Business

Friday August 21, 2009

Adequate local oil refining capacity

By ELAINE ANG and YVONNE TAN


Planned new refineries will cater to overseas markets

PETALING JAYA: There will not be a proliferation of refineries in the country despite the possibility of a few coming onstream in the next few years as the new capacity is targeted for overseas consumption, industry players said.

“The issue here is not so much of whether supply will outpace demand as the global refinery utilisation rate remains quite tight at the moment. It’s more of whether these projects are economically viable,” said OSK Research research head Chris Eng. “At such huge costs, how long is it going to take to recoup your investment? I think there is a risk of these new projects not materialising, we remain rather sceptical.”

Merapoh Resources Corp Sdn Bhd’s proposed US$10bil refinery in Yan, Kedah has struck a deal with China National Petroleum Corp, which would buy 200,000 barrels per day (bpd) of the refinery’s output under a 20-year deal.

Saudi Aramco will be the company’s main supplier of crude oil.

Qatar-based Gulf Petroleum’s US$5bil integrated oil and gas complex, which includes an oil refinery in Manjung, Perak, will source its crude oil supplies from Gulf countries and re-export 60% of the products. The complex is also expected to serve as its Asia-Pacific regional hub.

Details are still sketchy about the client list of SKS Development Sdn Bhd’s Kedah refinery but it is believed that the refinery will be used to process Iranian crude oil.

An industry player noted that Malaysia’s existing five refineries with a total capacity of 677,000 bpd were sufficient to cater to current domestic demand.

“Although most of the refineries have pretty high utilisation rates – averaging more than 80% – they can still play around if demand increases and even up existing capacity if the need arises,” he said. “The refining market in the country is pretty stable in terms of demand and supply.”

But Merapoh executive chairman Md Nazri Ramli sees an imminent need for Malaysia to build more refineries.

“The need for new refineries is to supplement the current global refining capacity as a majority of refineries are undergoing re-configuration exercises to achieve better refining margins,” he said.

Malaysia is also strategically located between crude producers in the Middle East and the biggest of consumers in China and Japan, hence the interest by industry players to set up refineries in the country.

“Most of the new refineries look to China as their market due to its huge purchasing power as well as the current under-supply in transport and heating fuel,” Nazri said.

TA Securities head of research Kaladher Govindan concurs.

“Overseas demand, especially from China, is there. As long as the new refineries add value, I don’t see why they should not be built,” he said.

Maritime Institute of Malaysia senior fellow Nazery Khalid noted that companies such as Merapoh, SKS Development and Gulf Petroleum were more focused on the long-term prospects of the refineries as they would only come onstream in the next three to five years.

“A rebound in the economy is expected in the fourth quarter or first quarter of 2010 and with it, demand for oil and gas and refined products,” he said.

Nevertheless, London-based Sanford C. Bernstein & Co, which covers the oil refinery sector, was quoted in a Bloomberg report yesterday as saying that as many as 10 oil refineries worldwide could be shut down because of weak demand and low profits.

The shutdowns would represent about 1.4% of the global refining capacity and tighten the fuel market by 2012.

Supply reduction, however, may be partly offset by the additional capacity due to come onstream in Saudi Arabia and West Africa, according to the report.

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