Oil trade pattern shifts as refiners go global
New ultra-modern refineries and major traders are shifting to longer-haul tankers and large storage terminals in key hubs as they reverse a decades-old pattern in their battle for new markets.
The latest refineries in Asia, the Middle East and the United States benefit from lower feedstock and energy costs and fewer taxes and regulations.
That allows them to compete against local refineries in Europe, Latin America and Africa to sell products such as petrol, diesel, gasoil and jet fuel.
Keen to sell larger volumes, refiners are using 75,000-tonne tankers, known as LR2s, which are double the size of the traditional oil product tankers.
The heavyweights of export-oriented refiners are Reliance Industries 660,000 barrels per day (bpd) Jamnagar refinery in India and the new 400,000 bpd Jubail refinery in Saudi Arabia, a joint venture with Total.
"The whole dynamics (of trading) are changing," Dario Scaffardi, general manager of Saras Group, an independent Italian refiner, told the Oil & Money conference in London this week.
"The basics of refining have always been to have refining centres close to consumption centres and crude on the long haul and the products were in the short haul. A lot of logistical problems related to bringing small parcels of product to a variety of small ports," Scaffardi said.
"This model has been challenged and changed and Reliance shows us that you can have models where you are shipping LR2 vessels around the world and the logistics is adapting to that. We will probably need to move to big size and some sort of vertical integration."
Big plants on the United States Gulf Coast, such as the 600,000 bpd Motiva refinery at Port Arthur, owned by Royal Dutch Shell and Saudi Aramco, are also targeting the international market as they ramp up petrol and diesel production thanks to the abundance of domestic light sweet shale oil.
Traders including Shell, Total and Vitol have in recent months also started using more LR2 vessels to ship diesel from the US Gulf Coast to Europe, an increasingly busy trading route.
"The transition in the ships that are being used has been enormous. We are using ships that are twice the size of those that were used 20 years ago, that can make a US$3-US$4 a barrel difference in shipping costs," Tony Fountain, head of refining and marketing at Reliance said at the conference.
The flow of oil products from overseas markets is taking a heavy toll on Europe's refining industry where many plants closed down in recent years due to falling demand and high costs.
The refiners and traders are also investing in large storage terminals in trading hubs in order to guarantee supply flows in case of shipping disruptions.
"In all our key markets, whether its Singapore, the Mediterranean, Rotterdam or New York, we hold storage in all of those. Hopefully there is confidence with the buyer that you are not totally dependent on the next cargo," Reliance's Fountain said.
Global refining capacity is set to grow by around 10% over the next five years to 106.7 million bpd and outpace demand, expected to be around 95 million bpd.
Competition among refiners will only increase.
"The European refineries are being undermined by the big investments in India and the Middle East Gulf," Rob Nijst, CEO of Vitol Tank Terminal Int (VTTI), a venture of top oil trader Vitol, said in an interview.
"The key here is to have terminals that are able to receive big ships. These refineries will produce large cargoes," Aernout Boot, commercial director for VTTI, said during the same interview. – Reuters, October 4, 2013.