Royal Dutch Shell Plc  .com Rotating Header Image (Philippines): Unmoved by delays, Shell still downbeat on refining

SINGAPORE – Royal Dutch Shell is sticking to its downbeat view of refining margins at the end of this decade, despite a wave of project delays and cancellations that has brightened the outlook, a top executive said on Friday.

Major construction or expansion plans worldwide have been dropping at an accelerated rate this year due to the soaring cost of materials and human resources, prompting at least one investment bank to more than double its forward profit forecasts.

U.S. ConocoPhillips warned last month that a new UAE plant may be delayed or cancelled, while Kuwait may also scrap plans for a huge new refinery.

Shell has frozen the expansion of a plant in the Philippines, while Russia’s LUKOIL and Austria’s OMV scaled back building in Turkey.

Asked whether these developments were changing Shell’s view about a downturn in refining margins around 2010, when many of the projects would have been commissioned, Shell’s Executive Director Downstream Rob Routs had a simple answer: “No.”

“The numbers we’ve given investors over the past two years is for a 22 percent expansion of capacity east of Suez, and that’s discounting announcements by 50 percent. So obviously that was a good thing to do,” he told Reuters in an interview.

“I don’t think human beings are going to change. There’s a certain cycle we follow diligently and every time we have good times we shoot ourselves in the foot.”

Shell is considering the sale of a number of downstream assets, including French and U.S. refineries, amid fears among many oil majors that an extended “golden era” in refining profits will have ended by 2010, as new plants come on line, particularly ones built by state-run firms in Asia and the Middle East.

“The upcycle has been unusually long,” Routs said.

But not all oil majors are retreating in the face of huge construction plans by state firms in the Gulf, India and China.

ConocoPhillips and Total are building multi-billion-dollar refineries in Saudi Arabia.

Chevron Corp. has a stake in a major new plant being built by India’s Reliance, while independent Petroplus CEO Thomas O’Malley has said he is “very interested” in more acquisitions.

Earlier this month, U.S. investment bank Merrill Lynch raised its 2009 European refining profit margins forecast to $5.50 a barrel, 153 percent higher than its previous prediction of $2.17. Its forecast for this year is $5.73 a barrel, with bottlenecks unlikely to ease before the end of the decade.

But it does expect more softness in the following decade, with 2010 forecast seen at $5.00, versus $2.17 previously, and 2011 at $3.50, also from $2.17 previously.

Routs declined to give any specific margin forecasts.

“(Margins) will be down, and as a result of that you have to position yourselves in the good times for the bad times,” Routs said. “You do that by building big and building complex.”

Others also see an easing in the bottleneck of refining capacity that has helped drive up global oil prices since 2003.

In its medium-term outlook published in February, the International Energy Agency (IEA) forecast total refining capacity to grow by 11.6 million barrels per day (bpd) from last year to 2011, outpacing oil demand growth of 8.8 million bpd.

Routs acknowledged that rising costs posed a challenge for the industry, but said he hoped this might take some steam out of project costs for Shell’s investment plans.

Shell is also weighing up a $5 billion project to more than double the capacity at its Motiva joint-venture refinery in Texas, making it the biggest in the United States, which Routs said he personally hoped would be given the green light.

A final decision on whether to expand its 285,000-bpd Port Arthur, Texas, refinery to as much as 600,000 bpd, is expected in the third or fourth quarter, he said. – Reuters and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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