Independent refiners are destined to be in the driver's seat of the U.S. refining industry as integrated oil companies increasingly shed refining assets, according to analysts at Deloitte LLP.

In a report released February 8, the consultancy said by the end of 2013, over 70% of domestic refining capacity may be controlled by independent refiners, a radical shift from 1990, when most of the refining capacity in the U.S. was in the hands of integrated oil companies. That likely means a reduction in the cyclical profit margin swings normally seen by refiners, as independent companies are less likely to be able to weather downturns and therefore strive for more efficient and stable operations, Deloitte consultant Roger Ihne said.

"Refiners operate on a very small margin," Ihne said. If it shrinks, "the amount of impact is greater" for an independent refiner than for an integrated oil company buoyed by profitable oil-and-gas production, he added.

For consumers, however, the smoothing of these profitability cycles is likely to have a relatively small impact, Ihne said, as profit margins account for a minuscule portion of the price at the pump. Independent refiners, however, likely are going to be more focused on the retail aspect, which has been neglected by the oil majors. "They're going to provide additional value to the consumer," Ihne said.

The restructuring of the U.S. refining industry comes as there are expectations for a long-term decline in domestic demand for fuel, driven mainly by gains in efficiency. That is triggering refinery sales and shutdowns, both among majors and independents.

Last year, integrated oil company Marathon Oil Corp. split into an oil-and-gas exploration company, and an independent refiner, Marathon Petroleum Corp. Energy company ConocoPhillips is in the process of completing a similar move. Meanwhile, UK-based oil major BP PLC has put two of its U.S. refineries up for sale.

Williston ND $200 Mln Diesel-naphtha Refinery Proposed

Dakota Oil Processing LLC, Williston, ND, is seeking financing and permits to build a $200 million, 20,000 b/d topping refinery in Williams County 16 miles southwest of Williston to produce mainly diesel to support the Bakken oil play and other local markets.

A 2011 design study indicates that the project would involve a 20,000 b/d atmospheric tower distillation unit and associated boilers, desalters, and other equipment, an 8,000 b/d distillate hydrotreater and associated hydrogen generator for producing ultralow sulfur diesel, a naphtha stabilizer, 667,500-bbl of tankage, and related facilities.

Two middle distillate products, kerosene and diesel, are to be blended to maximize the production of diesel fuel, the primary product for which the plant is designed. At capacity the plant could produce as much as 8,000 b/d a day of ultralow-sulfur diesel.

Light and heavy naphtha, about 30% of the output stream, most likely would be shipped by rail to Canada to be used as a diluent for bitumen, the company said.

Feedstock would be Bakken 41.9° gravity sweet crude and locally produced natural gas. The plant would be on 50-100 acres and take at least 18 months to construct. Operation could begin as early as late 2013, it added.

The nearly 200 drilling rigs working in the Bakken play consume an average of 1,500 gpd of diesel, hundreds of trucks serve drilling, casing, fracturing, pipeline, and other support operations, and diesel locomotives pull unit trains that ship Bakken crude south from North Dakota and Montana.

Dakota Oil Processing said Bakken oil production is approaching 500,000 b/d and is growing by as much as 10%/month.

PA’s United Refining Energy Considers Bid for Sunoco Refinery

The owner of a Western Pennsylvania refinery says he is considering bidding on Sunoco's giant Philadelphia refinery.

John A. Catsimatidis, chairman and chief executive of United Refining Energy Corp., said his company would decide this month whether to make an offer for the refinery, which Sunoco Inc. has promised to shut down on July 1 if it can't find a buyer.

"We have interest in it," Catsimatidis said in a telephone interview on March 1. "We're looking at it. But that's all there is to it."

Catsimatidis is the first potential buyer to publicly acknowledge an interest in the 335,000-barrel-a-day refinery, the largest on the East Coast and one of three in the Philadelphia area threatened with permanent closure because their owners say they are unprofitable.

C. Alan Walker, Pennsylvania secretary of community and economic development told the House Appropriations Committee on March 1 he believed two of the three refineries would find buyers.

"I am confident that there is a high likelihood that we will be able to save two of the three refineries," Walker said.

In addition to the Philadelphia refinery, Sunoco has already shut down operations at its Marcus Hook refinery. ConocoPhillips has shut down operations at its refinery in Trainer.

Catsimatidis initially stated his interest in the Philadelphia refinery to Bloomberg News.

His company in 1986 bought United Refinery Co., which operates a 70,000-barrel-per-day refinery on the Allegheny River in Warren, Pa. The plant processes Canadian crude oil delivered by pipeline.

The company also operates 366 Kwik Fill, Red Apple, and Country Fair retail gasoline and convenience stores in Western New York and Western Pennsylvania.

Catsimatidis, whose holdings include the Gristede's Foods grocery chain in New York City, owns all the voting shares of United Refining. The company reported revenue of $3.2 billion last year and a net loss of $8.1 million.

Sunoco, whose refineries lost $1 billion in the last three years, announced plans in September to get out of refining to concentrate solely on retail marketing and logistics. It said it had received no interest from potential buyers to run the Marcus Hook property as a refinery.

The Philadelphia refinery covers about 1,400 acres - 2.2 square miles - and employs about 850 workers.

The U.S. Energy Department on February 27 said fuel markets in the Northeast "could be significantly impacted" if the Philadelphia refinery shuts down, leading to tight supplies and price spikes in some areas.

The report from the U.S. Energy Information Administration said supplies of ultra-low sulfur diesel in Western Pennsylvania and New York State would be most adversely affected. Those areas are in the heart of United Refining's market.

