Tuesday, April 26, 2011

Mediterranean gasoline surplus and diesel shortage Volume 1

Despite an increase refinery capacities and an expected global reduction in oil product deficit in
the Mediterranean at horizon 2015, the future of the region appears troubled.With little time on their
hands to adjust and upgrade their refineries, Mediterranean countries will need to face the growing
demand for desulphurised diesel, while their current main provider, Russia, is looking less likely to
supply the required quantities and quality over the coming years. The increasing surpluses of gasoline
of the region seem to be likely to exceed the needs of its main importers, the USA and European
Union, and could possibly lead to future predicaments for the industry, the region and its populations.
Moreover, current and foreseen environmental measures are likely to reinforce the imbalance of the region.

The Case 
The Mediterranean region’s road transport is beaming. The demand for diesel has never been as high, and increasing. Refinery margins are high, and gasoline flows are uninterrupted to the thirsty American markets. However, the increasing mismatch of oil product supply and limited scope for capacity additions in the region are inducing a very tense situation.

The Mediterranean is facing an increasing Russian diesel-import dependency on one hand and a gasoline-export dependency to the USA on the other.2 While environmental restrictions are hindering new additions and upgrades in many parts of the Mediterranean,a shift in demand towards tighter product specification, mainly for transport, is pushing demand upwards and increasing the needs for upgrading units. The conversion units that are needed are costly and take a long time to build. Adding to these challenges is the prospect of Russian export potential lagging in volume and specification as well as a lesser need for gasoline to the USA.The challenge is a timely one but also raises future concerns on product outlets and providers. With only one main provider of diesel and one main outlet for gasoline, future trade prospects are demeaning Mediterranean oil product outlook.

This paper will first present the Mediterranean oil product demand and production outlook to examine the resulting imbalances and their evolution at horizon 2015. The analysis will then focus on, firstly, the diesel import challenge and will then proceed to examine the gasoline export prospects of the region, taking into consideration the domestic requirements of its main exporting and importing markets.

 Mediterranean oil products demand and output prospects

The Mediterranean oil products future outlook is marked by its growing demand, inadequate oil product output and limited capacity additions.

Mediterranean demand uneven trends

Currently, world oil demand stands at around 3.6 billion tonnes (Mt) of which 450Mt is in the Mediterranean region.3 In 2005, the Mediterranean region had a net deficit of –44Mt, including a net surplus of +12Mt of gasoline and a net diesel shortage of –31Mt. Data sources for oil demand and production include OME (2007), IEA (2006) and EC.

Total oil demand in the Mediterranean region is expected to increase at a slower pace compared with the past years, at an average growth of around 0.7 per cent per year, reaching to 486 Mt in 2015.4The increase in demand is set to strengthen after 2010. Oil products demand forecasts vary greatly, depending on the type of product considered. Two clear demand trends emerge in the Mediterranean future: a steady diesel demand growth and a receding gasoline demand. By 2015, middle distillates will remain, by far, the largest consumed
products. Residual fuel will have lost share to gasoline,while naphtha and liquefied petroleum gas will benefit from a robust growth in demand.

Gasoline and diesel accounted for over 50 per cent (235 Mt) of total Mediterranean oil demand in 2005 and are expected to account for 55 per cent (268 Mt) of total Mediterranean oil demand by 2015. The dieselisation trend is set to continue in the Mediterranean in the coming years, with an expected annual increase of diesel demand of +1.8 per cent per annum on average up to 2015, while gasoline demand is expected to decline at an average rate of around –0.3 per cent per year over the same period.

 Limited capacity increase and quality in the Mediterranean

From project phase to realisation, capacity additions take a minimum of 5–10 years to become operational because of the time constraints and environmental restrictions. There is hardly any place for additional increase within the time frame considered. Therefore, to horizon 2015, projects are known—either under completion or in agreement phase.

Overall, distillation capacity additions in the Mediterranean are expected to total over 39 Mt between 2005 and 2015. Taking into account the existing projects,5 most of the Mediterranean capacity additions are expected to take place in the south-west, notably through the Tiaret refinery project in Algeria (around 15 Mt) and in Spain and Portugal (around 13 Mt increase by 2015). In all other Mediterranean countries, capacity additions are limited and are mainly because of capacity creep.
Furthermore, most refinery upgrades are concentrated in meeting crude oil quality challenges and in increasing oil product quality specifications to meet new European Union (EU) regulations, not only in EU countries but also in most Mediterranean countries.

Crude oil quality is an issue that will have significant implications for the availability, affordability of oil products, as well as production of crude, its transportation by pipelines (i.e. corrosion) and refining. Besides those, crude quality is also an issue for the environment.

We are witnessing a gradual decline in the quality of crude oil being processed worldwide. For the refining industry, increase in sulphur and in density of crude oil trends have a significant impact on processing requirements, both desulphurisation capacity to produce high quality gasoline and diesel, as well as the conversion requirements to minimise fuel oil production,while meeting gasoline and diesel fuel demand requirements. Refiners will have to keep adjusting their upgrading capacity so as to be able to match the heavier supply barrel to the growing requirement for lighter products with less and less sulphur.

Overall, crude quality has been degrading and becoming more sour, and this trend seems unlikely to reverse through 2015. At a time when the USA, EU and progressively, more Asian countries are increasingly
capping the amount of sulphur in transportation fuels (because it can ruin catalytic converters in cars and cause damage to the environment), future crude quality is expected to continue to remain a major concern for Mediterranean refiners.

 Mediterranean output increase and demand mismatch

Up to 2015, refinery capacity is, therefore, expected to increase in the Mediterranean region at an average rate of 0.8 per cent per year. Refinery output will increase at a faster pace than capacity addition by 1.2 per cent per year over the same period on account of increased utilisation rates,which should bring refinery runs from the current 83 per cent to 87 per cent in 2015. Consequently, while refinery capacity is expected to reach 523 Mt in 2015 (a 33 Mt increase from 2005), refinery output should reach 473 Mt (a 53 Mt increase
from 2005) (Fig. 1). The increase in output will exceed that of the demand in the Mediterranean. Mediterranean refinery configurations, even for new projects, will enable increase in production not only for diesel but also for gasoline production.

All product outputs are expected to increase over time except for residual fuel.Residual fuel output has been declining and is expected to continue decreasing over time, leading to a reduction of around 13 Mt in 2015 compared with the current levels. Middle distillates supply, on the contrary, is expected to boom, increasing by 38 Mt by 2015. Gasoline and naphtha are also expected to contribute significantly to the increase in
supply, with additions of 13 and 10 Mt, respectively, by 2015.

As a result, limited oil demand growth, increased capacity and increased refinery output will lead the Mediterranean oil product balance to improve globally, more than halving the deficit of the Mediterranean region by 2015. By 2015, the total deficit is expected to amount to 21 Mt compared with the 44 Mt deficit in 2005. This improving product slate hides great disparities and an actual exacerbation of the current situation on a product basis (see Fig. 2). Most of this deficit will be the result of middle distillates deficit and more specifically, because of diesel shortages; all other major products are expected to be in surplus or near equilibrium (residual fuel6) by 2015.

Diesel and gasoline thus emerge as the two landmarks of future Mediterranean oil product trade predicaments. While diesel is in growing deficit, gasoline surpluses are surging—two interrelated and yet opposed trends and context.

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