APPEC: Asia committed to refining expansion, but with a pro-petrochemicals tilt

Asian refiners' capacity growth expansion plans will have a much bigger petrochemicals footprint by next decade, speakers at the Asia Pacific Petroleum Conference (APPEC) said, as they strategize to remain profitable in a changing energy landscape.

While India, China and some countries in Southeast Asia will continue to expand capacity, there was a need for refiners to tilt their strategy in favor of petrochemicals amid expectations that electric vehicles will continue to take a toll on consumption of transport fuels, they added.

"Asia will continue to focus on expansion of transport fuel capacity in the near term as there is a genuine need to meet the growing product requirements in the near term. But they will start to increasingly tilt towards petrochemicals in the next decade," said Sri Paravaikkarasu, director of market analysis at Phillips 66 International Trading.

For instance, state-run Indian Oil Corp. is looking to expand its Petrochemical Intensity Index (PII) to 15% by 2030, from the current 6.1%. This would involve boosting the petrochemical capacity to 13.6 million mt/year by 2030 from 4.3 million mt/year.

Another state-run refiner, Bharat Petroleum Corp. Ltd. is also set to boost its refining capacity to 45 million mt/year. Its refineries at Mumbai, Kochi and Bina currently have a combined refining capacity of around 35.3 million mt/year (709,000 b/d).

BPCL plans to build a 12 million mt/year (241,000 b/d) refinery in the next five years, and is exploring suitable sites in the states of Andhra Pradesh, Uttar Pradesh and Gujarat, according to company officials.

"Our business strategy is to nurture the core and invest in the future. We are also investing in a 2.4 million mt/year petrochemical facility, as well as pursuing our clean fuel ambitions," said Manoj Heda, executive director for international trade and risk management at BPCL.

Challenges for refinery projects

Paravaikkarasu added that while many refiners in China have plans to add more than one million b/d capacity each in the near term, they would have to operate at much lower utilization rates, until petrochemicals demand growth takes off again.

"China is witnessing weaker economic growth. And we should forget that a weak property market also has a direct market impact on petrochemicals demand," she added.

Japan, on the other hand, is adopting a different route. With demand for oil products falling, it has ensured that refining margins remain relatively healthy by gradually reducing capacity.

"One refinery was shut down last year and this could continue in the future. The strategy is painful for us but it is necessary for us to maintain domestic margins, which is pretty healthy," said Yasuhiko Oshida, senior vice president and managing executive officer for supply and trading at ENEOS.

Southeast Asia would continue to offer promising growth prospects for oil in the near term, speakers said at S&P Global Commodity Insights’ APPEC event.

"I think there will be good organic growth in demand for transport fuels for the rest of this decade in Southeast Asia. We will see some refinery expansions in Vietnam, Thailand and Indonesia in the near term, and that will help to plug the demand growth in the interim period. But beyond that they need to import," Paravaikkarasu said.

"The challenge is that when someone these days talks about a new refinery project, banks and the western world don't like it. Indian national oil companies have the muscle power to expand, but Southeast Asian refiners would benefit from collaboration with some Middle Eastern producers, which unfortunately, is not happening," she added.

Short-term outlook

On the short-term Asian outlook, speakers at APPEC said that the slower oil demand growth in China in 2024 -- after a year of strong growth in 2023 -- had surprised the market. But there is a scope to bounce back in 2025.

"I don't think there's a need to be so bearish about China. The expectation was set very high at the beginning of 2024, as 2023 witnessed strong oil demand growth. But we should not forget that 2023 growth was from a lower base and demand was recovering from COVID 19-hit levels," Paravaikkarasu said.

"We can't reverse what EVs are doing to the transport fleet and what LNG is doing to transportation by trucks. Those structural changes will be there. But if economic growth picks up next year, things could change," she added.

Within Asia, China's refined product demand growth is projected to lose momentum in 2024, owing to the normalization of transport activity, subdued economic growth and stiff competition from the rising penetration of electric vehicles and LNG heavy trucks, according to analysts at Commodity Insights.

That said, China will continue to be the single biggest contributor to Asian demand growth, although its share is expected to reduce from 74% in 2023 to 39% in 2024. Healthy economic conditions and rising exports of goods in South Asia and Southeast Asia will continue to drive Asian oil demand growth, said analysts.

Asian refinery runs are seen at 30.4 million b/d in third quarter of 2024, declining 376,000 b/d on the year, according to Commodity Insights.