MDU Resources to Build ND Bakken Shale Diesel Refining Project

North Dakota-based MDU Resources and Indiana-based Calumet Speciality Products have announced plans to build a 20,000 barrels-a-day (b/d) diesel refinery in south-western North Dakota. Located close to the Bakken shale play, from where it will source its feedstock, the plant will allow 40%-50% of crude to be processed into diesel thanks to the low-sulphur content and sweetness of Dakotan tight oil. The remainder of the crude is to be shipped to other Calumet facilities for further refining.

With feasibility studies on the way, Rick Matterson, MDU communications director, expects that the refinery could take 24 months to build once the development permit is granted. Therefore, the facility, which is anticipated to cost less than US$500mn, could come on-stream by 2014.

The facility would also leverage on the two companies strength and would play in their wider strategies. Thus, some of the crude processed will be provided by MDU's production company Fidelity while its construction arm, MDU Construction Services Group, will help build the refinery. MDU's utility branch will also provide the power necessary to run it and Calumet, by offering its downstream expertise and its capacity to process the remaining crude, has decreased the overall operational risk of the project.

The two partners are currently considering potential sites located near Dickinson and Richardton. Such a site would facilitate the monetization of the refinery's output thanks to nearby transport infrastructure such as the Interstate 94 and the railroad between Richardton and Bedingfield which services the state. The diesel output of the plant will be market to North Dakota's agricultural and industrial sectors.

MDU and Calumet's joint project comes at a time when Midwestern refining margins are particularly rewarding relative to other regions. According to the EIA, refining margins in the Midwest and Rockies hit US$35/barrel (bbl) and US$45/bbl respectively in August 2011, against US$10/bbl US$13/bbl in the North East and West Coast respectively. Unlike other regions, the Midwest benefits from the availability of large volumes of cheap tight oil feedstock while enjoying the rewards of a captured market. Therefore, it has not been affected by the spike in Brent prices as severely as other regions, particularly the Northeast which imports most of it feedstock, and has been able to arbitrage the widening WTI-Brent spread.

Diesel demand could also offer significant growth opportunities. Indeed, tighter regulation on fuel efficiency and emissions clearly advantages distillate fuel oil at the expense of gasoline. Hart Energy estimates that diesel engines carry vehicles 25% further per tank than gasoline engines. Furthermore, as regulation is tighter for the industrial and agricultural sectors, diesel consumption tends to be in close correlation to GDP growth. With the US economy recovering faster than expected, diesel could be a rewarding bet for MDU and Calumet.

It appears that the refinery is a bet on North Dakota's oil and gas upstream. Diesel consumption in the state has increased 51 percent since 2007. An oil rig requires more than 71b/d to operate, considering that Baker Hughes latest rig count put the number of rigs in the state at 185 in December 2011, there is a demand of more than 13,214b/d in the state, to which demand from trucks transporting crude, water and frack juice can also be added.

As a result, several other teapot projects have been announced in the region. North Dakota Refining is building another 20,000b/d plant in the state, the first Greenfield project in the country in 35 years, at a cost of US$200mn. Tesoro is also hoping to increase diesel production at its Mandan refinery by 5,000b/d to 22,000b/d by 2013.

The EIA projects that tight oil production will account for 31% of the lower 48 onshore output by 2035 and there will be significant growth in North Dakotan diesel demand in coming years originating from the oil sector. As a result, these teapot investments could prove to be extremely rewarding and have relatively short payback periods.

U.S. / CANADA

Husky Plans 2012 Maintenance at Ohio Refineries, Canadian Upgrader

Husky Energy has outlined in its fourth-quarter earnings report 2012 maintenance plans at its Ohio oil refineries and at its Lloydminster Upgrader in Canada.

The Lima, Ohio, refinery will perform 15 days of maintenance to replace the catalyst at a diesel hydrotreater and 29 days of turnaround maintenance at the plant's aromatics unit in the fourth quarter of 2012.

"Neither of the planned outages is expected to have a material impact on crude throughputs," the report said.

The Lima Refinery will shut down for 45 days for major turnaround maintenance on 70% of the operating units in 2014. The remaining 30% of the operating units will be addressed in a major turnaround currently planned for 2015.

The Toledo Refinery is scheduled to have a minor turnaround in mid-2012. The partial outage is expected to last approximately 21 days.

The Lloydminster heavy oil upgrader, located in Saskatchewan, is scheduled for approximately three weeks of maintenance in the first half of 2012 to facilitate hydrogen plant repairs and catalyst change out. The next major turnaround is scheduled to commence in the fall of 2013.

The Lloydminster Refinery will under go major turnaround in the spring of 2013. The plant is expected to be shutdown for 21 days during the turnaround for inspections and equipment repair.

And as previously reported, construction to build a 20,000-barrel-a-day kerosene hydrotreating unit at the Lima refinery is under way. The company expects the new unit to come on line in the first half of 2013.

The Lima refinery's boiler-plate crude oil throughput capacity is listed at 160,000 barrels a day, although the company said its combined throughput averaged 317,000 barrels a day in 2011, compared to 304,000 barrels a day in 2010.

Husky's Toledo, Ohio, refinery's throughput capacity is listed at 140,000 barrels a day. The Toledo refinery is a 50-50 joint venture between Husky and BP PLC.

BRAZIL

Petrobras Says PDVSA Failed to Give Guarantees for $5.8 Bln Refinery Loan

Venezuela's state-owned oil company PDVSA has failed to give Brazilian development bank BNDES sufficient guarantees to secure a partnership in the Abreu e Lima refinery with Brazil's government-run oil giant Petrobras, a director with Petrobras said February 7.

