ANALYSIS: Diesel output set to rise as refiners complete upgrades
London (Platts)--24Jan2013/747 am EST/1247 GMT
As Total's Gonfreville refinery in northwest France gears up for restart,
with a much boosted diesel production capacity, last year's refinery upgrade
program in Europe and the Mediterranean is nearing completion.
And with a large number of other refinery upgrades in Europe, Russia and
the Middle East set to be completed in the coming years, the question is
whether the market will be swamped with new diesel that it cannot consume.
Diesel consumption in Europe has been growing in recent years, but the
rate has slowed and there are fears there could be oversupply in coming
years, weighing on prices.
Among the more recent completed upgrades, Galp Energia said last week
the new hydrocracker at its Sines plant in Portugal had started up and, in the
first week of January, Israel's Paz Oil completed the planned upgrade at its
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Some of the raised diesel production in these countries will cover
domestic demand, but in the cases of Sines and Ashdod some will go to export.
Paz Oil said it plans to export between one and one a half cargoes a
month to the Mediterranean, and traders suggested that Sines could benefit
from its close proximity to normally diesel-hungry France.
But while France's diesel consumption grew by 1.5% in 2011, last year
the growth slowed down to just 0.2% and even dropped by 5% in December,
according to the country's oil industry association UFIP.
So far this year, diesel demand throughout Europe has been slow and
diesel prices, which had been the king of the barrel throughout the third
quarter of 2012, have been falling.
This week, diesel cargo prices in the Amsterdam-Rotterdam-Antwerp region
fell to a 13-month low, reflecting low end-user demand and high supply from
European and Russian refineries.
"Everybody filled up stocks after the year-end and there's simply low
end-user demand," said one trader.
While the winter period traditionally sees lower demand from farmers and
for driving, the diesel market has also been hit by ample production from
European refiners, increased Russian exports and a lack of support from
the German heating oil market.
Russia is expected to export around 1 million mt of 10 ppm diesel from
its northern port of Primorsk in January, the highest volume in several
months, as an increasing number of local refineries switch their output to
Euro 5 (10 ppm) standard.
More are also expected to do so following major upgrades.
And yet the diesel supply status could have been more acute if all the
planned diesel upgrades had been completed on time or had avoided the usual
Pernis' new hydrodesulfurization unit became fully operational in June
last year, Shell said at the time, adding that it would help "to achieve a
substantial production of low-sulfur diesel and heating oil."
But ever since, Europe's biggest refinery has been undergoing both
scheduled and unscheduled shutdowns, denting its diesel output.
And after being in startup mode throughout the summer following a $1
billion upgrade, Hellenic Petroleum's Elefsis refinery in Greece reached full
capacity only in November.
But traders have said the refinery has reduced its diesel production,
which some linked to poor margins, but others suggested could be related to a
Ashdod's upgrade was delayed several times during 2012, and was
completed only at the end of the year.
Israel's second refinery Haifa was also set to start using its new
hydrocracker in the second quarter of 2012. But it wasn't until January this
year that ORL finally announced the start of commercial production. The new
facility is set to produce primarily diesel and jet fuel.
Russian refineries have also been relatively slow in pursuing their
upgrades, said Stephen George of consultancy KBC.
"You look at Russia, they are coming slowly, [but] there is no great
incentive to start up before the shift in the heavy oil product export duty
structure," he said.
This week, Rosneft said it had launched two new refinery units in 2012
and is currently working on 24 new units.
In 2012, according to Russia's energy ministry, the country's oil
companies launched and upgraded 15 refinery units.
This is still a minor proportion of the 88 units set for launch or
upgrade to 2015.
"67% of refining capacity has now committed to upgrade by 2016," George
said, adding that that is when the majority of diesel upgrades will come
Nonetheless, a number of very big refinery projects were completed in
Gazprom Neft launched the long awaited diesel hydrodesulfurization unit
at its Omsk refinery in October, which will help in the product pipeline's
switch to lower sulfur diesel.
In November, Gazprom Neft also completed upgrades at its Serbian
refinery at Novi Sad, including the launch of a new hydrocracking complex,
which will increase its gasoline and diesel supply.
But 2016 could see a flooding of the European diesel market as Russia's
upgrade program comes to an end, coinciding with a large scale expansion in
the Middle East.
"Russia, the US and Saudi Arabia will be the marginal suppliers. That is
when the market will feel the pressure," said George.
Saudi Aramco Total Refining and Petrochemicals (SATORP) is expected to
start commissioning the 400,000 b/d Jubail oil refinery by the end of 2013.
Yanbu Aramco Sinopec Refining Company's (YASREF) 400,000 b/d refinery at
Yanbu is scheduled to be completed in 2015. Both are geared towards
substantial diesel output.
And "by then the Russians will be converting as well," George said.
--Elza Turner, email@example.com; Sophie Byron, firstname.lastname@example.org;
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--Edited by Stuart Elliott, firstname.lastname@example.org