The growing prominence

of Asian refining
Prepared for Petrotech-2016
12th International Oil & Gas Conference and Exhibition

December 2016

Authored by:
Navtez Bal
Arjun Chopra
Cherry Ding
Tim Fitzgibbon
Patrick Green
Alan Martin
Nipun Rastogi
Anantharaman Shankar
Sarabjit Singh
Artika Thakur
Copyright 2016, by McKinsey & Company, Inc.
The growing prominence of
Asian refining

Prepared for Petrotech-2016

12th International Oil & Gas Conference and Exhibition

December 2016

Authored by:
Navtez Bal
Arjun Chopra
Cherry Ding
Tim Fitzgibbon
Patrick Green
Alan Martin
Nipun Rastogi
Anantharaman Shankar
Sarabjit Singh
Artika Thakur
Acknowledgements
We would like to thank the Steering Committee of Petrotech 2016 for giving us the
opportunity to share our perspectives. This report draws extensively on the work of Energy
Insights, which combines McKinseys global energy expertise and proprietary data and tools
with a specialized team to deliver timely analysis and customized information to clients. We
thank Cherry Ding, Agnieszka Kloskowska and Ananthraman Shankar for their guidance.

This report also synthesizes our learnings from proprietary research and the cumulative
experience of McKinsey experts worldwide. The research and examples cited are meant to
be illustrative and not exhaustive.

We acknowledge the counsel of our senior expertsTim Fitzgibbon from the Houston
office and Patrick Green along with Alan Martin from the London office. We are also thankful
to Sarabjit Singh, an engagement manager from the Singapore office, and Arjun Chopra, a
senior research analyst from the Gurgaon office.

This report would not have been possible without the dedicated efforts of the McKinsey
teamAbhishek Agarwal, Nitesh Jain, Puja Jain, Aakash Jhaveri, Nipun Rastogi and
Artika Thakur.

We thank Noorain Nadim, Punita Singh, Parameshwari Sircar and Malini Sood from the
Client Communications team for their editorial support, and Fatema Nulwala, Ava Tata and
Natasha Wig for their inputs on external communication. We are also grateful to Manali Raul,
Pradeep Singh Rawat, Vineet Thakur and Royston Wilson for their support on design and
visual aids.

Navtez Bal Amit Khera Suvojoy Sengupta

Partner Partner Partner
Contents
Executive summary 01

Asia: A key driver of the refining industrys growth 02

Volume and variety of crude flows to Asia 10

Asias increasing product flows 12

Potential decline in utilization and margins 15

Possible options for refiners and strategies adopted 19

The growing prominence of Asian refining v

Executive summary
Global demand for refined products grew at 1.4 percent annually from 2010 to 2015.
Demand may continue to grow from 2015 to 2020, but is expected to slow down to
0.7percent growth annually in the low-demand case and to 1 percent growth annually in
the high-demand case. In this scenario, Asia is expected to drive the refining industrys
growth with an increase in demand by 1.8 percent and 2.3 percent annually in the low- and
high-demand cases respectively. Besides the growth in demand, Asia is also projected to
lead in capacity expansion along with the Middle East and Africa, further contributing to the
industrys growth.

The volume and variety of crude flows to Asia have increased. Going forward, a large
proportion of products from the Middle East is likely to target the Southeast Asian market,
adding to the growing oversupply of oil to the region. Growth in North American supply is
expected to resume, redirecting crude volumes from the Atlantic Basin to Asian markets
where demand is expected to remain relatively strong. In addition, increasing supply
competitiveness in Asia could provide Asian refiners with a more diverse mix of crude
supplies and increased opportunity for price optimization.

Product flows to Asia are expected to increase. Lower demand in North America along with
strong refinery utilization could push the region to a net long position, with growing flows to
Asia. In addition, growing oversupply of distillates (diesel and jet/kerosene) in North America,
the Middle East, and the Former Soviet Union (FSU) countries could lead to increasing
product flows to Europe and Asia.

With the growth rate of refining capacity being more than 50 percent greater than the growth
rate of oil demand, there could be excess supply of refining, which is expected to continue
to increase. This is likely to put downward pressure on utilization and margins in the three
hubs (North America, Europe and Asia) up to 2020. In 2021, the global implementation of
Marine Pollution (MARPOL) Annex VI is expected to lead to tighter restrictions on quality
specifications for bunker fuels. As a result, demand for distillates is expected to grow, and
utilization and margins are projected to increase.

To offset the effects of a decrease in utilization and margins, refiners can adopt several
strategies. Asian refiners, in particular, can take advantage of the increased diversity in
crude slates and focus on crude optimization to increase profitability. Other possible
options include increasing operational efficiencies, creating flexibility in the refining network,
continuing to enhance the inland distribution and retail network and exploring opportunities
in downward integration into specialty-grade petrochemicals.