In exchange for a 40% stake in the refinery, PDVSA would have to submit guarantees for a $5.8 billion loan (R$10 billion) that Petrobras took to build the refinery in the northeastern Brazilian state of Pernambuco. Petrobras, which has been trying to forge a 60%-40% partnership with PDVSA in Abreu e Lima since 2005, should make a decision in the coming days, according to downstream director Paulo Roberto Costa.

The refinery is scheduled to come on stream in early 2013.

Utilities Contracts Delay $2.6 Bln Petrobras Comperj Refinery Start-Up

Brazilian state-run energy giant Petroleo Brasileiro (Petrobras), said February 16 that delays in contracting utilities for a refinery under construction in Rio de Janeiro state would push start-up back to 2014.

Petrobras had originally expected the first train at Comperj to come online by the end of 2013, with a processing capacity of 165,000 barrels a day. Now, the company expects the first train to start production in September 2014.

"The new date stems from the fact that more time was needed to contract utilities," Petrobras said in a statement.

Petrobras plans to build five new refineries to meet Brazil's shortfall in oil products. The shortfall has forced Petrobras to import large amounts of gasoline and diesel to meet domestic demand, causing a $2.6 billion (4.4 billion Brazilian reais) loss in the company's downstream operations in the fourth quarter.

The company also said that the Abreu e Lima refinery in Pernambuco state would start output in June 2013, with a second phase of development expected to be completed by January 2014. Petrobras is building the refinery with joint-venture partner Petroleos de Venezuela SA, or PdVSA, the Venezuelan state oil company.

Petrobras said heavy rainfall and strikes by contractors at work on the project had caused some delays at Abreu e Lima.

Petrobras Sets June 2013 Start-Up for Abreu e Lima Refinery

Brazil-based Petrobras plans a June 2013 start-up date for the first stage of its Abreu e Lima refinery near Recife, the company said on February 23.

The second stage should start operations in January 2014, the company said.

The refinery, also known as the Refinaria do Nordeste (RNEST), will have a processing capacity of 230,000 bbl/day, Petrobras said.

Petrobras had planned to develop the refinery with Petroleos de Venezuela (PDVSA). PDVSA would own a 40% stake in the project.

However, PDVSA has been unable to secure a $10bn (€7.7bn) loan to pay for the stake. Earlier this year, it missed another deadline to secure the loan.

Petrobras has given PDVSA up to a year to secure the loan, according to a report from Reuters.

With or without PDVSA, Petrobras said it would complete the project.

The Abreu e Lima refinery is among several that Petrobras could build in Brazil.

Operations should start in September 2014 at the first phase of a new refinery at the Complexo Petroquimico do Rio de Janeiro (Comperj). That refinery could have a processing capacity of 230,000 bbl/day.

A second phase at the complex should start operations in 2018, bringing Comperj's processing capacity to 330,000 bbl/day.

Petrobras is in the planning stage for two more refinery complexes.

Premium I would be built in two stages in the state of Maranhao, Petrobras said. Each stage would have a processing capacity of 300,000 bbl/day.

Premium II in the state of Ceara would also have a processing capacity of 300,000 bbl/day, the company said.

The projects come as Petrobras expects that it will import more gasoline in 2012 because of rising demand.

Petrobras Says Utilities Contracts will Delay Comperj Refinery to 2014

Start-Up

"The new date stems from the fact that more time was needed to contract utilities," Petrobras said in a statement.

Petrobras said heavy rainfall and strikes by contractors at work on the project had caused some delays at Abreu e Lima.

ASIA

AUSTRALIA

$1.5 Bln Write-down by Caltex Australia Ups Risk of Its Refinery Closures

A $1.5 billion write-down by Caltex Australia of its refining assets has increased the risk that its two plants will close and added to the manufacturing industry's woes because of the strong dollar, rising costs and intense overseas competition.

Caltex chief executive Julian Segal said the charge did not mean the two refineries in Brisbane and Sydney would be closed, but said relying solely on imports to supply customers was one option. "Continuation of the status quo is not sustainable," Mr Segal said.

Caltex, which supplies more than a third of Australia's motor fuels has been reviewing its loss-making refinery business since August but is still six months away from deciding on its fate. Some 800 Caltex employees and about 650 contractors work at the plants.

But the 80 per cent write-down has highlighted the problems faced by Australia's small, old refineries and comes on top of Alcoa's decision to review its Point Henry aluminum smelter in Geelong and warnings from Alumina chief executive John Bevan of the difficulties being caused by the robust dollar.

"The strong Australian dollar certainly makes it more difficult to make money in Australia than it was previously," Mr Bevan said. "Certainly, from a current aluminum price and current Australian exchange rate relative to the US dollar, it is very difficult to operate the smelters in particular."

Meanwhile, the construction materials manufacturer Adelaide Brighton said it was re-examining its high-cost clinker kilns. "The reality is the dollar encourages us to rely more on clinker imports, regardless of the carbon tax," said managing director Mark Chellew.

Caltex's Julian Segal held back from urging the government to tackle the rising cost base of local industries, saying that "big market forces" were at play driving the dollar higher, alongside major global economic and financial issues. "Caltex is very much focused on making sure there is reliable supply and anything that is going to ensure that is going to be welcomed," he said.

Morgan Stanley analyst Stuart Baker said: "This is broader than just a Caltex issue, with Australian manufacturing across the board facing a declining competitive position.

"Caltex has structural issues and management is responding as you'd expect, which is to defend that asset and make it as viable as possible but the rising Australian dollar, increasing input costs and poor margin outlook are macro headwinds beyond its control and it's not obvious when these headwinds will abate."

The impairment cuts the carrying value of the refineries on Caltex's books by more than 80 per cent to $340 million. It will be reflected in Caltex's 2011 full-year earnings and send the company's bottom line into the red by about $630 million, said Deutsche Bank.

