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Earnings To Cool For Asian Refiners: Analysis
Seng Li Peng | November 03, 2011

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Singapore. Asian refiners could earn as much as 20 percent less in 2012 from processing a barrel of crude into fuel than this year’s average, as they get pinched between new additions to capacity and expectations of slowing global demand growth.

Reduced earnings may mean complex refineries that are able to process cheaper heavier crudes into cleaner burning fuels will benefit at the cost of older, simpler plants that need more expensive higher quality oil to make such products.

Tighter margins for the simpler plants could force them to cut output. A prolonged decline may also bring delays to expansion plans, threatening to squeeze supply in years to come.

Industry executives are already cautioning against expansion of plants, particularly those exporting their output, in a sign the outlook is turning bleak.

Some may get into petrochemicals to offset reduced earnings as refining margins slide.

“The refinery business is not a piece of cake anymore,” said Bhavana Suphavilai, the president of Energy Solutions. “The trend, moving forward, will be for refiners to look for partnerships with petrochemical companies.”

China and India are exceptions since they were adding refinery capacity in a bid to become self-sufficient, she added.

Asian refining margins measured against Brent crude may be around $7 to $8 a barrel compared with around $8 to $10 this year, said Sonia Song, HSBC’s Asia head for oil and gas research. This is based on estimates that the average price of Brent crude is around $90 a barrel in 2012 and $110 this year.

Energy consultancy JBC Energy expects margins against Dubai crude to be down to an average of $4 a barrel next year from $6 a barrel this year.

The industry is banking on China’s gasoil demand to help support margins. Rising local consumption in the world’s second-biggest economy is restricting exports, partly helping to push diesel cracks, or profits from producing the fuel, to $24 a barrel in April.

“Gasoil will remain the margin driver in Asia next year,” said Vienna-based David Wech of JBC Energy. “China is expected to be the single largest contributor to global gasoil demand growth.”

Gasoil is part of a group of refined products known as middle distillates, which accounts for around 30 percent to 40 percent of a refinery’s output and is generally the most profitable segment.

Supplies of most other fuels such as gasoline, naphtha or fuel oil are expected to be ample.

Reuters