1 The growing prominence of Asian refining

Asia: A key driver of the refining
industrys growth
Light product demand in Asia has increased
The demand for light products in Asia exceeded expectations in 2015, growing by over 700
thousand barrels/day, a 4 percent increase over 2014 (Exhibit 1). The fall in global crude
prices since late 2014 and lower transport fuel costs led to a sharp uptick in Asian demand
growth. Gasoline was the biggest driver of demand growth in 2015, followed by liquefied
petroleum gas (LPG). Demand for gasoline grew by 8 percent year over year, adding an
extra 400 thousand barrels/day. In contrast, demand for diesel increased by a modest 2
percent or about 150 thousand barrels/day. Fuel oil was the only product with negative
growth, a trend consistent with historical declines in fuel oil consumption in the industrial and
power sectors in Asia.1

Gasoline demand accelerated in 2015 across many Asian countries, particularly China and
India, with both posting an increase of 15 percent over 2014.2 In China, auto sales reached
record levels in 2015, driving gasoline demand. In India, the removal of diesel subsidies in
2014 stimulated the purchase of gasoline vehicles over their diesel variants, and lower fuel
prices contributed to the increase in gasoline sales.3 The impact of low prices on discretionary
consumption and fuel demand growth was also seen in the case of jet fuel. China, which
accounts for roughly a third of regional jet fuel demand, saw an increase in demand by about
100 thousand barrels/day in 2015.4 Also, Chinese air traffic demand showed the highest
increase in recent years as airlines passed on lower fuel costs to consumers.

Demand growth for diesel/gasoil has shifted gears since 2012 on weaker industrial demand
in Asia. This trend was most evident in China. Demand growth was 1 percent in 2015,
compared to double-digit growth before 2012. Growth in India was also more muted as a
result of the cancellation of diesel retail subsidies in 2014. Korea was the only bright spot for
diesel/gasoil in Asia as government subsidies for taxis spurred domestic demand.

1, 2, 3, 4 JODI

The growing prominence of Asian refining 2

Exhibit 1

Asian 1 light product demand

Million barrels/day
2015 2014 2013 2012
17
16
15
14
13
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1 Gasoline, jet/kerosene, diesel/gasoil demand in China, Taiwan, India, Indonesia, Japan, South Korea, Philippines, Thailand
SOURCE: JODI

Refining throughput in Asia has increased

Refining throughput in Asia increased by an average of 700 thousand barrels/day in 2015
(Exhibit 2). Refiners increased runs in late 2014 and delayed maintenance programs to
capture higher margins. High runs persisted through the third quarter of 2015 when margins
weakened. In the winter season, lighter demand for gasoil contributed to lower utilization,
which persisted through the end of the year.

Exhibit 2

Asian 1 refining throughput

Million barrels/day
2015 2014 2013
28
27
26
25
24
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1 Includes Australia, Brunei, China, India, Indonesia, Japan, Korea, Malysia, Myanmar, New Zealand, Papua New Guinea, Philippines, Taiwan,
Thailand and Singapore
SOURCE: JODI

3 The growing prominence of Asian refining

In 2015, refining capacity expansions and increased runs at Chinas independent teapot
refineries contributed an additional throughput of 500 thousand barrels/day. Korean refiners
ran harder to satisfy demand growth, both domestically and in export markets (Exhibit 3).

Exhibit 3

Refinery crude throughput

Thousand barrels/day
2014 2015 2015-2014 % change

China 10,084 10,586 502 5%

Korea 2,533 2,799 266 10%

Thailand 1,028 1,119 91 9%

India 4,503 4,585 81 2%

Philippines 168 213 44 2%

Japan 3,126 3,138 12 0%

Indonesia 842 832 -10 0%

Taiwan 850 838 -12 -1%

Malaysia 506 464 -42 -2%

Singapore 1,265 1,193 -72 -6%

Aus NZ 645 542 -103 -16%

25,590 26,316 726

SOURCE: JODI

The growing prominence of Asian refining 4

Demand growth is expected to slow down under different scenarios
Post 2016, the growth in global oil demand is expected to slow down under different
scenarios (Exhibit 4). In the low-demand case, a global downshift in demand is likely
due to weak but increasingly stable global growth. In the high-demand case, a global
synchronicity in demand is expected due to a rapid distribution in global growth.

Exhibit 4

Global oil demand1

Million barrels/day
BP McKinsey: High Demand ("Global Synchronicity")

ExxonMobil IEA: New Policies

IEA: Current Policies McKinsey: Low Demand ("Global Downshift")

120

115

110

105

100

95

90
2015 2020 2025 2030

1 Includes all oil products including refinery gas, petcoke

SOURCE: Energy Insights: Global Energy Perspective, BP Global Energy Outlook (2016), ExxonMobil Outlook for Energy (2016), World
Energy Outlook OECD-IEA 2015 IEA publishing; modified by McKinsey&Company

5 The growing prominence of Asian refining

Asia is expected to be the driver of demand growth
In the low-demand case, overall demand for oil products from 2015 to 2020 is expected to
slow down to 0.7 percent annually and that for light products could decline to 0.9 percent.
This represents a slowdown in comparison to the 1.4 percent annual global growth for all
products between 2010 and 2015. In the outlook, between 2020 and 2030, total product
demand growth could decelerate to 0.5 percent per year, while transport fuel (primarily
middle distillates) growth could rise to 1.1 percent per year (Exhibit 5). Asia may remain the
top oil consumer because of rising demand in India and China. GDP growth in these two
countries could be 6.2 percent and 4.9 percent respectively between 2015 and 2030.5