Caltex, which is half-owned by U.S. oil giant Chevron, flagged a possible write-down in December when it warned that its full-year profit would fall by up to 40 per cent. Last year it announced charges of $67.7 million on the closure of two units at Kurnell in NSW.

Australia's seven remaining refineries are small and relatively old compared with the massive plants coming on stream in India and China.

Last year Royal Dutch Shell announced the closure of its Sydney refinery, which it will convert into an import terminal. It has given no guarantee about the future of its second plant, in Geelong.

Despite Mr Segal's comments, some analysts see the write-down as a sign that Caltex is moving towards the closure of at least one refinery. "We expect Caltex would prefer to close its refineries if it possibly could, but needs to secure a safe and reliable fuel supply," Credit Suisse said. It values Caltex at $18.44 a share if it closes both refineries and continues as a marketing business but at $10.60 a share if it keeps the plants open

But Morgan Stanley's Mr Baker said he saw no bullish story in Caltex cutting back on refining. "Actions to rationalize refining bring risks to marketing which have yet to be defined," he said.

Caltex chief financial officer Simon Hepworth said the company's forecast for underlying profit for 2011 was unchanged.

"Importantly, there is no impact on sale and reliable operations, credit metrics or debt covenants," he said. "Our balance sheet continues to be strong and we remain committed to retaining our BBB+ credit rating."

Australia’s Caltex Denies Refinery Closure Speculation

Caltex has denied it has moved a step closer to shutting down its Kurnell oil refinery by slashing $1.5 billion off the value of its refineries in Kurnell and Brisbane.

The write-down was announced to the stock exchange mid-February and sparked a spate of media reports speculating on the future of the two plants.

However, Caltex spokesman Sam Collyer said the move did not signal an imminent closure and any decision on the plant's future would come after a review of its operations in about six months.

''Caltex announced back in August that it was conducting a major study into the role of the refineries as part of its supply chain,'' Mr Collyer said.

''There are many issues to consider.

''The outcome of the review will be known in about six months. We remain strongly committed to safe and reliable operations.''

But not everyone is convinced.

CFMEU (Construction, Forestry, Mining and Energy Union) district secretary Lorraine Usher, whose union represents 800 workers at Caltex's two refineries, declared the downgrade a ''cynical maneuver to justify closure''.

Ms Usher said Australia needed to maintain the capacity to refine oil.

''These closures would put Australia's oil refining capacity in jeopardy, to the point Australia would struggle to meet our defense fuel supply needs,'' Mr Usher said.

She said that without any domestic refineries, Australia would be vulnerable to fuel shortages in the event of a war or a natural disaster in the Asia- Pacific region.

Whatever the final outcome, Collyer admitted sweeping changes were in the pipeline for the Kurnell plant. ''It is clear that continuation of the status quo is not sustainable, ''Collyer said.

''So we continue to thoroughly evaluate all options to improve the 'as is' business, ranging from investing to improve their performance or closing if we are able to import product at a competitive price.''

INDONESIA

Saudi Aramco Subsidiary, Pertamina Sign MOU for Indonesia Refinery and Petchem Plant

Saudi Aramco Asia Co Ltd, a subsidiary of oil giant Saudi Aramco signed an initial deal with Indonesia's state energy firm, PT Pertamina to look into building a refining and petrochemicals project in Indonesia, Aramco said on February 18.

Aramco has said a refinery in Indonesia was among other planned refining projects which would raise its total global refining capacity to 8 million barrels per day (bpd) in a decade as it seeks to balance its energy portfolio by increasing downstream investments.

Under the Memorandum of Understanding (MOU), Aramco and Pertamina will undertake a feasibility study first to jointly build a refinery and petrochemicals project in Tuban in East Java.

The refinery would process 300,000 bpd of crude mainly supplied by Aramco via a long-term agreement to produce oil products and petrochemicals which will meet rising demand in Indonesia and countries in Southeast Asia, Aramco said on its website.

"This MOU is a significant first step in extending our already strong relationship with Pertamina, and is also part of Saudi Aramco's strategy to enhance its global downstream presence," said Dawood M Dawood, Saudi Aramco's vice president of marketing, supply and joint venture coordination.

Aramco's CEO Khalid al-Falih has said repeatedly that, while other companies are reducing exposure to the refining business, Aramco sees it as a growth industry. The oil firm sees the integration between refining and petrochemicals as boosting profitability.

Aramco did not say when the feasibility study of the project in Indonesia was due to be completed.

A former Opec member, Indonesia is now a net importer of oil and its growing domestic fuel demand has made it into one of Asia's top oil products buyers.

Last year, it said top Middle Eastern oil-producing countries had expressed interest in participating in two proposed new oil refineries in Indonesia.

"The Tuban refinery and petrochemicals project is part of Pertamina's plan to improve Indonesia's energy security," said Afdal Bahaudin, Pertamina's director for investment planning and risk management.

NEW ZEALAND

New Zealand $365 Mln Expansion Refinery Project Gets Go Ahead

A planned $365 million expansion project at the Marsden Point refinery will be its third major upgrade in a decade.

The project, just approved by the board, is expected to see a $60m lift in operating profits and a strong jump in dividends once completed in 2015.

On February 21, Refining New Zealand announced that profits for the year fell 40 per cent to $34.5m, as margins fell away at the end of the year and profits were knocked by a strong New Zealand dollar.

Despite the profit fall, it will pay a final dividend of 9 cents a share, the same as the previous year. After its growth project is complete, dividends are likely to be "40 per cent north of where they would have been otherwise", chief executive Ken Rivers said, though dividends may be down a little during construction.

Just under a third of growth project spending will be on specialized equipment from overseas, with the balance of about $250m spent in New Zealand.

