09.30 – David Wech, JBC Energy – · PDF fileMonthly Additions of New Crude Streams...

The Good News for (European) Refining

CIS Downstream Summit

29 November 2016

David Wech

JBC Energy

For World Refining Association

Disclaimer

All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements (including those depicted in graphical form)are statements of future expectations that are based on JBC Energy’s current expectations andassumptions and involve known and unknown risks and uncertainties that could cause actualresults, performance or events to differ materially from those expressed or implied in thesestatements. Forward-looking statements include, among other things statements expressingJBC Energy’s expectations, beliefs, estimates, forecasts, projections and assumptions. Theseforward-looking statements are identified by their use of terms and phrases such as‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘may’’, ‘‘plan’’, ‘‘objectives’’,‘‘outlook’’, ‘‘probably’’, ‘‘project’’, ‘‘will’’, “forecast”, “predict”, “think”, ‘‘seek’’, ‘‘target’’, ‘‘risks’’,‘‘goals’’, ‘‘should’’ and similar terms and phrases. All forward-looking statements contained inthis speech/presentation are expressly qualified in their entirety by the cautionary statementscontained or referred to in this section. Readers/audience should not place undue reliance onforward-looking statements. Each forward-looking statement speaks only as of the date of thispresentation. Neither JBC Energy nor any of its subsidiaries undertake any obligation topublicly update or revise any forward-looking statement as a result of new information, futureevents or other information. In light of these risks, results could differ materially from thosestated, implied or inferred from the forward-looking statements contained in thisspeech/presentation. Any persons acting on information contained in this presentation does sosolely at their own risk. JBC Energy is not responsible for the accuracy of data collected fromexternal sources and will not be held liable for any errors or omissions in facts or analysiscontained in this presentation. JBC’s third party sources provide data to JBC on an “as-is” basisand accept no responsibility and disclaim any liability relating to reliance on or use of theirdata by any party.

Tuesday, 29 November 2016 www.jbcenergy.com Slide 2

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Audience Polling

How much refining capacity will be forced to shut in Europe by 2025 to keep margins reasonably healthy?

a) About a quarter of the installed capacity.

b) About 15% to 20%.

c) 10% should be sufficient.

d) It may well be that economic shutdowns are not needed.


Abundant & Cheap Feedstock

The market is set to move from a temporary rebalancing in 2016 to sizable surpluses again in 2017, especially from the crude side, which should pressure oil prices to a certain extent and support refining economics.


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Crude balance Implied Total Liquids Stock Change

Observed Crude Stock Change Observed Total Liquids Stock Change

Implied Stock Change and Crude Balance vs. Observed Stock Change [million b/d]

Source: JBC Derived Data

Abundant & Cheap Feedstock

Over the next half year a big wave of new supply flows is set to enter the market, with practically all relevant streams being linked to the Atlantic Basin (see review of 99 upstream projects in Benigni on Oil Markets Report Issue 6)


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Canada oil sands North Sea

US GoM Brazil

Russia WAF

Asia Kashagan

Monthly Additions of New Crude Streams (excl. Middle East & US Shale - 3MMA) ['000 b/d]

Source: JBC Energy

Demand Got a Boost from Low Prices

Oil demand has received a sizable boost from lower oil prices, especially the private transportation fuels gasoline and jet fuel. Regionally, consuming nations have benefitted, while the economies of producing areas are coming under pressure (partly leading to subsidy cuts). We see the lifeline for oil demand being expanded to 2020, but afterwards relative dynamics

remain largely unchanged.


Refinery Utilisation is Rising

Higher demand and cheap feedstock costs have pushed refining operations higher, and future capacity additions may struggle tokeep pace with demand (as long as it grows).


Not Too Much New Capacity Coming In…

There is still quite some investment in all types of refining units over the next 5 years, but projects for later on are very scarce. In particular, there are barely any new (as opposed to long-planned and delayed) projects.


