New plants in Asia threaten fuel profits

SINGAPORE - India's Reliance Petroleum is among Asian refiners whose profits may shrink as increased fuel-making capacity causes a glut, analysts say.

The profit from turning crude oil into fuels in Asia may fall as much as 44 per cent in the next four years when new plants start production, UBS said in a report. Demand for petrol and other fuels may lag output as refiners invest in new plants, industry consultant Fereidun Fesharaki said at the India Oil & Gas Conference in New Delhi last week.

Reliance, which plans to spend US$6.1 billion ($10 billion) to double the size of its facility in India by 2008 and make it the world's biggest refinery, will compete to sell fuel in the US, Europe and Asia. ConocoPhillips and Total are bidding to build export-oriented plants in Saudi Arabia, while South Korean companies including S-Oil Corp are expanding.

"Capacity additions in India pose a threat to future refining margins," Fesharaki, president of energy consultant FACTS Energy, said. "If the products don't go west, then they will head to the Asian market and margins will be affected."

As new plants start, refiners may lower operating rates to 89 per cent and the average refining margin, or profit from processing each barrel of crude oil, may decline to US$4.50 a barrel in 2010 from US$8 in 2007, UBS said in its report. Surplus refining capacity in India, the Middle East and other parts of Asia may be the reason BP, Europe's largest oil company, pulled out of a proposed US$3 billion refinery project in India last week, Fesharaki said.

"India has too much capacity and BP may have recognised that," he said. Fuel demand has exceeded capacity in the Asia-Pacific region since 2003, boosting refining profit. Last year, global margins rose to a record after hurricanes in the US shut refineries and prompted imports from Europe and Asia.

"There has been a renaissance of sorts in refining investments," Jeet Bindra, president of global refining at Chevron Corp said in New Delhi. "If all the refinery projects are completed, we might end up with overcapacity."

Globally, there are 500 refinery projects and 66 new refineries that are being planned, Bindra said.

There will be as much as 10 million barrels a day of new refining capacity added in the next five to 10 years, he said.

Reliance Petroleum's new refinery will process 580,000 barrels of oil a day.

India's refiners may add one million barrels a day of capacity through 2010, and China, the world's second-largest oil user after the US, may boost output by two million barrels a day, according to FACTS.

Middle Eastern refiners may add three million barrels a day by 2012.

The expansions may force refiners in Asia to cut operating rates to 92 per cent by 2010 from 97 per cent in 2007, UBS said.

"India will remain long on oil products," said Ashok Sinha, chairman of Bharat Petroleum Corp, India's third-largest oil refiner. "We need to look into developing our own overseas network or trading desk to sell our products."

- BLOOMBERG