Refining products in desperate need

It is the talk in today’s marketplaces - how and where to find finished petroleum products, given the limited availability of petroleum products globally. As it seems, the two Babs - the Strait of Hormuz in the Arabian Gulf and Bab Al Mandab at the entrance to the Red Sea, extending towards the Suez Canal and down towards Asia - are both under threat of closure or attack. This is causing concern and worry over the transit of oil towards Europe and the United States. Oil prices have jumped to new highs of above $100 a barrel, with Russian crude approaching $120, while Arabian Gulf crude oil prices have exceeded $110 a barrel. This is benefiting oil-producing countries, but their ability to sell is limited because of concerns over the operational capacity of oil-refining facilities, as well as the daily threats of attacks on oil carriers.

There is also the threat of the closure of the Strait of Hormuz, or the need to obtain the necessary authorization to pass through designated and authorized routes that ships must fully adhere to. Oil production is at a 40- year low, while oil stockpiles are being rapidly depleted globally. It is not a lack of crude oil availability, but rather the threat of escalating war and attacks on ships navigating the Arabian Gulf. Severe damage has also been done to refineries in different parts of the world. It’s not, however, that Gulf oil is the main concern, but also the loss of refining capacity in Russia that is putting pressure on the availability of finished products. With Russian refining capacity down by more than 450,000 barrels per day, Europe is being forced to search desperately for new sources of imports and supply. It must look mainly to the United States and its refining capacity for imports, as other supply markets are tight and short.

This is particularly important during the wintertime, when demand for heating oil reaches its peak. European countries have a total demand of between 20 million and 22 million barrels per day. With Russian supplies reduced and some concerns over the availability of Arabian Gulf products, the dilemma is becoming more difficult. Certainly, the world is still in need of more refined products and is searching for additional refining capacity. This could push the price of refined products to more than $100 above the price of a barrel of crude. This is where countries with refining capacity come to the forefront. However, greater refining capacity means a greater need for crude oil production to cater to and meet the needs of refineries. Here in Kuwait, we face such a dilemma, with a refining capacity of 1.8 million barrels per day in KPC’s eight refineries spread globally, with three in Kuwait and three outside Kuwait, in Oman, Milazzo, and Vietnam.

This represents, today, almost all of our crude oil production. This means that KPC must acquire and buy some foreign crude oil to cater to the needs of our overseas refineries, or reduce our combined refinery runs, making more crude available for sale to customers globally. It is a huge challenge for our oil industry. We must, however, cater to and respect our commitment to the OPEC quota and adhere to it. In the meantime, it is not advisable to increase our refining capacity. We must stick to our 50 percent policy between crude oil and finished-product production, despite the fact that refined products provide us with greater profits than the sale of pure crude oil.

By Kamel Al-Harami
Independent Oil Analyst
Email: [email protected]