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Financial Times: Oil bosses play down refining capacity fears

By Kevin Morrisonand Rebecca Bream in London

Published: June 19 2006 03:00 | Last updated: June 19 2006 03:00

Leading oil executives, including BP chief executive Lord Browne, have said there is plenty of oil refining capacity, in spite of market fears to the contrary.

Oil prices remain close to $70 a barrel even though oil inventories in the developed world rose to their highest level in more than 20 years in April, suggesting there is no shortage of oil.

Analysts said the high prices reflected the tightness in the production process of turning crude into finished products such as petrol, diesel and jet fuel.

Francisco Blanch, commodity strategist at Merrill Lynch, said the global refining system was so tight it would impede world demand for oil products next year. “In our view, refineries will not be able to process the incremental crude output coming on stream over the next 18 months.

“This implies that global product growth rates will have to continue to slow down to match available gasoline, diesel and jet fuel supplies,” Mr Blanch said.

Merrill Lynch expects global oil production to rise by 2.6m barrels a day next year, which would lead to further increases in global oil stockpiles.

However, international oilcompanies such as BP, Royal Dutch Shell and ExxonMobil do not see any shortage in global refining capacity. “We have plenty of capacity not just for today but for tomorrow,” Lord Browne, BP chief executive said last week.

Rob Routs, director of downstream products at Royal Dutch Shell, said there was more investment in refining. Mr Routs said between 2006 and 2010, about 11m b/d of refining capacity was due to be built round the world. Much of this growth would take place in Asia, with a 22 per cent jump in refining capacity planned “east of Suez”, compared with 6 per cent growth in the Americas and 2 per cent in Europe and Africa.

Mr Routs said this meant that there was a risk of too much oil refining capacity in some parts of the world, which would depress refining margins. “By 2010, these good refining margins will be once again history.”

ExxonMobil executives have played down the need to expand refining capacity by building new plants, instead preferring to upgrade existing refineries.

Oil inventories in countries of the Organisation of Economic Co-operation and Development are even higher than the very high levels seen in 1998, which triggered an oil price collapse to $10 as demand started to slow.

Copyright The Financial Times Limited 2006

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