Thailand's oil plans: A lot more refining to do

Jun 25, 2004 02:00 AM

by Andy Ho

Geographically located at the centre of the oil supply chain from the Middle East to Asia, Singapore is the world's third largest oil refining centre after Rotterdam and Houston. But Thailand now wants to challenge the Republic's pre-eminent position.
The Kingdom, which has seven refineries that together process 975,500 bpd, announced plans for its eighth and largest plant with a 300,000 bpd capacity. The reason: Singapore processes 1.3 mm bpd.

The plan bodes ill for both countries but Thai Prime Minister Thaksin Shinawatra obviously doesn't think so. Last August, he told an energy seminar in Bangkok how he would transform Thailand into Asia's premier oil refining, trading and distribution hub within five years.
Dr Thaksin said: “Singapore has a market of 1.2 mm bpd, while we have a domestic market of 600,000 bpd. The question is how Thailand could equalise volumes by luring 300,000 bpd from Singapore.” In three steps, it would seem.

Get the traders
First, attract oil traders.
Last January, corporate taxes on all oil trading companies registered in Thailand were slashed from 30 % to 10 %. However, seven laws relating to oil trading transactions, imports and exports remain on the books, rendering the Thai regulatory environment uncompetitive against Singapore.
It is no simple matter removing these laws since they are protectionist measures meant to buffer PTT -- formerly the Petroleum Authority of Thailand -- the only active oil trader in the Kingdom. The state still owns 68 % of PTT which controls Thai Oil, the country's largest refiner. By contrast, Singapore's refiners are completely unprotected.

Thailand's Deputy Permanent Secretary at the Energy Ministry, Mr Pornchai Rujiprapa, admitted that “Thailand has so far failed to attract overseas oil traders because of (excessive) regulations”.
Still, Thailand has created a customs-free area for the oil trade at a port and tank farm facility on two islands -- Si Rach and Si Chang, respectively. Lying12 km from the shore in Chonburi province, south-east of Bangkok, the Si Rach port had remained unused after the 1997-1998 Asian financial crisis -- until now. To date, none of the Si Chang storage tanks are running at full capacity.

Make it bigger
Second, boost refining capacity -- thus the announcement of an eighth plant.
But given Asian refining's wafer-thin margins over the past five years, this is bad economics. True, up till the mid-1990s, Singapore's refining margins were among the world's highest, surpassing those in the United States Gulf Coast and north-western Europe. However, fortunes changed during the Asian crisis and US refineries have been consistently more profitable than Singapore's since 1997, while Europe's overtook the Republic's in 1999.
One reason is refining overcapacity to the tune of 1.2 mm bpd in the Asia Pacific and Middle East regions combined. A wave of capacity expansions and new plants coincided with the 1997-1998 financial crisis, when consumption droppedsharply, sending industry profits into a tailspin.

Singapore's refining capacity is nearly double its rate of petroleum products consumption. Because new refineries have been built in its traditional Asian markets, export opportunities are now limited. The 540,000 bpd Reliance Petroleum refinery at Jamnagar has reduced India's demand for Singapore's motor fuels and lubricants since 2000. Malacca's 120,000 bpd PSR2 refinery has reduced Malaysia's demand for Singapore's specialty products.
Then there is Thailand's own excess capacity: Domestic demand for its own petroleum products is under 650,000 bpd. Last April, Indonesia resumed work on a 100,000 bpd refinery project in Tuban, East Java, that had been stalled by the 1997-1998 crisis.

Another reason refiners have been struggling is that Asian demand for refined oil products will not grow as dramatically as it did during the pre-crisis years. The region's economic growth is now more modest. Also, many nations are switching to natural gas for power generation and industrial use, cutting demand for fuel oil and diesel.
True, overall demand is rising once again and profits have surged in recent months. Many plants are working near capacity: Singapore's refiners, for example, are pumping at 85 % now, up from the 60-65 % utilisation rates in 2002. Forbes magazine reported last February that “these are bright days for Asia's refining industry”.

