x Abu Dhabi, UAEThursday 27 July 2017

Rise in refiners' profits to boost Gulf countries

A turnaround in this sector would be a boost to Gulf countries, which have poured tens of billions of dollars into new projects.

Profits for oil refiners in Europe and the US rose in the past three months after one of the sector's toughest periods in history, but analysts say it is still too early to call a recovery. A turnaround in the refining sector would be a boost to Gulf countries, which poured tens of billions of dollars into new refinery projects over the past three years only to see operating profits shift to negative at the end of last year.

Since March 20 refiners' profits, which are determined by the difference between the market prices for products such as petrol and the cost of crude oil, have increased by 65 per cent to $9.41 a barrel on the US Gulf coast, according to Bloomberg, and jumped 53 per cent in north-west Europe to $15.31. But margins remain low compared with the average in recent years, are extremely volatile and likely to decrease again, said Michael Corke, a vice president and refining expert at Purvin and Gertz, the energy consultancy.

"We're still in a situation at the moment where there's not really much pressure in the refining industry," he said. "If anything, margins are likely to settle back a little bit." The UAE has several refinery projects in the works, including a major expansion to double capacity of the refinery in Ruwais by the end of 2013, a small upgrade this year to a refinery in Jebel Ali, and a proposal to build a new refinery in Fujairah.

Mr Corke said margins were not likely to return to their levels from when these projects were conceived, in part because new refineries in the Gulf and Asia will cause a glut of capacity just as demand for products begins to recover. "That increase in capacity is going to mean that even if demand recovers, which is what we are predicting, it's not going to cause the strong numbers we saw in 2007 and 2008," he said. "I don't expect to return to the margins we had in 2004-2008 ever, really."

Standard & Poors, the credit rating agency, has retained its "negative" rating on the global refining sector. It said this month that margins were not likely to improve significantly in the next five years. But analysts expect new refineries to register steady returns in the medium term, in part because the world fuel market is expected to shift from petrol to diesel, which is a more efficient transport fuel.

Although the US and parts of Europe primarily use petrol to fuel their cars, major growth regions including China and India will rely heavily on diesel, experts say. That shift benefits newer, more complex refineries with so-called "hydrocracking" capacity, which turn a higher proportion of a barrel of crude into diesel. "Projects favouring diesel production are likely to be soundest," Mr Corke said. "We're seeing margins for complex refineries bouncing back. They will see better returns on their investments than the people who focused on gasoline."

Purvin and Gertz predicts net margins in north-west Europe, including capital costs, will be $5 a barrel for hydrocracking refineries compared with $2.20 for refineries with so-called "catalytic cracking", an older technology. cstanton@thenational.ae