The project was expected to lift operating earnings by about $60m a year and pay back its cost within four years, he said. The project would lift gasoline production by about 2 million barrels a year, taking market share from 50 per cent to about 65 per cent, improving the company's competitiveness with imports.

The total cost of the project, including engineering planning work and capitalized interest costs, is $425m. The high cost, half of Refining NZ's market capitalization, means it will go to shareholders for approval at its annual meeting on April 27. The growth project will take from 2013 to 2015.

While Refining New Zealand is about to launch into the giant project; Rivers, 60, will leave the company once a replacement is found.

He was seconded from Shell in Britain, where he was manufacturing director, and will return there. Refining NZ will look to replace him over the next six months.

He would remain with the company through the full approval process for the project. The internal rate of return on the scheme is just over 17 per cent, which he said was "healthy".

The growth plan follows about $200m spent on one expansion in 2005 and another $190m in the 2009 Point Forward project.

The new project would employ up to 300 at its construction peak, but would likely create double that number of jobs outside of the site, with jobs among suppliers.

"It will be a boost for New Zealand - a fresh bit of capital coming in," Rivers said.

Meanwhile, the Northland- based oil refinery company said operating earnings were $132.2m for the year to the end of December, down from $156.7m in the previous year, a drop of 15 per cent.

Rivers said refinery margins remained relatively healthy at an average US$6.11 (NZ$7.28) a barrel in the past financial year, compared with US$6.17 the previous year. The fall in overall profit, down 40 per cent, partly reflected a drop in intake of crude oil, down from 41 million barrels to 39 million in the year just ended.

"The key is the foreign exchange. In 2010 it was US$0.72 and in 2011 it is US$0.79. That is the really big kicker [for lower profits]," he said. "That's what hurt us."

The bottom-line profit was also down because of high depreciation of assets.

The company repaid $60m in debt during the year, leaving it owing just $25m. It has effectively paid off the $190m Point Forward project just two years after commissioning the plant.

THAILAND

Shaw to Revamp Residue FCC Unit in Thailand

The Shaw Group Inc on February 6 announced it has been awarded a contract to provide the technology license and process design package for the revamp of a residue fluid catalytic cracking (RFCC) unit for Star Petroleum Refining Company in Map Ta Phut, Thailand. The design will upgrade the 40,800 barrels per day (bpd) RFCC unit by incorporating the latest advances in reactor system technology.

"Shaw was the original licensor of this RFCC unit, which first started-up in 1996," said James Glass, president of Shaw's Energy & Chemicals Group. "We are now upgrading the unit to incorporate the latest technology features and improve performance and profitability."

Shaw jointly developed the proprietary RFCCU technology through an alliance with Axens and Total that began in the early 1990s. To date, Shaw and Axens have licensed 51 grassroots units and performed more than 200 revamp projects.

The undisclosed value of the contract was included in Shaw's Energy & Chemicals segment's backlog of unfilled orders in the first quarter of fiscal year 2012.

EUROPE / AFRICA / MIDDLE EAST

EUROPE

Frost & Sullivan Consultant Reports Europe's Refineries will Face more Problems

The pending bankruptcy of refiner Petroplus is only the start of further problems for nearly 40% of the European Union’s 104 refineries now in need of refurbishment, according to a new consultancy report.

“Demand for crude oil products is increasingly volatile, and many refineries do not have the flexibility to accommodate this more rapidly changing demand,” said energy consultant Enguerran Ripert of Frost & Sullivan.

“Beyond the structural issues, many owners need access to credit lines, which in the case of Petroplus amounted to €2.4 billion, to carry on doing business in the short term,” Ripert said.

European refineries’ capacity utilization consistently decreased from an average of 90% in 2005 to less than 75% in January 2012. In Ripert’s view, this change reflects “the much tougher” competitive environment, but also a trend toward “flexible demand-supply” of crude oil products.

Road transport fuel, and in particular gasoline which Europe has a lot of capacity for, is being replaced by diesel and kerosene.

Meanwhile, heavy oils, bitumen, waxes, and petroleum coke are no longer in such high demand, making way for liquefied petroleum gas, naphtha, and other smaller chains alkanes.

The misalignment between demand and supply capabilities leads Europe to be a net exporter of gasoline to the U.S., and a net importer of diesel from Russia.

“Although this movement of refined goods is not an issue in itself, it does reflect the inability of refineries to adapt to local demand quickly and profitably in their current state,” Ripert said.

“This growing requirement for diesel and kerosene despite the latest economic turmoil cannot be met profitably due to cost and capacity reasons intrinsic to the current fleet of refineries,” he said.

Since any investments, such as hydrocracking units to increase diesel production, need bank funding due to the high cost, the ability to make these investments lies with the banks which hold much of the debt.

“But with higher capital ratios imposed on banks, and attractive spreads between ECB lending rates and local government bonds, banks prefer to avoid lending to the refining sector, or any other relatively high risk sector,” Ripert said.

Refineries will have tougher times ahead of them due to such banking issues, along with the increasing probability of another European recession, the uncertainty around ETS and carbon taxes, the rigid and costly labor laws, and tightening regulation on sulfur content.

The average size of refineries in Europe is less than 140,000 b/d, with slightly over half of them dealing with less than 100,000 b/d.

According to Ripert, the majority of these refineries were built more than 20 years ago when the demand dynamic was more stable and crude oil prices were less than half their 2012 levels.

“In a context where demand patterns change more rapidly, a lower number of much larger refineries is needed to offer both flexibility in product output, and lower costs,” Ripert said.

In a world where labor flexibility is limited and the relocation of physical assets is extremely difficult, Ripert said that many more refiners will be sure to sell assets at highly discounted prices in the coming years or slowly erode their assets.

