through Energy Products
Petroleum Refining and retailing
is the second link in RIL's drive for growth and
global leadership in the core energy and materials
value chain. RIL has 1.24 million barrels per
day (MBPD) of crude processing capacity, the largest
at any single location in the world
The crude oil demand recovered strongly after a period of
contraction in 2009. As a consequence, oil inventories
reduced to five-year averages resulting in lowering OPEC
spare capacity. Higher oil production also resulted in lower
spare capacity and consequently putting upward pressure
on prices. Higher demand for light products and higher
refining utilisation rates resulted in widening light-heavy
The growing gap between demand and oil supply, coupled
with strong crude prices, is encouraging OPEC producers
to further ramp up production. This is resulting in increased
supplies of heavier crudes and further impacting lightheavy
differentials. This should cause light-heavy spread
to widen, and hence improved complex refining margins.
For FY-11, Arab light-heavy differential averaged at $ 3.2/
bbl, an increase of 86% over the previous year.
According to IEA, oil demand in 2010 grew to 87.9
MMBPD, up 3.4% in 2010 vis-à-vis 2009. It is pertinent to
note that demand growth in 2009 was (-)1.3% vis-à-vis
2008 and therefore, seen in the context of the change over
the last 2 years, growth in 2010 was in excess of 4.5%, the
fastest recovery in over a decade. Demand growth in 2010
was driven by non-OECD countries which contributed to
an additional growth of 2.2 MMBPD (5.7% on a year-onyear
basis) which was 76% of global demand growth.
Average crude oil prices ($/bbl)
The consumption of middle distillates, the part of the barrel
that is most levered to the economic cycle has picked up
particularly strongly in recent months, leading to higher
global oil demand. Middle distillate product cracks are
expected to continue to rise due to strong demand for
these products across Asia. Stronger oil demand, delays
in new refining capacities in Asia, and widening lightheavy
oil price differential going forward provide a further
upside to complex refining margins in Asia. Geopolitical unrest in the Middle East/North Africa regions
has been a major cause for the oil price increase in early
2011, with increasing focus on potential contagion to major
oil exporters beyond Libya. Since the oil price spiked in
February 2011, refining margins have strongly recovered
and remain higher across all regions, driven by strong
diesel margins, with Asian margins close to all-time highs.
Refinery outages of around 1.4 MMBPD in Japan have
taken away around 350,000 BPD of diesel supply from the
domestic market. Prior to the earthquake, Japan's 4.5
MMBPD refining capacity was running at close to 90%
with diesel production of around 1.25 MMBPD. Large Asian
export-oriented refiners are likely to shift products to Japan,
leading to tightening supply in the European market.
Refinery capacity and utilization
It is estimated that the net refining capacity addition in
2009 was 2.6 MMBPD and a further 0.5 MMBPD in 2010.
Limited capacity addition in 2010, strong demand growth
and wider margins have helped utilization rates improve
during the year. The average capacity utilization rates in
FY-11 for refineries in North America, Europe and Asia
were at 83.8%, 77.8% and 83.9% as compared to 81.6%,
76.6% and 83.5% of last year's respectively.
With higher global GDP forecasts and higher global oil
demand forecasts coupled with minor capacity additions,
refining utilisation rates are expected to improve over the
next few years.
Demand for petroleum products
Gasoline was a weak link in the otherwise improving
refining business. For most of the year, high inventories
kept gasoline markets in USA amply supplied. Structural
issues, like tightening fuel standards and rising share of
ethanol, are likely to impact the gasoline cracks in the
Recent improvement in overall economic condition has
had its positive impact. Gasoline inventory draws are
presently higher at 1.9% and below the 5-year average
and 5.3% below the year-ago level. On a year-on-year
basis, the DOE of USA estimates gasoline demand is up
1.1% as Americans drove 0.2% more in early 2011 compared
to the year-ago period.
Gasoline consumption in non-OECD is underpinned by
rising incomes, younger demographics and surging car
sales of China, India, Brazil and other emerging economies.
These have been the harbinger of the improvement seen
in refining margins during the year. Better demand and
improving prospects have resulted in diesel cracks at early
2008 levels. It is pertinent to note that the refining industry
has actually had to operate at close to 2008 peak diesel
yields in 2H FY-11 in order to meet demand.
Given the loss of refinery capacity in Japan, growing
industrial demand for diesel generators in the country and
on-going diesel demand from emerging market economies,
the supply cushion is clearly smaller than it otherwise
would have been.
Middle distillate stocks are at a virtually identical level to
those seen at the beginning of 2007, six months ahead of
the start of the rally that culminated with diesel cracks
close to $50/bbl. With crude oil stocks once again tight,
and concern rising as to whether OPEC supplies will be
sufficient to meet peak summer demand, the conditions
for a rapid distillate stock draw - similar to the one seen in
2007 - are highly possible.
A much faster and stronger economic growth in non-OECD
has resulted in higher demand for diesel. Supporting
factors for Asian diesel market were strong demand for
low sulphur diesel from India. China suffered from diesel
shortage in the second half of the year, prompting increased
Demand for Petroleum Products
As per IEA estimates in April 2010, the fall
in OECD demand was largely attributed to Europe
and North America. Oil demand in OECD Europe fell
by 5.2% to 14.5 MBPD whereas demand in North America
fell by 3.7% to 23.3 MBPD in 2009. On the contrary,
demand in non-OECD markets remained resilient
with Asia, including China and India growing at
5.1% to 18.5 MBPD. Demand in other non-OECD markets
including Latin America, Middle East and Africa
remained stable to marginally positive by 1.2%
at 16.4 MBPD.
