19-02-09 Brazil's Petrobras and its Japanese partner Sumitomo have put off completing a joint study to examine an estimated $ 1.1 bn upgrade of their 100,000 bpd Nishihara refinery in south-western Japan by a year to March 2010 amid growing uncertainty in the refining business. Among the options on the table is not to make any investment at all in the refinery in Okinawa, Samir Passos Awad, Petrobras's executive manager and board member of the refinery operator Nansei Sekiyu said in Tokyo.
"Between Petrobras and Sumitomo, we have agreed to postpone finishing study [on] revamping or expanding the Okinawan refinery to March 2010, which was meant to be concluded in March 2009," Awad said.

"Market conditions are not leaving us comfort to conclude the study because forecasts are very unpredictable both on cost side and oil price side," he said, referring to current volatility in the market. "We were seeing very cloudy scenarios for forecasting and putting figures," Awad said. "There is no way to make a final investment decision in a scenario like that."
State-owned Petrobras bought an 87.5 % stake in the refinery from ExxonMobil arm TonenGeneral for $ 55 mm in April 2008, the Brazilian company's first foray into the downstream Japanese sector. Sumitomo holds the remaining 12.5 % in the joint venture, Nansei Sekiyu.

Plant old and inefficient
The Nishihara refinery, which started up in 1972, has become outdated and inefficient over the years as it has few secondary units. Most of its output is relatively low-value fuel oil. It had been operating at barely a quarter of its nameplate capacity of 100,000 bpd when Petrobras bought into it.
Soon after the acquisition, Petrobras CEO Jose Gabrielli announced plans to study the possibility of an upgrade of the refinery with an investment of around yen 100 bn (which equated to $ 986 mm then, but is closer to $ 1.1 bn today). Nansei Sekiyu has been conducting a study on the investment plan since then. But the climate in the oil industry has undergone a dramatic change in the interim.

In the wake of the global financial crisis and the resulting slide in oil demand, Petrobras, like many of its peers, has been reviewing its domestic as well as international investments.
The reviews delayed the Brazilian oil giant's release of its five-year strategic investment plan for 2009-2013 from October 2008 to January 2009. The company has planned a $ 174.7 bn investment over the next five years, which includes a $ 15.9 bn spending on upstream and downstream oil businesses outside Brazil.

Uncertainty forces spending review
With uncertainty looming large over demand for products from the Nishihara refinery in the near term, Petrobras and Sumitomo are revisiting their options, which include no spending at all, Awad said.
"We might reach 2010 to conclude that investments are not good enough to pay [for] what we receive," Awad said.

"Keeping the refinery running as it is might be one of the possible conclusions." Should that be the final decision, it would not have been prompted by Japan's declining domestic oil products demand, Awad said. Rather, it would have to do with unpredictability over the cost of materials and oil prices, he added.
The study currently underway focuses on improving the refinery's economics by installing secondary units for processing heavy crudes. In the absence of units such as a fluid catalytic cracker, residue fluid catalytic cracker, a coker, and a direct desulphurizer, Petrobras has been processing light crudes with an average gravity of around 40-50 API and medium grades with an average gravity of around 30-40 API at the 100,000 bpd refinery, company sources said earlier.

Throughput at Nishihara was ramped up to more than 60,000 bpd last September, but has been averaging 40,000 bpd-50,000 bpd since, due to weakening demand, Awad said. The refinery could go up to 80,000 bpd if demand returns, but not more than that because of pipeline bottlenecks and storage issues, he added.
If the partners press ahead with the investment, the upgrading work or modifications would take at least three years, Awad said.