Wednesday, May 31 , 2000

Refineries face tough battle for survival

KUALA LUMPUR: Asian oil refineries are paying the price for reckless investment during the region's boom years and face an increasingly tough struggle for survival, experts warned on Tuesday. Despite a resurgence in Asian demand for oil, refining capacity has far exceeded demand growth and the overhang is expected to worsen over the next two years, the experts said at the Asia Oil and Gas Conference here.

David Isaak, president of US-based Delta G Research, told AFP the refinery boom since 1996 was largely due to foreign companies wanting to gain a presence in Asia. "Companies invested, knowing that they wouldn't make a very good return, to get into a market," he said. "There is also investment in protected markets where people don't see what real prices are or what the demand situation is like such as in China, India and Indonesia."

In 1999-2000, Isaak said, nearly one million barrels a day of new capacity came onstream in India alone. "I see the industry miserable for the next one or two years. Things won't really improve until after 2002," he added. Isaak said some 30 refinery projects in the region had been scrapped recently, including two or three each in Malaysia and Taiwan, four in Indonesia and about half a dozen in India. "A refinery now costs about a billion to two billion dollars, so it's a very high stakes game. Nobody's going to loan you that kind of money any more and governments won't want to invest that kind of money," he said.

"The damage the industry has done to itself this time around may be enough that people can't borrow the money to finance. So hopefully, the construction will stop." Daryl Pattison, senior vice-president of Reliance Petroleum Ltd. in India, earlier predicted a "very bleak" future for Asian refineries. The overhang in Asia Pacific and Middle East refineries grew from 10 percent in 1990 to 14 percent this year and is seen to jump to 22 percent by 2002, Pattison told the conference. "The region's capacity has gone beyond its capacity to absorb it," he told the conference. "It is going to get much worse."

Pattison blamed "overinflated" forecasts for Asia's gross domestic product growth for surplus capacity. "With the high forecast, everyone wants a slice of the business and unfortunately from time to time, this means a severe overhang in refining capacity. "Unless something changes, the rate of return for refineries will remain poor. I don't see a solution in the short-term," he said. Delta's Isaak said Asia and Middle East refineries must cut capacity and output must be ultimately "rationalised and modernised especially in Japan."

He said huge projects planned in China and particularly India should be put off. Enrico Sismondo, managing director of Muse Stancil (Asia) Pte. Ltd. in Singapore, said Asian refineries were relatively "young" with inefficient regional distribution systems. "Many inland refineries have been protected from direct international competition," he said, adding that most could not meet tight environmental emission rules and high quality specifications.

Poor margins do not justify major refinery investment in Asia unless subsidies are given but Sismondo said the region faced globalisation pressure to scrap subsidies and import restrictions. Margins above six or seven dollars a barrel are required for economic investment but the range is not sustainable over the long-term, he said. "The http://www.jang.com.pk/thenews/index.htmlrecent crisis has shown up the difficulties with project financing based on unrealistic earnings projections," he said. He agreed that the excess capacity would remain for the next two years, but said higher crude prices may provide some marginal relief in the short-run.

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-- Martin Thompson (mthom1927@aol.com), May 31, 2000