As per IEA estimates, world oil demand in 2010
is expected to rise to 86.60 MBPD, an increase
of about 1.67 MBPD over 2009. Demand growth in
non-OECD markets is expected to remain robust
and is expected to rise by 1.78 MBPD, an increase
of 2% to 41.24 MBPD. Asia, Middle East and South
America are expected to account for over 83% of
global demand growth.
Increased business, personal travel and global trade led
to demand growth and better aviation fuel margins.
Petroleum products demand growth, product mix
redistribution and progressively stricter quality
requirements will continue to reshape the refining industry.
The trend is towards lighter and lower sulphur refined
transportation fuels. All regions of the world, except Africa,
will reduce sulphur in gasoline to below average 150 ppm
by 2020. For diesel, all regions except Africa will have
sulphur content below an average content of 50 ppm.
Changing product specifications for sulphur (parts per
Equally important is the growth in demand for
gasoline in the non-OECD markets, large parts
of which are witnessing significant economic development
and increase in personal vehicle growth in Asian,
Latin American and Middle Eastern countries. There
is strong correlation between the non-OECD gasoline
demand growth and their GDP. As a result, worldwide
gasoline consumption could increase by an average
of 1.6% annually over the next 2 years.
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The continuing global trend of tightening product
specification presents new trade and margin opportunities
for large modern refiners like Reliance, which has the ability
to produce large quantities of ultra-clean fuels.
Demand for petroleum products in India
The demand for petroleum products in India increased
from 130.5 MMT to 134.4 MMT, reflecting a growth of
2.9% in FY-11. The Indian refining capacity increased to
184.1 MMT from 179.9 MMT. Details of product-wise
demand and growth during the last year are as follows:
An increase in per capita income led to higher penetration
of personal vehicles (cars and two-wheelers) which resulted
in double digit growth in gasoline demand. Higher
economic activity resulted in higher diesel demand as well
as increased air travel. Increase in availability of natural
gas resulted in reducing demand for naphtha while
improved distribution of LPG and lower domestic
production impacted sales of kerosene.
Gross refining margins
A robust demand in Asia led to improvement in key product
cracks virtually throughout the year. A strong growth in
personal automobile ownership in developing Asia
resulted in healthy gasoline cracks in the region. Middle
distillates were the largest contributors to improved refining margins in the region. Economic growth, shortage
of diesel in China, particularly in the second half of the
year and cold winters, were seen to be the key contributors
to the strength seen in diesel cracks. Robust petrochemical
demand also meant that for most part of the year, naphtha
cracks remained strong. Fuel oil crack was the notable
exception and remained in the negative, thus creating a
drag to simple refining margins. This was mainly on
account of abundant supply as US became a major exporter
to key Asian markets.
Singapore margins benefit from growth in demand fuelled
by emerging Asian economies. Widening of light-heavy
differentials added to the widening complex margins in
the region. Europe was impacted by lacklustre petroleum
demand and strong Brent price resulting in higher
Production of Petroleum Products [in
Kilo Tonnes (KT)]
|Gross Refining Margins ($/bbl)
|US Gulf Coast (Brent)
|US Gulf Coast (WTI)
For the year under review, RIL's Gross Refining Margin
(GRM) was $ 8.4 /bbl, a premium of $ 3.2 /bbl over the
Singapore complex margin.
RIL processed 66.6 million tonnes of crude and achieved
an average utilization of 107%, which is significantly higher
than the average utilization rates for refineries globally.
Exports of refined products were at $29.3 billion. This
accounted for 38.6 million tonnes of product as compared
to 32.8 million tonnes the previous year.
Reliance has consolidated operations of its GAPCO
subsidiaries in East Africa. GAPCO group owns and
operates large storage facilities and also has a well-spread
retail distribution network. It owns and operates large
coastal storage terminals in Dar-e-Salaam (Tanzania),
Mombasa (Kenya) and an inland terminal at Kampala
(Uganda) and has well-spread depots in East Africa.
GAPCO achieved a turnover of $ 1.1 billion for 2010
(January-December) which was 36.2% higher as compared
to the previous year. GAPCO's EBITDA for 2010 was $
29.7 million, an increase of 26.9% on a year-on-year basis
while profit before tax increased by 24.5% to $ 19.3 million.
It sold 1.6 million kilo litres of petroleum products during
2010, which was 23.6% higher over the previous year.
Strategy and outlook
Reliance is best positioned to capture top decile margins
as a result of processing cheaper, heavier crudes and
benefitting from low operating costs. Built in the last
decade, the RIL refineries are state-of-the-art and among
the most complex refineries in the world. Strategically
located on the west coast of India, it benefits from low
transportation costs for its feedstock and also from its
proximity to the high-growth markets of Asia. From a
product slate perspective, the refineries have been
designed to produce higher quantities of middle distillate
products like diesel and jet-kero and also ultra-clean fuels
that provide it the potential for higher refining margins.