoline and kerosene keep rising, but more slowly: 118.95 million tons of gasoline, up 2.54% YoY, and 30.58 million tons of kerosene, up 9.2%. In contrast, the consumption of diesel fuel fell to 163.30 million tons, down 6.1% YoY – the first annual decline of diesel consumption since 2001.
The slow growth of China’s economy is gradually stabilizing this year. Annual crude oil consumption is forecast to be up a bit, and dependence of imports is looking higher. Oil refining capacity will return to growth mode, and the challenges of surplus capacity will become more severe. Oil product consumption is expected to amount to 319.72 million tons this year (up 2.2% YoY): 125.25 million tons of gasoline, up 5.3%; 160.86 million tons of diesel fuel, down 1.5%; 33.61 million tons of kerosene, up 9.9%.

Five major trends for the future

1. Further development towards large-scale production and industrial clustering

The average scale of refineries around the world will increase further. It reached 7.44 million t/a in 2016, 11.7% larger than in 2010.
Sinopec will invest RMB200.0 billion during the Thirteenth Five-Year Plan period (2016-2020) to create world-class refining & chemical bases at Maoming/Zhanjiang, Zhenhai, Shanghai and Nanjing. The refining in these four bases will reach 130 million t/a, or 45% of Sinopec’s total and 17% of China’s total.

2. Improvement of standards toward cleaner fuels will be accelerated

The upgrading of standards for oil products in some major countries has accelerated in recent years. Reducing the sulfur content in gasoline and diesel to below 10×10-6μg/g is basically an international trend.
China started to implement the China V standard nationwide on January 1, 2017 and will implement the China VI standard for vehicle gasoline and vehicle diesel starting January 1, 2019. The overall trend includes reduction of sulfur content in gasoline to 10×10-6μg/g, further reduction of volume fractions of olefins, aromatic hydrocarbons and benzene to 15%, 35% and 0.8%, reduction of sulfur content in diesel to 10×10-6μg/g and further reduction of the volume fraction of polycyclic aromatic hydrocarbons to 7%.

3. Intensive adjustment toward the prevailing mode of global crude oil trade will be speeded up

With the constant increase of crude oil output in the United States, its ban on crude oil export was lifted in 2015, leading to a drastic increase of export. The major destination today is Canada, accounting for around 60% of US crude oil export. Export to Asia, Europe and Latin America has also increased.
Growth of global crude oil consumption will of course further increase crude oil trade volume. Reduced output from oil producing countries will change the patterns of oil trade in the near future. Two major exporters of crude oil – North America and the Middle East – will dominate. Despite China’s efforts to diversify import sources, dependence on the Middle East will remain rather high, and a few import sources will dominate.

4. Market competition of oil products will grow fiercer

Oil refining capacity in the United States and the Middle East has increased constantly in recent years, and those regions have actively expanded export of oil products. Countries’ standards for oil products are converging. International trade of oil products will therefore become more brisk, and competition will become fiercer.
China has adjusted the balance of domestic resources through expanding its export of oil products, becoming a net exporter of gasoline, kerosene and diesel in 2016. With China’s constant expansion of oil product export, the patterns of oil product trade in the Asia-Pacific region will change. China faces export competition from Japan, Korea and Singapore.

5. The world will embrace more medium/heavy varieties of crude oil

The “shale oil revolution” in the United States eased the trend of supplying high-sulfur poor-quality crude oil in the world. In the medium term, the United States’ shale oil output has considerable opportunity for growth. OPEC will likely rein-in its oil output from the historic high of 2016. Therefore, medium/light varieties will still make up a major proportion, and the trend of lightening in the quality structure of crude oil trade will not change. Longer term, however, as most of the world’s remaining proven crude oil reserves are medium/heavy grades, more medium/heavy varieties will be traded.