“Building a new facility will have a shorter payback period than the purchase of a cheap old one,” he said.

In all, despite the need for an increase in crude oil processing capacity in Europe, a large portion of the existing capacity needs to be replaced, and this readjustment comes at a time when the banking support structure is not ready to support it fully.

“The larger groups with a high involvement in exploration will be the ones able to weather the continuing losses,” Ripert said, adding that many of them will either “decide to sell downstream assets” or “will continue to make losses.”

LIBYA

Libya Sees Return to1.6 Mln bpd Pre-War Oil Production in Summer, 2012

Libya anticipates a return to pre-war oil output of 1.6 million barrels per day (bpd) in June or July this year, Deputy Oil Minister Omar Shakmak said. Oil companies were currently producing at between 60 and 90 percent of their normal output, he told Reuters in an interview.

"In general, if you look at the oil companies, they are all between 60 and 90 percent of the normal production for each company," Shakmak said. Libya is currently producing 1.3 million bpd, he added, after the civil war which toppled leader Muammar Gaddafi brought flows to a standstill.

When asked if pre-war output could be achieved before the summer, Shakmak said: "Yes, if you consider the progress in production which has been achieved now, maybe that will be before. But if it is by June-July, we are quite satisfied." Libya exported 32.2 million barrels of crude in January, state oil company NOC said.

Shakmak said a draft proposal looking to split the running of Libya's oil industry between oil production and exploration, or upstream, from oil refining or downstream activities was being looked at but it was unlikely any such change would happen under the current transitional government. "That's one of the proposals we are thinking of as a strategy, it is not in stage of activity," he said.

"But I'm not expecting that will be done during this transitional period of government because most of the major changes should be done by the elected government - all the Libyan people should be involved." A transitional government appointed in November is leading the North African country to elections in June.

Shakmak said some of the remaining challenges included dealing with complaints by workers at oil services companies over employment terms. "We need to solve these problems because they are serving the production companies," he said. Officials have spoken of plans to train and unite thousands of former rebel fighters under an umbrella oilfield and installation guard. Until now, groups of fighters have stood guard at different fields in the absence of a national army. Shakmak said the plans were for a force of around 9,000.

"The plan is to give a chance to the people who have taken care of the oilfields during the war against the Gaddafi regime," he said. When asked when Libya's largest refinery Ras Lanuf would resume operation, he said: "I hope by the end of this quarter, this is the plan." Ras Lanuf can process up to 220,000 bpd and accounts for well over half of the country's total oil refining capacity. It was halted during the uprising and the reopening date has consistently been pushed back.

NIGERIA

Nigeria Will Issue Licenses for More Refineries

Nigeria’s President Goodluck Jonathan on February 5 said the Federal Government was willing to give licenses to those interested in setting up refineries in the country.

The move, he said, is part of the overall efforts by government to raise the nation's petroleum refining capacity and reduce the importation of refined products. President Jonathan was speaking to a delegation of Brazilian investors, led by Mr. Reuben Voigt, chairman of the Voigt Group, at State House.

The President commented that, "Nigeria has four refineries, but their combined capacity does not meet the country's needs, so we are willing to approve applications for refining licenses.

He said Nigeria is still a green area in terms of investments, and the Government has opened up sectors of the economy, which were previously restricted, to private sector investment.

He therefore, directed the Coordinating Minister of the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, to hold discussions with the Voigt Group, to explore areas of mutual cooperation.

Those who also attended the meeting include the Ministers of Housing, Trade and Investment, Power and FCT (State).

Nigeria to Establish 12 Modular Refineries in Niger Delta States

The former chairman of Delta State Oil Producing Areas Development Commission, (DESOPADEC), Chief Wellington Okirika, has called on the Nigeria’s Federal Government to establish 12 modular refineries in the core Niger Delta states of Delta, Bayelsa, Rivers and Akwa-Ibom to fast-track deregulation of the downstream sector of the petroleum industry.

Okirika, who made the call in Warri, Delta State, said: "Modular refineries are the quick solution to the importation of refined petroleum products in Nigeria.

"Niger Delta has comparative advantage in the establishment of refineries because of its crude oil base, the best option is to establish two to three modular refineries in the core states of the Niger Delta- Delta, Bayelsa, Rivers and Akwa-Ibom, making a total of 12 refineries with a total capacity of 240,000 barrels per day, of refined petroleum products."

He urged the Directorate of Petroleum Resources, DPR, to relax its rigid guidelines on establishment of refineries and called for more funds to be provided in the Petroleum Subsidy Reinvestment program of the Federal Government for the establishment of new refineries.

He said: "The production from these modular refineries and the three existing refineries in the country will meet our domestic consumption and we will have enough for export. Modular refineries are small or medium size refineries that are manufactured in modules in factories in United States and Europe, transported and assembled on sites for production of refined petroleum products, petrol, kerosene and diesel.

"The main objectives and attraction of modular refineries are the short-time and low-cost of establishment of such refineries. Production in the case of modular refineries can be within 16 months with complete funding, while large-scale traditional refineries need about eight years.

"There is rapid realization of the project. For example, 20,000 barrels per day capacity of modular refinery will cost between $200 million to $250 million, while the traditional refinery is in the range of billions of naira," he added.

SOUTH AFRICA

PetroSA Discusses $10 Bln Mthombo Refinery Financing with China’s Sinopec

PetroSA and state-owned Chinese petroleum and petrochemical company Sinopec were discussing the possibility of Chinese financing for the giant $10bn Mthombo crude oil refinery planned for Coega, Parliament's energy committee heard February 14.

The planned refinery would have an initial capacity of 400000 barrels of oil a day.

