International refining industry

The international refining industry is highly cyclical. Demand for liquid fuels closely follows economic growth and development. Fuel supply is heavily dependent on the construction of capital intensive and long-lived assets, and their capacity, reliability and utilisation.

While the market for liquid fuels is international, there are three distinct but interconnected regional markets covering Asia, Europe and the United States. Each of these markets has its own supply and demand characteristics which also influence market opportunities between the regions. For example, Europe is oriented towards diesel consumption with surplus gasoline exported to the United States.

The major factors affecting the international liquid fuels market over the last five years have been strong world economic growth, and refinery construction levels which have not kept pace with demand. This has resulted in a general increase in world refining margins from around US$1 per barrel in 2002 to over US$4 per barrel in 2006.

Over the period, regional markets have been strongly influenced by local events:

• United States refining margins rose to almost $18 per barrel after Hurricane Katrina before falling back to around us$8 per barrel in 2006 as refineries came back on stream.
• Asian margins rose rapidly in 2004 to almost us$8 per barrel in response to a growing regional supply shortfall arising from strong economic growth in China and India.

Future international refiner margins will depend on regional demand and supply. Changes in the crude oil market, the market for construction services, and regional government policies such as cleaner fuels and other environmental regulations will also play a major role. For individual refiners, profitability will be critically dependent on production efficiency and reliability, as well as supply chain and logistics efficiency.

World refining capacity

Refinery competitiveness

Economies of scale provide a key competitive advantage in refining, with larger refineries having lower unit costs of production. Economies of scale arise from larger production runs, lower labour costs per unit of capital, and lower purchasing costs for greater volumes of inputs, such as crude oil, energy inputs and transport. In addition, newer refineries have additional efficiencies arising from newer technologies and the associated flexibility in the crude oil and product slates.

Refiners seek to run the optimal mix of crude oils through their refineries, depending on the specific equipment at the refinery, the desired output mix to meet the demand and quality standards of their target markets, and the relative price of available crudes domestically and internationally.

There are also competitive disadvantages in industrialised countries which impact on capital and operating costs of new and expanded refinery investments. These include higher labour and construction costs as well as environmental and other regulatory constraints. Comparatively favorable taxation treatment is also provided in industrialising countries (particularly in Asia) — both for new facility construction and for substantial refinery upgrades.

The major refineries currently under construction are very large and generally in industrialising countries. For example, the Reliance refineries at Jamnagar, India are doubling capacity to nearly 70 000 ML pa (nearly twice Australia's total refining capacity). Other large projects under construction or being considered in the region have capacities ranging from 12 000 to 75 000 ML pa in China and 25 000 ML pa in South Korea. The size of these refineries and the installation of newer technologies will make these refineries the benchmarks for competition in the Asian region.

General make-up of refinery costs

The cost of crude oil is the major input cost for refineries. Some of the other key costs for refineries include:

• crude oil shipment and storage costs
• the cost of additives, catalysts and chemicals
• capital costs/depreciation
• wages and salaries
• plant maintenance and 'outages' costs
• costs of site security and systems
• environmental protection costs
• product shipment and storage
• utilities charges
• government taxes and charges.