The refining sector around the world seems to be far from rosy compared to its petrochemical brother, as international companies are divesting their refining investments. US major ConocoPhillips announced in April it was pulling out of its planned 400 000 b/d joint venture Yanbu’ export refinery project with Saudi Aramco.
“The quality of Saudi Aramco as a partner and significantly reduced capital costs from the recent re-bidding process made it a very difficult decision for us,” said Willie Chiang, ConocoPhillips’ senior vice-president, refining, marketing and transportation. “We ultimately decided this project was not consistent with our current strategy to reduce our downstream footprint around the world,” he added.
In May, Shell confirmed it is in discussions with third parties as part of a review of its many liquefied petroleum gas (LPG) businesses. The preferred outcome of the review is the sale of the Shell Gas (LPG) businesses worldwide.
In addition to this announcement, Shell has confirmed downstream reviews in Finland, Sweden and Africa, proposed sales in Germany and the UK, and completed sales in France and New Zealand.
Greater risk when market is squeezed in refined products is blamed to be the reason behind this divetissement, as refiners get their profits from price difference between crude oil value and refined product prices.
“If the cost of the crude is US$80 per barrel and the refining cost is $20, while the price of equivalent barrel of refined product (like diesel) in the market is $105, the refinery profit in this case is $5,” said Dr Ahmed Al-Mazroui, petrochemical analyst at the Saudi based Alpha Beta company. “But if the price of the refined product in the market is $95, the refinery in this case post losses of $5.”
This profit margin depends on different factors including world’s production capacities, operating rate of refineries, as well as demand on refined products. “Depending on these factors, profit margins fluctuate between positive and negative,” he explained.
Historically, the refining sector witnessed its bonanza in the last decade, mainly in the years 2006-2008 which has been referred to as “the golden age” for refineries, due to sustained high profit margin.
But these profits margins vanished during the credit crunch, and reached their lowest levels during 2009 and the beginning 2010. “Compared to petrochemical products which showed price increase, refined product prices didn’t rise due in part to the extra refining capacity which exceed 4 million barrels per day,” observed Dr Al-Mazroui.
There are many international indicators that measure profit margins of international refineries; one of the main indicators is British Petroleum’s (BP) GIM (Global Indicator Margin) index, which measures profit margin of different refineries operated by BP in different locations around the world and use different crudes. The index showed that margins has reached its lowest level in the first quarter 2010.
According to the historical data, GIM reached an average between 7 and 15 US$ per barrel during 2007 and 2008.
Risk associated to refining sector and preference to focus more on exploration and production are the main reason behind this trend, as even in what could be considered as a bad years, IOC profits were dragged down by refining sector not exploration and production.
