The global production of crude oil will not peak before 2030, if necessary investment is made in exploration and production.
Nearly $500 billion in investment includes refining but excludes investment in tighter fuel specifications, which has absorbed most of the refinery investment in Europe over the last decade.
Meeting tighter product specifications requires refiners either to use more expensive low-sulphur crude or to invest in new hydrofining units to reduce sulphur content in product. The units needed are major investments and take several years to plan and build.
At the same time, the changing expectations in refining globally have resulted in a strong push for cleaner fuels, biofuels and carbon dioxide emission reductions.
More clean-refiners have to adapt for operational excellence, giving due consideration to the complexity and scale of any new expansion or construction. This desire is tempered, however, by concerns about crude oil supply, quality and cost of production.
At Shell Global Solutions, we believe that conventional crude resources are not in imminent danger of running out. There are sufficient reserves to last for 40 to 100 years, given new technology to extend recoverable oil reserves and "yet to be found" oil.
We also feel there is the potential to recover unconventional reserves, such as heavy oils and oil sands. Output of liquid fuels will be supplemented by gas-to-liquids technologies, which convert stranded gas from remote areas into transport fuels.
Closure of refineries will exacerbate any shortage as it will affect the supply side. Refineries will also have to process different crude oils. Initially, other low-sulphur crudes may be used, but over time the crude oils available will become heavier and sourer (i.e. containing more sulphur) and low-sulphur crude will carry an even greater premium. Hence, refineries will have to adapt processing to serve that trend.
By 2030, there will be fewer oil-producing nations than today, and Opec countries will supply half of the world's oil needs. Consequently inter-regional trade in oil will double to 65 million barrels a day by 2030.
As we struggle to understand the increases in margins and differentials, we have to ask: What changed? World refining utilisation has gone up 2% from 2003 to an average of 86.3% worldwide.
The exceptional margins result from four drivers: strong demand, nearly full utilisation rates of refineries, length in global fuel oil supplies and high oil prices.
Most of the refinery expansions being announced are in the strong-demand regions of Asia and the Middle East. In Europe and the US, the focus is more on using heavy feedstocks, adjusting the product mix, and improving cost efficiency. More expansions are planned for the end of the five-year period.
There is an increased interest in achieving top-quartile performance. A refiner can invest to improve reliability, energy cost and other operational factors to achieve improved competitive cost structures. The improvement will lift the refiner's income, as energy cost is tied to crude price, and returns on reliability and operational improvements are margin-dependent.
Three factors have been influencing them to increase capacity, including the need to boost profitability, widen the price gap between light and heavy products, and increased cash and personnel availability as companies finish their low-sulphur fuel investments.
On the question of over-expansion, in general the boom will drop utilisation regionally, and Asia and Middle East are at highest risk of over-expansion. Other regions, given their slow demand, will keep their expansions to a minimum. Yet, in the next few years, prior to that capacity coming online, refining capacity will remain tight since new construction will take more than five years.
Author: Jo Amey
