APPEC: Asian refiners in stronger position than Western peers to lift runs post pandemic

Asia's robust refinery capacity additions in recent years will provide ample bandwidth to ramp up runs as demand recovers following the pandemic, but China's limited product export quotas and feeble domestic demand will keep overall Asian refining growth at modest levels in the near term, speakers and delegates at the Asia Pacific Petroleum Conference organized by S&P Global Commodity Insights in Singapore said.

With the refining sector having faced a challenging environment since 2020 amid a bumpy recovery in demand due to several rounds of COVID-19 outbreaks, refineries have been struggling to adjust to changing market conditions, and the situation may not change anytime soon, they said.

"Today, fast changing product flows, market volatility, changing crude and product prices, shifting trade flows, as well as the upgrading of product specs are all sending mixed signals for refining margins and individual crack margins as we head towards the end of 2022 and into 2023," said Kang Wu, head of global demand and Asia analytics at S&P Global.

According to S&P Global, Asia is expected to see around 1 million b/d of net CDU capacity additions between 2019 and 2022, despite massive contractions in North America, Europe and Africa.

"This will allow Asian refiners to ramp up crude runs to meet rising regional demand while addressing potential shortages in other regions. However, a big portion of spare refining capacity in the region sits in China, where utilization is driven more by government policies than economics," said Lim Jit Yang, adviser for Asia-Pacific oil markets at S&P Global.

The China factor

According to S&P Global, China's refinery runs are expected to decline by 600,000 b/d this year due to weak domestic demand, while being further constrained by limited product export quotas.

"Lower product exports from China since H2 2021 have given other refiners the opportunity to export more products," Lim added.

However, latest market talk indicates that the Chinese government in the coming days or weeks could potentially issue up to 15 million mt, or around 119 million barrels, of product export quotas in the final round for 2022. The export quotas would cover a wide range of oil products including gasoline, gasoil, jet fuel and fuel oil.

Chinese refiners and trading firms may also no longer be required to fully utilize the oil product export quotas in the year they were allocated as Beijing is poised to adopt a more lenient stance by providing companies with the flexibility to control their export volumes in line with market fundamentals and sales margins, industry sources have said.

Unlike in previous years when quota holders were constantly under pressure to fully utilize their export quotas regardless of the economics and refining margins, this would mean that oil firms could potentially adjust their monthly and annual oil product export volumes at their own discretion.

Asian refineries have carried out massive upgrading over the years, with substantial additions of conversion capacities across FCC/RCC, coking and HCU.

The ratio of conversion to CDU capacity for Asia is now higher than all other regions except North America. These refinery upgrades will provide refiners with more flexibility to cope with market uncertainties, analysts said.

"Southeast Asian refiners are more susceptible to the changes in crude and product markets as they are less sophisticated compared to their regional peers," said Sri Paravaikkarasu, Director of Market Analysis at Phillips 66.

Kadek Ambara Jaya, director of infrastructure projects at Pertamina, said the refiner was optimistic on demand growth in 2023, with the tourism sector expected to make a full recovery next year. Indonesia aims to continue upgrading and expanding refining capacity, especially the Balikpapan complex, over the long term to improve refining economics and cover more domestic demand.

Adjusting to shifting flows

Delegates said that as European refiners absorb more US, North Sea and Johan Sverdrup crudes to replace Russian Urals, Asian refiners will likely depend more on Middle Eastern supply, with key regional crude buyers including India, South Korea and Japan actively securing Saudi and UAE sour crude under long-term contracts.

Amit Bilolikar, deputy general manager of crude trading at India's Bharat Petroleum Corp. Ltd., said the state-run refiner had managed to tie up term contracts with major Middle Eastern producers, including the UAE, stretching until the first quarter of 2023.

Feedstock trading and management sources at Japanese and South Korean refiners also indicated that they would continue focusing on securing as much supply as possible from Middle Eastern suppliers.

Japan's crude imports from Saudi Arabia rose 10% year on year to 1.03 million b/d over January-July, while shipments from the UAE during the first seven months jumped 26% from a year earlier to 988,109 b/d, latest data from the Ministry of Economy, Trade and Industry showed.

South Korean refiners said their crude import diversification efforts may need to be put on hold in 2022 and 2023.

Over January-August, South Korea's crude imports from Saudi Arabia jumped 30% from a year earlier to 233.6 million barrels, while shipments from Kuwait increased 16% and from Iraq rose 38%, latest data from state-run Korea National Oil Corp. showed.