Bradford L. Stults
Consultant Muse Stancil & Co.
Muse Stancil & Co. has updated the basis for the refining margin series that are reported each month in Oil & Gas Journal. Margins are reported for each of six world refining centers: US Gulf Coast-Houston; US East Coast-New York; US Midwest-Chicago; US West Coast-Los Angeles; Northwest Europe-Rotterdam; and Southeast Asia-Singapore.
These margin series were started in 2001 (margin data dating back to 1995) and are described in the Jan. 15, 2001, issue of OGJ. The series are intended to identify margin trends for typical refining operations in each region. Current changes to these regional models have been made consistent with this objective.
Model changes reflect changes in crude supply, product demand, product specifications, world trade patterns, and refining capacity that have occurred since the model was last updated about 4 years ago. The following list briefly describes some of the issues that have driven changes to the model.
• Use of oxygenates in gasoline is increasing throughout the US and Northwest Europe. In the US, this is rapidly shifting the refinery production of gasoline to unfinished "BOBS" to which ethanol is added downstream of the refinery to make a variety of finished gasoline grades. These BOBS are now the primary refinery gasoline product in the US and are traded at published prices.
• World demand for distillate continues to rise, which has raised prices for distillate (jet and diesel) relative to gasoline. Particularly in the US, distillate is becoming a greater share of the refinery product slate and for the past 3-4 years has become a significant export, especially from PADD III (the US Gulf Coast).
• Product specifications continue to tighten to produce cleaner-burning products and higher-quality fuels. This is occurring in all regions but with the most significant change in the developing countries of Asia.
• Residual conversion capacity continues to be built to keep the world in residual balance as demand for transportation fuels is outstripping demand for heavy products (bunkers, fuel oil for power generation, and asphalt). This trend is also driven by oil prices, which have risen more rapidly than natural gas prices, making heavy fuel oil a less competitive fuel for power generation in areas where gas is plentiful or where LNG can be delivered.
• Crude supply is changing for many refiners as production is generally declining in mature oil basins (the North Sea, the US Midcontinent, and Southeast Asia). For a refiner, this is changing both the quality of crude available and the source of crude supply. In turn this has changed the relative competitiveness of these refining centers. Two notable changes are the increased availability of Canadian crude, which is now flowing to the US Gulf Coast, and West African production, which is now flowing to Asia in large volumes.
• Refinery investment in capacity and complexity has been made in response to: regional petroleum demand growth, demand for higher refined product quality, and changes in crude supply. In particular, investment in Asia has helped refiners to produce higher yields of higher-valued products, raising average refinery margins in the region.
• The investments in Asia to produce improved quality products and a greater proportion of higher-valued products also raise variable operating costs. These are in part being offset by improved efficiency in refinery operations and by economies of scale as larger refineries are constructed.
Slow growth for petroleum demand over the last 2 years has resulted in excess refining capacity, especially in the developed economies. This has led to depressed margins, and some capacity rationalization. As the world economy recovers, demand for petroleum products will increase and capacity should tighten, but it remains to be seen just how quickly and to what degree margins will respond.
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