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East to crack the west’s grip on refining

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By Carola Hoyos

Published: November 14 2008 02:00 | Last updated: November 14 2008 02:00

In the state of Gujarat, north-west India, lies Jamnagar, the world’s biggest oil refining complex, which covers 7,400 acres.

As Reliance Petroleum, the Indian company, prepares to send the first barrel of oil through the complex’s 4,000km of snaking piping, its newly-built second refinery on the site will become the most visible symbol yet of the shift in an industry that is moving east after a century of western dominance.

While refineries in Europe and the US in particular suffer from a collapse in fuel demand, and big integrated oil companies such as BP and Royal Dutch Shell sell one facility after another, Asia and the Middle East are emerging as the new centres of the industry.

Two thirds of the world’s new refining capacity to be built over the next two to seven years is expected to be located in the Middle East and Asia, according to a new report by Wood Mackenzie, the Edinburgh-based industry consultants.

The biggest projects will be led by state-owned national oil companies such as Saudi Aramco, of Saudi Arabia, China’s Sinopec and Kuwait Petroleum.

The reasons were made clear this week by the International Energy Agency, the watchdog agency of the world’s developed countries.

The World Energy Outlook, the IEA’s annual flagship report, published on Wednesday, predicted that oil supply would grow in developing countries and shrink in developed ones. “We think OECD oil demand has peaked,” said Fatih Birol, the report’s author.

All the growth in oil demand to 2030 is expected to come from developing countries, with China contributing 43 per cent and India and the Middle East each about 20 per cent.

The rest will come from other emerging economies in Asia. As a result, the share of rich countries in global demand will drop from last year’s 59 per cent to less than half of the total in 2030.

But much of the diesel from the new Jamnagar plant is likely to head to Europe. Other refineries in Asia and the Middle East also supply countries beyond their local markets.

Alan Gelder, the author of the Wood Mackenzie refining report, said: “New refineries in Asia and the Middle East are competitive in terms of earnings per barrel because they use sophisticated technology to convert very low quality, cheap crude oil into high-end products such as petrol and diesel.”

In the Middle East, the boom in refinery building illustrates not only the increased demand from the region, but also the ambition of oil-producing countries’ and others to benefit from more of the value chain by building plants that can process their particular oil.

However, this is not the best time to be building a new refinery, even in India and Saudi Arabia.

Wood Mackenzie’s report concludes that only 30 of the 160 construction projects announced since 2005 will now go ahead, because demand has collapsed.

Asia and the Middle East are far from immune.

Neil McMahon, analyst at Sanford Bernstein, sees the refining malaise spreading well past US borders.

“European refining earnings in 2009 could well emulate the steep decline in US refining earnings seen this year, as much weaker economic conditions spread from the US to the rest of the world, particularly with a slowdown in non-OECD demand growth and manufacturing activity,” he said in a recent report.

With such prospects, Jamnagar, which will be able to process 1.2m barrels of oil a day when completed, may well remain the giant of its kind for some years yet.

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