Perhaps. After poor demand growth in 2001 and 2002, Asian oil demand did rise last year -- but by only 664,000 bpd. That does not make “a broad-based growth revival”, opined Dr Fereidun Fesharaki, an energy analyst who spoke at the Institute of South-east Asian Studies' Energy Forum recently. He expects demand this year to grow by only 550,000 bpd, and driven mainly by China. Even India's demand is slowing down because of high prices. Meanwhile, Japan's growth in oil demand is negative, because a rapidly ageing population uses less energy.
Finally, regional overcapacity can only worsen when Iran and Kuwait,which still import refined products from Asia now, see their own refineries come online. In the medium term, regional demand will grow by only 2 %, so refiners must look for markets further afield, particularly if China slows down.

Pipe it over
Third, build the Kra pipeline.
Thailand made it clear that its eighth refinery will be co-located with a planned pipeline. In order to move 3 mm bpd of crude from tankers on the Andaman Sea, across the Kra Peninsula, to tankers on the Gulf of Thailand, this pipeline is to be built along the 160 metre wide median of the four-lane Highway 44 that already links the two seas.
Slated to shorten the current tanker trip via the Straits of Malacca by 800 km, decrease shipping time by a week, and cut $ 2 (S$ 3.45) off the price of each barrel of crude, the proposed pipeline will also bypass Indonesia's turbulent Aceh region which has a long shore along the Straits. If Aceh's Islamic fundamentalists gain power, the Straits could become too risky.

For some time now, the pipeline has been a pipe dream championed mainly by Japan. The reason: Japan, which imports 99 % of its oil, sees the depots of 100 mm barrels of oil to be built on both sides of the peninsula -- together with the crude in the 230 km pipeline -- as an Asian strategic reserve buffer.
Still, it might be China's burgeoning thirst for oil that will see the pipeline built. Now the world's second largest consumer of fossil fuels after the US, China sees itself as vulnerable, especially since its hopes of piping in Russian and Central Asian oil and gas were scuttled recently. A Chinese firm, Sinopec, began talks with PTT about investing in the $ 720 mm project. A feasibility study will be completed by year's end.

Just as open to attack
Yet, if built, the pipeline may be no less vulnerable than tankers plying the Straits. Well known is the Muslim problem in southern Thailand, where terrorism has seen tourism drop in Yala and Narathiwat just north of the Kra Isthmus. Terrorists have targeted pipelines before in Baluchistan, Chechnya, Colombia, Algeria -- and recently, in Iraq.
The 230 km Kra pipeline could be difficult to patrol: A simple explosive device could puncture it and put it out of action for weeks. One consolation is that China has had many years' experience not just building pipelines in Sudan but also protecting them in a country beset by war. While Sudan's oil flow is still small, the pipeline from its south to Port Sudan on the Red Sea operates with minimal trouble.

But safety aside, Thailand doesn't have a harbour as good as Singapore's. The Gulf of Thailand and the Andaman Sea are comparatively shallow seas, making it difficult for very large tankers to discharge their cargo. For reasons of economies of scale, Middle East crude is moved chiefly by very large tankers carrying 2 mm barrels a voyage.
They are too large to enter even US ports, except Louisiana, which is why the US imports more South American crude -- by smaller tankers -- than Middle East oil.In the case of Kra, some or all of the cargo will have to be transferred to smaller vessels, either at sea or at an offshore port, before they are pumped into the pipeline.
But there is another complication: The sea in the Gulf of Thailand may be too rough for loading oil because its tides are complex. In some spots, there is only one high tide and one low tide a day; in others, there are two highs and lows each day; and in yet other places, it is one or the other on different days. Moreover, Gulf currents change direction with the monsoons. Dr Thaksin has his work cut out in more ways than one.

Meanwhile, though the overall outlook for Singapore refiners remains uncertain, they are the most versatile and technologically advanced in the Asia Pacific region, processing more than 40 different kinds of crude, from the Middle East's low sulphur to Malaysia's high sulphur.
The Republic will also continue to move on to higher value-added downstream products. The future of refining lies in integrating it tightly with petrochemical production, thus spinning off parallel projects.

To compete, Thailand will have to play not only catch-up, but also hardball.

Source: Straits Times
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