Asia Pacific Energy Research Centre

Asia Pacific Energy Research Centre (APERC)in collaboration with the

Institute of Energy Economics, Japan (IEEJ)

APEC Downstream Oil Market Study

EWG30 Ulsan, KoreaAugust 2005

• Scope of the study• Characteristics of the

APEC downstream oil market • Case study: US and China• Preliminary findings • Initial recommendations

Outline

Preliminary findings

• There is a clear linkage between the recent high oil prices and the problems in the downstream oil industry:

• rapid growth in oil demand

• increased share of light vs heavy products

• tighter and more stringent petroleum product specification

• lower oil inventories

• lack of refining capacity (CDU and upgrading facilities)

• tight oil transport and storage facilities

• These problems are emerging or imminent in some APEC economies

• US and Chinese downstream oil market play important roles in stabilizing supply and demand in terms of its share to the market

• There is a growing need to address problems/barriers to market integration for APEC economies to streamline trade

Gasoline and Crude Oil Prices

0

50

100

150

200

250

1/4/

1999

7/4/

1999

1/4/

2000

7/4/

2000

1/4/

2001

7/4/

2001

1/4/

2002

7/4/

2002

1/4/

2003

7/4/

2003

1/4/

2004

7/4/

2004

1/4/

2005

7/4/

2005

Cen

ts p

er g

allo

n

0

10

20

30

40

50

60

70

80

Dol

lar

per

barr

el

US Gasoline Price WTI

Scope of the study

• Petroleum product supply/demand balance

• Refinery capacity, configuration (product mix), utilization rate, over/under capacity

• Factors that limit investments

• Government actions/strategies

A. Examine/analyze the characteristics of the APEC downstream oil market

B. Case study/analysis of US and China

C. Identify areas for possible joint regional cooperation:

• measures and strategies to address structural problemsand/or “bottlenecks”

APEC refining 2004Half of the world’s refining capacity is in APEC

Source: Prepared by author from IEA data

755

9

2,017

227

4,650

0

2,255

4,707

2,577

545

1,684

104

33

193

333

5,433

1,337

1,220

703

16,775

0

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

Thousand barrels per day

Australia

Brunei Darussalam

Canada

Chile

China

Hong Kong China

Indonesia

Japan

Korea

Malaysia

Mexico

New Zealand

Papua New Guinea

Peru

Philippines

Russia

Singapore

Chinese Taipei

Thailand

United States

Viet Nam

• World – 82.4 mil b/d • APEC – 45.6 mil b/d (55%)

APEC refinery configuration 2004:

Source: Prepared by author from O&GJ/IEA data NB: HongKong China & Viet Nam currently have no refining capacity

Refining Hydrotreating/ Cracking+reforming/ Cracking to Light(distillation) distillation distillation ratio distillation products

Capacity ratio ratio yieldEconomy 1000B/d % % % %

United States 16775 76 64 43 78Russia 5433 40 22 7 51Japan 4707 92 37 22 73China 4650 7 23 20 74Korea 2577 42 21 12 68Canada 2017 50 56 37 74Mexico 1684 58 40 23 53Singapore 1337 43 23 13 67Chinese Taipei 1220 41 26 16 66Indonesia 2255 2 30 20 70Australia 755 44 55 32 84Thailand 703 65 31 18 67Malaysia 545 40 23 7 74Philippines 333 40 15 5 63Chile 227 56 45 77Peru 193 2 17 16 56New Zealand 104 47 51 25 84Papua New Guinea 33 11 65Brunei Darussalam 9 66 85

APEC 45557 56 43 27 71World 82409 50 37 23 69

Source: BP Statistical Review of World Energy 2005, NB: not all APEC economies are represented in this data

Oil demand in APEC economies is growing, 1.7% pa

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

mill

ion

to

nn

es

APEC oil consumption

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

1,00

0 B

/D

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Capacity Refining runs Utilization

• Refining capacity increasing but demand growth outpacing supply increases

• Refinery utilization rate in APEC reached 92% in 2004

APEC oil demand and refinery output

USA42%

China13%

Japan11%

Russian Federation6%

Oceania 2%

North East Asia3%

South America5%

South East Asia8%

Canada5%

South Korea5%

Gasoline and middle distillates take up the lion’s share of the product demand growth

Middle distillates 32.9% Gasoline 29.7% , 2004

• USA, the largest oil consumer in 2004 (42%), China (13%)

0

10,000

20,000

30,000

40,000

50,000

60,000

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

1,00

0 B

/D

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%Others Middle distillates GasolinesFuel oil % US % China

China 1.4% – 13%

Tightening Oil Products Specification in APEC• Initiatives are taken to tighten product specification to mitigate

problems on air pollution in APEC economies (particularly in major cities):• lower sulfur content of gasoline, diesel, etc.• limit specific component (e.g. olefin content) of gasoline• introduction of “reformulated” gasoline, etc.