A memorandum of understanding between the two companies was signed in September last year for them to explore the possibility of working together to develop the project, conduct exploration and production, engage in wholesale trading and distribution of petroleum products in SA, and crude trading in general. This was one of a number of memorandums of understanding PetroSA signed with various foreign oil firms as part of its growth strategy and to source feedstock for its Mossel Bay gas-to-liquids refinery, which is running out of supplies.

Sinopec is ranked fifth in the Fortune Global 500 index for this year. It has cash reserves of more than $100bn and is listed in Hong Kong, New York, London and Shanghai.

The Department of Energy's chief director of international co- ordination, Elizabeth Marabwa, told Parliament's energy committee, during a briefing on the department's international activities, that given the high risk and cost of upstream activities, PetroSA needed partners with a lot of expertise.

In terms of an agreement signed between SA and China in 2010, the China Development Bank Corporation would set aside $20bn for investment in the energy sector in SA. The commitment was reconfirmed by Deputy President Kgalema Motlanthe when he visited the country last year.

“We really have developed a very significant relationship with China and we are in the process of implementing that,” Ms Marabwa said.

She said the government was engaging with Venezuela, Egypt, Ghana and Algeria to secure new and diversified oil supply sources.

SA was working with the gas commissions of Namibia, Mozambique and Sonangol in Angola regarding oil and gas supplies.

A memorandum of understanding was also signed with the Democratic Republic of Congo in November last year regarding the Grand Inga Project on the Congo River, which Ms Marabwa said had the potential to generate 40000MW of hydropower.

She said this memorandum paves the way to developing a treaty between the two countries which will enable SA and the Congo, together with other countries, to exploit the potential of the Grand Inga. With regard to the Southern African Development Community (Sadc), Ms Marabwa said cross- border power trading was possible in the region but first an enabling environment would have to be created in terms of financing, security of supply, regulation and pricing.

The Sadc had approved a number of energy infrastructure projects in Mozambique, Zambia, Zimbabwe and Namibia.

PetroSA's $10 Bln Mthombo Refinery Project Expected to Move Forward with Government Announcement

Project Mthombo, PetroSA's multi billion rand oil refinery which is expected to massively boost the Eastern Cape's economy and create thousands of jobs, will move a step closer to reality next month when government is expected to announce another milestone in the project.

The direction on the $10-billion (R80-billion) Project Mthombo will follow other massive infrastructure investments in the province's ports, rail network and the Coega industrial development zone announced by President Jacob Zuma in his State of the Nation address earlier this month.

In her State of the Province address on February 17, Premier Noxolo Kiviet said an announcement on the refinery was "imminent".

An insider in the high level discussions on Mthombo said February 20 government and PetroSA would announce a milestone for the project within three to six weeks.

The insider, who spoke on condition of anonymity, also said while the announcement would propel the project, the actual construction of the refinery was estimated to begin in two years.

In a mid-February interview Eastern Cape economic development MEC Mcebisi Jonas said it was only a "matter of time" before Mthombo commenced.

The feasibility study had been done, and next was obviously the front end engineering design, Jonas said.

Five years after Mthombo was mooted by the energy department, the Eastern Cape government, business and civil society had been pushing for the refinery with the hope that it would boost the province's economy and drastically reduce its unemployment.

The project has been criticized by some industry players who have said its 360,000 barrels a day capacity was not viable.

Although he would not confirm the announcement, PetroSA spokesman Thabo Mabaso said the company had been "working over the last couple of months to strengthen its business case and we hope to report back soon".

Jonas also moved to allay fears that the refinery could be set up elsewhere.

"We are no longer debating the location for this project, it only makes sense that it be at Coega," Jonas said.

Mabaso said the front end engineering design - the next step of the project - could take up to 18 months.

Also in mid February, the Department of Energy's chief director of international co-ordination, Elizabeth Marabwa, told parliament's energy committee that PetroSA and state-owned Chinese petroleum and petrochemical company Sinopec were discussing the possibility of Chinese financing.

The committee heard that a memorandum of understanding between the two companies was signed last September for them to explore the possibility of working together to develop the project.

Reacting to Kiviet's address, Nelson Mandela Bay Business Chamber CEO Kevin Hustler said: "We were also encouraged to hear of the 'imminent' announcement about PetroSA's Project Mthombo oil refinery, which holds significant potential to act as a catalyst for socio-economic transformation and industrial diversification of the Eastern Cape."

UGANDA

Cnooc, Partners in Talks on $1.5 Bln Uganda Refinery Project

China's Cnooc Ltd. and its partners in a Uganda oil production and refining project are working out details of a 200,000-barrel-a-day refinery to be built in the country, the China Daily reported February 23, citing a senior Ugandan industry official.

The parties are still discussing how the $1.5 billion investment in the project to build a refinery near Lake Albert will be shared, Elly Karuhanga, chairman of the Uganda Chambers of Mines and Petroleum, said in the report.

On February 21, Cnooc, the UK's Tullow Oil PLC and France's Total SA agreed on terms with the Uganda government for the development in the Lake Albert region of three large oil blocks, which will feed the refinery.

Some of the oil from the blocks will also be exported overseas via a pipeline to the Kenyan port of Mombasa. Karuhanga said China is expected to be the largest buyer of the crude. The refined products from the refinery will be sold in Uganda and neighboring countries, he said.

Crude-oil production at the three blocks is projected to start in 2013, with full output being achieved three years later. The refinery is scheduled to start operations by 2015.

KAZAKSTAN

Eni, Petrofac Draft Plans for First Phase of $4.9 Bln Karachaganak Refinery

Italy's Eni and Britain's Petrofac have drafted their own plans for building the first phase of a gas refinery at the Karachaganak field in Kazakhstan, Lyazzat Kiinov; the head of Kazakhstan's national oil ad gas company KazMunayGas, said at a cabinet meeting.

