Oil Refinery Capacity Bottleneck

High oil prices are still being propped up by a shortage of refinery capacity and there is little sign of the bottleneck easing until 2010, industry executives and officials discussing OPEC’s future have warned.

That potential respite relies on the unlikely prospect all 66 refineries planned by oil companies and producers being built, as well as a total of about 300 billion dollars in investment by 2015, they added.

“The need for downstream capacity is just as important as other issues,” said Claude Mandil, executive director of the International Energy Agency at a two-day conference which was continuing Wednesday.

ยป Source: Middle East Online

“There is a general recognition now that no spare capacity in refining together with no spare capacity in crude production are the key factors we have to manage on high prices,” he added.

Mandil said: “If everything goes well, we could witness starting 2010 some spare capacity in refining. I say if - this is a huge question mark.”

The 11 nations in the Organisation of Petroleum Exporting Countries are pumping out about 30 million barrels of crude oil per day, according to recent data.

A quota for 10 of them is set at a 25-year record high, to cope with strong global demand boosted by China’s emerging economy in recent years.

Prices have fallen back from a 78 dollar peak in July in response to fears that global economic growth and therefore demand for energy is about to tail off. However, they are still high - around the 63 dollar mark.

“Current downstream tightness in the form of inadequate refining capacity is putting much pressure on oil prices generally,” said Mohamed Barkindo, acting secretary general for OPEC.

No new refineries have been built in the United States for 30 years and for about 20 years in Europe, said Shukri Ghanem, head of Libya’s National Oil Corporation.

“With so much uncertainty regarding oil demand in the short term, no one can tell for sure whether all or part of this investment will materalise during the next five years,” Ghanem said.

Refinery capacity is essential to transform crude into petrol (gasoline), diesel, or household fuel. A shortage of spare refining capacity adds to overall supply bottlenecks.

“There are 66 refineries being considered for construction, I have some doubts whether all of these will go through,” Mandil said.

Barkindo said 160 billion dollars needed to be ploughed into downstream capacity within 10 years, and another 150 billion dollars for maintenance and replacement.

“Such amounts are not forthcoming: there is an investment gap of something like 100 billion dollars,” he added.

Saudi Arabia’s Oil Minister Ali al-Nuami told the conference that “prudence” was to be expected while crude prices were so volatile.

“It is estimated that a difference of just one million barrels per day of projected production from OPEC entails an over or under investment of 8.0 billion dollars by 2010 and about 15 billion dollars by 2025,” he explained.

OPEC has long been looking to oil companies to make the kind of investment that provided large amounts of spare capacity in the 1970s.

However, they were offered little respite from the Anglo-Dutch giant Shell. Chief executive Jeroen van der Veer said there were expectations of unlimited investment from industry.

“This is not how we look at it at Shell,” he told the conference.

The refinery industry faces added challenges. On the consumer’s end of the chain, more stringent energy efficiency and environmental standards translate into a upgraded need for highly refined cleaner fuels, officials said.

And Nuami pointed out that on the production side, the kind of crude oil being extracted is becoming heavier and sourer, requiring even more extensive and costly refining before it is turned into fuel for transport and industry.


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