… Also As Investments are Delayed or Cancelled

We have consistently downgraded our expectations for upcoming CDU additions, which in part reflects a weakened investment environment for downstream and upstream operations alike. Most new capacity is built by oil producers which cut back investments.


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CDU Capacity Addition (y-o-y) Expectation By Date ['000 b/d]

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Change to Forecast by

Region (Current vs 2015)

CDU Cap Additions Annual

European Base Case Outlook as Improved…

All these factors help to push the call on European refining (as key swing producer much higher in 2015, with 2016 barely dropping of. This was also a function of specific problems in competing markets, which may well reoccur in the future, providing some upside risk.


… Helped by Disappointments in Other Places

Especially refinery runs in the FSU (tax changes, impact of low oil prices on Russian refining economics), the Middle East (project delays, some regional run cuts) and Latin America (incl. Mexico; poor economics, strong US competition, outages) disappointed this year and many of the underlying factors are seen as permanent.


But Demand Outlook is Not Good Beyond 2020

With the potential (likely) lack of growth from road transportation fuels, players will be very careful to invest into refining capacity from here on (also considering the long lead and amortisation period), potentially keeping the market tight in spite of poor/no demand growth.


And Road Fuels May Come Under Pressure

Our long-term outlook foresees a reasonably balanced market across the board in the coming years up to 2020, with LPG and fuel oil relatively most supported. In the longer term the driving fuels tend most to oversupply. Accordingly, good value may lie in side products.


Tuesday, 29 November 2016 www.jbcasia.com Slide 15

The IMO regulation will be largely met with LSFO volumes, the production of which will however require significant changes in refining operations, withsecondary feedstocks being redirected into the bunker blending pool. Generally we see this as supportive for refining, especially in the short term.

Side Products Like 0.5% Bunker Supportive

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LNGGas Oil0.5% Fuel Oil3.5% Fuel OilScrubbers ShareLNG Share

Bunker Fuel Mix [million b/d, %]

Source: JBC Estimates

This chart shows only preliminary indications. Final findings will be

presented in the JBC Bunker Study, available as of 10 Jan 2017.

mailto:[email protected]?subject=Trial Request - Bunker Study 2020

mailto:[email protected]?subject=Trial Request - Bunker Study 2020

General JBC Key Messages

• Near-term:

– Crude prices are currently supported by some actual rebalancing over the course of 2016, OPEC cut speculation and a generally more optimistic energy outlook (natural gas and coal prices).

– Unless there is a major and sustainable producer intervention, oil markets will see a deepening surplus in 2017 on a wave of new supplies.

– On sustained lower prices demand continues to surprise on the upside

– The refining system is operating close to its realistically available capacity level

• This together with cheap crude and stretched gasoline yields should provide sizable upside risks for refinery margins

• The downside risks stem from a surprise comeback of Russian and Latin American refiners.

– The exploitation of global crude procurement and storage options has the potential to provide huge leverage to the bottom line. For petchem feedstocks the expected volatility in crude prices is likely leveraged by ups and downs in refining margins, suggesting the use of hedging tools at low points.

• Mid-term:

– Only in 2019/20 will supply & demand return to balance, with crude prices rising to the mid-60s as a result

– We believe the ongoing focus on upstream capex cuts is misleading – it will be offset by cost cutting, efficiency gains and a leap in the application of improved technologies

– Future demand growth will overwhelmingly be driven by petrochemicals, aviation and – on a shrinking scale – road transportation

– But efficiency gains, substitution, regulation, high degrees of automation, and a move away from diesel may all eat into road transportation growth, leading to peak demand within a 10-year window.

• Lower prices provide some cushion on the demand side, but any stronger increase will accelerate the above threats

– The refining business will face regular challenges, but economics may be much better than thought

• Also margin may benefit from side products (0.5% bunker, jet fuel, petchem) more than from standard road fuels

• At any rate, flexibility is key, but there may be also good business opportunities for simple setups


Thank you!

09.30 – David Wech, JBC Energy – · PDF fileMonthly Additions of New Crude Streams...

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