Viewpoint: Capacity surge pressures Asian gasoline

A surge in new refining capacity coming on line in Asia-Pacific will increase gasoline supplies and put pressure on refining margins in 2019.

Asia-Pacific refining capacity is expected to increase by about 1.6mn b/d in 2019, the largest growth in more than five years, according to Argus data.

New crude distillation units (CDU) in China, Malaysia, Brunei and Kuwait, and a new condensate splitter in Iran, are expected to boost regional gasoline supplies.

Gasoline refining margins have already taken a hit, falling into negative territory for the first time in seven years. Rising supplies from the new 200,000 b/d Nghi Son refinery in Vietnam and the return of gasoline production units at state-owned Mideast Gulf refiners Kuwait's KPC and Abu Dhabi's Adnoc has weighed on the market in recent months.

China adds supply

Chinese gasoline exports have been rising steadily in 2018, supported by the start-up of state-controlled PetroChina's 260,000 b/d Anning refinery and a 200,000 b/d expansion at state-owned CNOOC's Huizhou operations. Exports are on course to rise even further, as the increase in Chinese gasoline production is expected to outstrip the growth in apparent demand for the fuel.

Two major new private-sector refineries are scheduled to start-up in China in the coming months — Hengli's 400,000 b/d Dalian Changxing plant and Zhejiang Petroleum and Chemical's 400,000 b/d Zhoushan operations. The capacity additions come as China's apparent gasoline demand in January-October 2018 increased just 4pc from the same period a year earlier to 2.94mn b/d.

In southeast Asia, Malaysia's refining capacity will increase by more than 50pc from current levels of about 550,000 b/d when state-owned Petronas brings its 300,000 b/d Rapid refinery on line. The refinery, which is expected to begin production by the first quarter of 2019, has already taken its first Mideast Gulf crude for commissioning.

Mideast Gulf deficit shrinks

The Mideast Gulf, a net importer of gasoline, will add supplies in 2019 as three new projects are scheduled to start. The region is short of about 100,000-200,000 b/d of gasoline, but this could drop to about 50,000-100,000 b/ next year, according to Argus projections.

KPC's $16bn clean fuels project will integrate the 265,000 b/d Mina Abdullah and 440,000 b/d Mina al-Ahmadi refineries, raising combined capacity to 800,000 b/d. State-owned Saudi Aramco's new 400,000 b/d Jizan refinery is scheduled to ramp up to capacity in the first half of 2019, while Iran is expected to start its third 120,000 b/d Persian Gulf star condensate splitter in the same period. The new splitting capacity will produce Euro-5 compliant gasoline as Iran works towards being self-sufficient in the fuel.

Regional balance

The increase in Chinese supply, and the narrowing of the Mideast Gulf's deficit of the fuel, will add to availability and threatens to further weigh on prices. But balancing factors could emerge. Indian refineries are planning to undertake upgrades next year as they look to produce Bharat Stage-6 fuels — equivalent to the Euro-6 vehicle emissions standards — from 2020.

India is a large and growing gasoline consumer, with consumption at around 500,000-600,000 b/d, according to oil ministry data. Indian state-controlled refiners, including public-private sector projects, operate 3.2mn b/d of the country's total 4.95mn b/d capacity. The government, under pressure from the Supreme Court, decided to advance the launch of transport fuels with less than 10ppm sulphur by two years to 2020.

Private-sector refiner Reliance Industries and state-controlled IOC and HPCL plan to take their refineries or secondary units off line for partial shutdowns in 2019, as they undergo modifications to produce 10ppm compliant fuels before the 2020 deadline.

The Indian shutdowns could help mitigate the impact of the surge in new capacity. And there is the possibility that refiners in China and elsewhere could tweak their production yields to raise output of diesel to meet demand from the International Maritime Organisation's 0.5pc sulphur cap on marine fuels, which comes into force in 2020. But these factors look unlikely to fully offset the big rise in new supply.