Analysis: Southeast Asian refiners pump billions into new capacity amid tough markets

Singapore (Platts)--8 Mar 2018 947 pm EST/247 GMT

Southeast Asia's key national oil companies are pumping billions into expanding downstream refining assets to meet energy security targets, despite tough margins and an increasingly challenging refinery landscape, senior executives said Thursday.

New refining investments by state-run majors like Malaysia's Petroliam Nasional Berhad or Petronas, Indonesia's Pertamina and Thailand's PTT will boost crude oil flows to the region, driven by transportation fuel demand and demographics.

Global crude distillation unit capacity expanded by over 1 million b/d in 2017, more than 0.8 million b/d in 2018, and is expected to grow by 7.7 million b/d through to 2021, led by China and the Middle East, Adi Imsirovic, global head of oil and products at Gazprom Marketing and Trading, said.

He said excess global refining capacity may now rise to over 5.0 million b/d in 2021.

"Nearly two-thirds of global spare capacity is now found in non-OECD countries, where refineries are under-utilized," Imsirovic said at the S&P Global Platts Asia Refining conference in Singapore.

Capacity additions in Southeast Asian countries like Thailand, Indonesia, Malaysia and Vietnam, in particular are characterized by the "utility model" where investments are made according to planned demand while returns are managed by the state, he said.

This is different from the merchant model in refining hubs like Singapore, South Korea and Japan, where investments are driven by export demand and refining margin economics.

Consequently Southeast Asian refiners suffer from a lack of funds as foreign or local investors prefer guaranteed returns, which are difficult when state subsidies give rise to artificial demand that can fluctuate according to government policy.


A new wave of Southeast Asian oil refining capacity will be led by Petronas and Saudi Aramco's $7 billion Refinery and Petrochemical Integrated Development or RAPID project in southern Malaysia, with a capacity of 300,000 b/d and expected to start in 2019.

Southeast Asian refiners face multiple challenges of balancing regional product supply, changes in fuel specifications and the need to capture profitable refining margins at the same time, Zabidi Ahmad, Managing Director & CEO of Petronas Penapisan (Terengganu) Sdn Bhd, said.

Petronas Penapisan (Terengganu) operates Petronas' flagship Kertih Refinery in Malaysia.

The RAPID refinery complex is designed to meet both domestic demand and export markets, and has been located strategically in the Malacca Straits in proximity to Singapore's refining hub.

"Despite a challenging refining landscape, Southeast Asia represents excellent market opportunity," Ahmad said, adding that Petronas has been driving down cost through efficiency and digitalization.

However, progress in neighboring Indonesia has been a lot slower, with state-run Pertamina struggling to add new refining capacity due to indecision and a lack of funds.

Indonesia's total refinery capacity was an estimated 1.1 million b/d at the beginning of 2015, at six major refineries and a few smaller facilities, according to the US Energy Information Administration.

Since the construction of the Balongan refinery in 1994, no new refineries have been built in Indonesia and Pertamina has struggled to meet domestic demand, relying heavily on imports from Singapore.

Pertamina still has plans to upgrade four refineries under its Refinery Development Master Plan and build two new grass root refineries, which will double its capacity to over 2 million b/d by 2025, Ardhy N Mokobombang, Mega Project Refinery & Petrochemical director, said.

He said the new capacity will cost $60 billion-$70 billion and Pertamina is keen on inviting investors to help fund the expansion.

So far Saudi Arabia's Saudi Aramco has been roped in for the Cilacap refinery that will be ready by 2023, Russia's Rosneft for the Tuban refinery expected to complete by 2024, and Oman for the Bontang refinery for 2025, Mokobombang said.

It remains to be seen how Pertamina will pull off its capacity expansions.

In Thailand, state-run PTT is pushing for more digitalization, investing in the full LNG supply chain from upstream gas to power plants, participating in special economic zones and expanding into high-value petrochemical production to stay on top, Chansin Treenuchagron, chief technology and engineering officer, said.

Other major Southeast Asian refinery expansions are in Vietnam, where the Nghi Son refinery will help reduce dependence on oil product imports and Brunei's China-backed 175,000 b/d Hengyi refinery planned for 2019.

-- Eric Yep,

-- Edited by Jonathan Fox,

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