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Equities
● Asia-Pacific
April 2019
Refining industry: Short lead time plans are set
Most refiners appear to have put in place business plans for IMO 2020 as the implementation
date approaches. We believe they can be categorised as follows:
1. Capex to increase conversion capacity: The long lead time (3-5 years) full-scale
investment window has almost shut and there are only a few companies making progress
with this. We don’t really see a pickup in fresh investment for the conversion units aiming
for the early phase of IMO 2020. However, some refiners have recently revealed plans to
raise their secondary conversion capacities through a restoration of idled plants, capacity
creeping, revamping or debottlenecking scheduled for completion before or early 2020.
Conversely, there are some delays in the progress of greenfield refinery expansion (not
uncommon) despite the fact that on-time delivery now becomes much more important for
project returns than ever. From a global scale perspective we believe the ability to raise
conversion capacity significantly enough is limited, indeed nearly impossible.
2. Reconfiguration, overhauling, and feed changes: Those refiners that have technical
and/or economical flexibility can alter their operations without modification of their physical
assets. Some companies are working to shift their crude diet into sweeter (low sulphur)
grades in order to minimise production of high sulphur residue from the beginning. Some
refiners plan to change product flows within the system under a new economic assumptions
reset. Some (e.g. Japanese) plan to jointly work to solve the profit maximisation equation
together. Another way being considered to capture additional margin is to bring forward
regular maintenance activities into 2019 (from 2020+), so that they can run at higher
utilisation and better conversion efficiency at the peak of the cycle.
3. HSFO supply contracts: Those with limited ability to significantly cut HSFO production by
reconfiguration face concerns about the marketability of their HSFO product. Some refiners
have become actively engaged in trying to solve the dirty fuel marketability issue, by
making a long term contract with the shipping lines to supply HSFO to vessels equipped
with scrubbers. The strategy ensures that refineries will operate as usual and continue to
process sour (high sulphur) crude oil at a discounted price, but the companies involved
face margin risk (having to bear a negative margin from HSFO sales) if the contract pricing
is linked to a trade market benchmark. Many refiners already have long-term business
relationship with shipping companies (for their crude and product deliveries) and in some
cases own their own fleet. Some companies provide financing for the new vessel orders or
scrubber-retrofitting, which usually involve an agreement to share the investment return to
hedge the margin risks. This is why scrubber penetration has been so fast in the tanker
category within the shipping industry.
4. Blending: A fourth solution is to dilute the excess dirty fuel with higher value/low sulphur
blending materials (mostly gasoil range products). A better segregation of the fuel oil
stream, as some companies plan to do, is in a broad sense a kind of blending driven mix
change, as we understand it.
We are not seeing new
investments for conversion
units targeted for the early
phase of IMO 2020
Refiners with flexibility can
change their crude diet and
optimise product flows
Several refiners are actively
engaging in long-term supply
contracts with shipping lines
to supply HSFO
Better segregation of fuel oil
stream to aid blending on-
spec IMO 2020 fuels