ROD DEAN'S 2006 REVIEW
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E & C Hydrocarbon Review - The Global view from Europe. Looking back on 2006 & ahead to 2007.
I don’t often look at refining margins but in the past couple of years we have had some quite major fluctuations so it may be worth a paragraph or two. We had high refining margins in 2005 and the first half of 2006. Global refinery utilisation during 2005 was very high at over 92% and the whole supply chain was creaking but in the latter part of 2006 we have seen a reduction in product demand which has resulted in falling crude prices - now around $50/bbl. OPEC are supposed to have cut production to bolster the crude price, although one report is sceptical of this. A further cut may be required. In a relatively short period of time, we seem to have accepted that $60 crude is the norm - how times change.
The story for Europe is clear: if you have an investment plan, it needs to be proof against forecasted lower margins. Whoever did the economic analysis would be remiss if they have not done a sensitivity analysis for differing economic scenarios. Even with good refinery margins however, owners will be wary of increased exposure to risk from increased equipment pricing and extended project schedules - everybody wants a hydrocracker and a coker! Owners will now be factoring these elements into their long-term project plans. Clearly, COP has decided to pull out of the Wilhelmshaven investment. I also think the investment by Lotos at the Gdansk refinery is looking more risky. They have just deferred their plans to look at alternative ROSE unit feeds which would have resulted from advanced investment in incremental crude/vac processing capacity.
There is still some incentive for European refiners to do something about reducing fuel oil. If the changes to European coastal and inland marine fuel oil specifications do go ahead, there are both positive and negative implications for investment. On one hand, there would be an increased demand for 1.5%S fuel oil; on the other hand, LCO could be used as the base-stock for inland waterway marine fuel without the need for very expensive upgrading. However, in a Europe which is trying to process more Russian crude, it would mean that refineries could only sell high sulphur bunker fuel to ships leaving European waters or to power markets outside Europe. Total, in a presentation at the ERTC, have stated that the economics for their investments in Europe have export HS fuel oil as the base scenario and it still makes sense.
As always, the refineries with most to gain are the hydro skimmers as the margin for this type of refinery is back to break-even at best.
Syngas
Even the Ammonia business (which is 65% of this area) is looking much better with old plants closing and prices recovering greatly. The big growth area remains the Middle East and Iran (if you can take part in the action in the latter country). KBR, Uhde (Topsoe) and KBR dominate this market but only the former two have competitive EPC offerings. Activity is picking up and a net 15-20% of additional capacity could come on stream by 2010. This could be up to 4 major plants a year - depending on train size. With Methanol the situation is slightly different where mega plants (7,500 TPD) are now part of the landscape - one new plant a year may suffice. This market is dominated by Methanex with technology coming from Lurgi and Johnson Matthey (DPT) with AkerKvaerner and Lurgi providing execution. Hydrogen is still important but more of a commodity these days and highly competitive too with Technip, Howe-Baker, Linde and Topsoe dominating the market place which serves Refining, DRI and to a growing extent GTL (hopefully!).
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