• Current status and future plan to step up product specification differ by economy (depending on economic, social and oil industry structure)

• US and Japan lead the introduction of stringent specification, followed by developing APEC economies (e.g. voluntary introduction of “sulfur-free” gasoline in Japan, started in April 2005)

Project petroleum product demand/supply balance (selected APEC member economies, 2010), in thousand barrels per day

Source: Prepared by author from EDMC, IEEJ data

Despite refinery capacity additions, APEC will remain a net importer of petroleum products in 2010

Net Product Importers Net Product Exporters

-101

-6

-173

-41

-770

-320

-357

-855

40

-135

-267

-33

-114

317

135

-15

-2865

-218

-3500 -3000 -2500 -2000 -1500 -1000 -500 0 500 1000

Australia

Brunei Darussalam

Canada

Chile

China

Hong Kong ChinaIndonesia

JapanKorea

Malaysia

Mexico

New Zealand

PhilippinesSingapore

Chinese Taipei

Thailand

US

Viet Nam

thousand barrels per day

APEC downstream oil marketIn summary…

• US and China could play an important role in the APEC downstream oil market currently with 65% of demand for petroleum products

• Lag in APEC refining capacity; increasing only at 1.3% against a 1.7% increase in APEC petroleum product demand

• As a result the APEC regional refinery utilization rate reached 92% in 2004

• With a larger share of oil demand taken up by transportation – the share of “white products” in the refining slate has increased dramatically (63% of oil products are middle distillates/gasoline)

* It should be noted that this is just presented to give an overview of some of the issues pertaining to the downstream oil market in APEC; all economies will

be studied and collectively reported

The next section are snapshots of the two largest APEC economies, US and China case studies.

Case Study – US & China

Case Study – USA

0

2

4

6

8

10

12

14

16

18

20

22

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 20000

50

100

150

200

250

300

350

Refining Capacity

Number of Refineries(Right Axis)

Operating Ratio( Right Axis)

%

2004

Million B/D

Number of Refineries

Refining Capacity

OperatingRatio

Number of Refineries

Operating Ratio%

Refining Capacity

Average Refinery Capacity (×1000 B/D) 21 32 44 56 76 104 115

0

2

4

6

8

10

12

14

16

18

20

22

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 20000

50

100

150

200

250

300

350

Refining Capacity

Number of Refineries(Right Axis)

Utilization Rate ( Right Axis)

%

2004

Million B/D

Number of Refineries

Refining Capacity

UtilizationRate

Number of Refineries

Utilization Rate %

Refining Capacity

Average Refinery Capacity (×1000 B/D) 21 32 44 56 76 104 115

Source: Prepared by author from BP and O&GJ data

62

6466

6870

72

7476

78

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Demand Structure (light products out of total product demand)

Ratio of upgrading capacity to CDU capacity

US Ratio of upgrading capacity to CDU capacity

%

In summary…• Streamlining of the refining industry has significantly improved capacity utilization rate; to the point where a minor incident may cause sudden supply disruption and/or impact on price.

• Main reasons why refinery capacity has not kept pace with demand growth are:

• historical low rate of return• siting and permitting problems• increased environmental compliance

• “boutique fuels” have necessitated exporting countries to make special product components; which in turn forced exporters to demand higher prices for their products, albeit reducing the number of import sources.

• Reluctance of refiners to build additional capacity exerts an upward pressure on the US’s dependence on imports.

Case Study – USA

China’s oil consumption by product

Source: BP statistical review of world energy, 2005

Chinese Petroleum Demand Growth

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Yea

rly

Dem

and

(1,0

00 B

/D)

Others Middle distillates Gasolines Fuel oil

• bulk of the growth came from the transport sector

Middle distillates 34.3% – 35.2% ; Gasoline 15.3% – 25.2%

• Petroleum product demand has doubled since 1990:

• 2003-2004: 16% • 2002-2004: AAGR 8.0%• 1990-2004: AAGR 6.0 %

• Backed by high economic growth, oil consumption grew at AAGR 7% over last decade

Case Study – China Downstream oil market

• In 2005, stricter gasoline specifications (sulfur 0.05%, olefin 30%) introduced in selected cities. Diesel to follow in 2008

China’s refining capacity and operation rate

0

1000

2000

3000

4000

5000

6000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

50

55

60

65

70

75

80

85

90

95

100

Capacity

Throughput

Operation rate

(1000 B/D) (%)

Source: BP statistical review of world energy, 2005

• Refining capacity has almost doubled in the past 15 years

The demand increase for transportation fuels and distillate fuel oil for electricity production, refinery utilization rates increased rapidly reaching almost 95% in 2004

• At present 3.5 million B/D of new refining capacity is planned by CNPC, Sinopec and others

Case Study – China

In summary…

• In China’s domestic downstream market, such factors as:

a. growing demand, b. changing product mix,c. tighter specification, and d. changes in crude type for refining, etc,

have become important factors, which might have implications for future policy planning at the government and industrial levels

• Huge investment for refining capacity is required to address the above problems

• Regional approach (optimal utilization of the regional capacity and infrastructure) may be a useful solution

Case Study – China Downstream oil market

Preliminary findings

• Rapid and unexpected growth in petroleum product demand (particularly lighter petroleum products), tighter and more stringent product specifications, and low surplus refinery capacity (CDU and upgrading facilities) have contributed to the upward pressure on oil prices.

• These problems are emerging or imminent in some APEC economies

• US and Chinese downstream oil market play very important roles in stabilizing supply and demand in terms of its share to the market

• There is a growing need to address problems/barriers to market integration for APEC economies to streamline trade

Preliminary findings

• There exist investor constraints (although may differ in existence and degree by economy) for refinery investments:

•low return on investments (low refinery margins)

• huge upfront (capital) costs

• high risk due to instability (and uncertainty) of market

• siting and permitting problems

• stringent environmental standards and changing fuel specifications

• country and political risk

• Some potential for either refinery expansion and reactivation based on current and future oil demand growth.

Initial recommendations

• Facilitate the optimal utilization of existing refining capacity and infrastructure available within the APEC region

• Remove barriers/constraints to freer oil product trade

• Facilitate investment in refining sector both for CDU and upgrading facilities.

• either through:

• market incentives (or government subsidies)*

• support for R&D and technology development (lowering cost of cracking, alternative fuels-biofuels)

• transparency in information/sharing (JODI)

• Possible facilitation of investment in other downstream infrastructure (pipeline, terminals, etc)

To address the problems, it is necessary to:

THANK YOU