According to Eni's proposals, the refinery would be built in 2015-2019 at a cost of $4.9 billion, and according to Petrofac's vision, it would be built in 2013-2016 at a cost of $2.5 billion.

"This year's task is to obtain an opinion from the state agencies on the project's feasibility study, a comparative analysis that determines who drafts the designs and to complete the designs in December this year," Kiinov said.

"Also, talks need to be started on arranging the supply of feedstock for the refinery from the Karachaganak project, which is one of the key aspects," he said.

KazMunayGas has said the refinery's first train might be put into operation in 2019, and the second in 2023. It will be built in 2014-2018 after the consent of partners to the production-sharing agreement has been obtained and without harming KazMunayGas's obligations to Russia as per their agreement on cooperating in the creation of a joint venture at Orenburg Oil Refinery.

KazMunayGas estimates the cost of the Karachaganak refinery at $3.7 billion.

KazMunayGas has looked at several options for financing the project - it could be included in the initial program for the third stage of Karachaganak's development; implemented as a gas project in accordance with the conditions of a basic production sharing agreement (PSA); or 100% funded by the government, given agreement with the contractor on the buy-sell conditions of gas volumes necessary for long-term operation at the plant.

The Karachaganak oil and gas condensate field is one of the largest in the world. Its reserves are estimated at 1.2 billion tonnes of oil and 1.35 trillion cubic meters of gas. The field is operated by Karachaganak Petroleum Operating B.V. (KPO), an international consortium comprised of BG Group (32.5%), ENI (32.5%), Chevron (20%) and Lukoil (15%). On December 14, 2011, the Kazakh government and KPO shareholders signed an agreement in accordance with which Kazakhstan will acquire a 10% stake in the project.

Kazakhstan May Build Fourth Refinery as Kashagan Project Develops

Kazakhstan may consider the possibility of building its fourth refinery as the Kashagan project develops, said Kazakh Prime Minister Karim Masimov.

"Maybe, we will build a fourth refinery in the republic as part of the Kashagan project so that we can be 100% sure that we are independent in terms of oil products supply," the prime minister told a Wednesday meeting of Majilis, the lower chamber of the Kazakh parliament.

Kazakh Oil and Gas Minister Sauat Mynbayev said last autumn a new refinery in Kazakhstan would not be built before 2019-2020.

"Modernization of all three oil refineries is slated until 2015 to ramp up their aggregate processing capacity up to 17.5 million tonnes per year and increase oil refining efficiency to make Kazakhstan self-sufficient in all types of petroleum products. After 2019-2020 building of a new refinery is planned," the minister said.

Currently, there are three oil refineries in Kazakhstan: in Pavlodar, Shymkent and Atyrau. They all are controlled by the KazMunayGas national company.

The North Caspian Project (for development of the Kashagan field) was launched back in 1997 when the Kazakh government and AGIP KCO (the previous operator of the project) signed a production sharing agreement (PSA) for the period of 40 years.

Commercial production at the Kashagan field is slated to commence in December 2012 - June 2013. During Phase I, oil production is expected to be about 370,000 barrels per day, and could reach 450,000 barrels.

Phase II entails boosting production 375,000 barrels per day for at least three years.

Under PSA the licensed area will also include the three oil-bearing structures Kalamkas, Aktoty, Kairan in addition to Kashagan. These four structures consist of 11 marine blocks, which occupy an area of about 5,600 square kilometers. NCOC estimates the recoverable oil reserves at Kashagan at 11 billion barrels and the total oil in-place at 35 billion barrels.

The bulk of the work at the onshore and offshore facilities had been completed by the end of 2009, as agreed with the Kazakh government, with a view to starting production at Kashagan at the end of 2012.

TARTARSTAN

Tatarstan Refineries Plan to Process 15MM Tonnes of Oil in 2012

Rafinat Yarullin, the head of OJSC Tatneftekhiminvest-Holding who coordinates the activities of Tatarstan's oil and petrochemicals enterprises, said at the company's board of directors meeting January 30 that the republic’s oil refineries plan to refine 15 million tonnes of oil in 2012. Tatarstan's oil refineries processed over 10 million tonnes of oil last year.

In particular, OJSC TANECO (a subsidiary of Tatneft), launched into commercial production last year, refined 2.08 million tonnes of oil. The enterprise produced straight-run gasoline, technical kerosene, vacuum gas oil and fuel oil. "In 2013, the enterprise plans to begin producing diesel fuel and motor oils," Yarullin said.

OJSC TAIF-NK processed 8.3 million tonnes of material last year, or 2.8% more than in 2010. Light hydrocarbon fraction production was up 13%, straight-run gasoline output grew 5%, and automobile gasoline production rose 6%. "In November, an audit was performed on compliance to requirements under the new version of the international aviation standard, which allowed for resuming aviation kerosene production," Yarullin said.

For last year, TAIF-NK had revenue topping 124 billion rubles - 33% more than in 2010.

The first phase of the TANECO oil refining complex, with a 7-million-tonne oil capacity, was launched into testing and commissioning mode on October 26, 2010. In September 2011, the Federal Ecological, Technological and Nuclear Oversight Agency (Rostekhnadzor) gave the green light to Transneft to ship oil for TANECO at volumes requested by the company. Transneft received the right to sell to TANECO not material for testing, but for commercial oil. In October 2011, TANECO started testing the oil refining complex's equipment at 100% capacity.

TAIF-NK is part of TAIF Holding. The oil refining complex includes an oil refinery, a gasoline plant and a gas condensate processing facility.

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