In the high-demand case, global oil demand growth is expected to rise 1 percent per year
over the next five years, compared to 0.7 percent in the low-demand case. Most of this
growth is expected to come from gasoline and middle distillates, and is projected to be
reflected in higher transport fuel growth of 1.2 percent per year compared to 0.9 percent per
year in the low-demand case over the next five years (Exhibit 5). Asia may remain the leading
consumer, with GDP growth in India and China expected to be higher at 7.2 percent and 5.9
percent respectively between 2015 and 2030.6

5, 6 Energy Insights: Global Energy Perspective

The growing prominence of Asian refining 6

Exhibit 5

Global refined product 1 demand

Thousand barrels/day
Delta > 200 kbd Delta 0 < x < 200 kbd Delta < 0 kbd

201520 delta low-demand case

North South Europe/ Middle Asia Global 2020-30
America4 America Med FSU Africa East Pacific total delta
LPG 64 -14 -43 42 32 49 246 377 1095

Naphtha 107 10 -84 75 4 51 120 284 1497

Gasoline -440 22 59 27 200 -3 1503 1367 -922

Middle
101 30 -28 41 244 111 895 1392 4373
distillates
Heavy
-202 24 -24 -22 -61 -77 -4 -366 -3705
products2
Total -370 72 -120 162 419 130 2760 3053 2338

CAGR -0.3% 0.2% -0.2% 0.7% 1.9% 0.4% 1.8% 0.7% 0.5%
Transport -0.4% 0.2% 0.1% 0.5% 2.6% 0.5% 2.5% 0.9% 1.1%
fuels
CAGR 3

201520 delta high-demand case

North South Europe/ Middle Asia Global 2020-30
America4 America Med FSU Africa East Pacific total delta

LPG 67 -11 9 74 33 49 320 540 1675

Naphtha 110 31 -12 133 4 50 344 659 2556

Gasoline -375 57 76 34 203 2 1721 1718 49

Middle
258 65 103 45 254 136 1108 1967 6162
distillates
Heavy
-233 36 2 -19 -58 -54 40 -286 -3614
products2
Total -174 177 178 267 436 182 3534 4599 6828

CAGR -0.2% 0.6% 0.3% 1.1% 1.9% 0.6% 2.3% 1.0% 1.5%
Transport -0.1% 0.5% 0.4% 0.6% 2.6% 0.7% 2.9% 1.2% 1.9%
fuels
CAGR 3

1 Excludes refinery feedstock, additives/blending components, other hydrocarbons

2 Includes fuel oil, lubricants and asphalt
3 Gasoline and middle distillates
SOURCE: Energy Insights: Global Energy Perspective

7 The growing prominence of Asian refining

Growth in global refining capacity is expected to come mostly from
developing markets
Greenfield investments combined with creep in existing capacity are likely to allow the
Middle East, Africa, and Asia to lead capacity expansion. Capacity growth in these regions
will include Saudi Aramcos 400 kbd Jazan refinery, scheduled to go online in 2018;
Dangotes 650 kbd Lagos refinery, planned to be online in 2020; and KNPCs 615 kbd Al
Zour refinery, also planned to be operational in 2020.7 Growth in North America may be
limited to creep plus around 200 kbd of small expansions early in the period.

Growth in distillation capacity is expected to accelerate after 2020 to 0.7 percent per annum,
with most of the new builds concentrated in Asia. The outlook assumes additional capacity
investments may be needed in Asia, primarily in china and India, where overtime markets
could witness growing shortages of light products over time. To meet the growing product
shortages starting 2021 to 2030, the outlook could build an additional capacity addition of
260 kbd in china and 1200 kbd in India (Exhibit 6).

Exhibit 6

Global refining capacity outlook distillation1

Million barrels per stream day Low-Demand case High-Demand case

103.3 3.0 111.1

1.1% p.a. 1.5% p.a.
1.2 1.5
0.2 1.5
1.6 1.1
0.6 1.4
0.4 -0 0.5
0.5 0
98.0 1.2 103.3 1.3
ex-FSU

ex-FSU
global
NA

Total

global
NA

Total
2015

Latin

2020

2015

Latin

2020
FSU

AG

FSU

AG

Asia
Pacific
Europe

Asia
Pacific

Europe

Africa
America

Africa

America

20152020 increase 20152030 increase

Note: Crude and condensate
1 Firm and probable projects; does not include shut downs

SOURCE: McKinsey Refining Capacity Additions Database

7 McKinsey Refining Capacity Additions Database

The growing prominence of Asian refining 8

Conversion capacity is expected to grow faster than distillation capacity
Conversion capacity is expected to grow at an annual rate of 2.2 percent over the next five
years. This is almost twice the rate of growth of distillation capacity, resulting in growing
overall average complexity and conversion rates. This growth could primarily come from
greenfield refineries that are being built with much larger conversion capacity than the
average existing capacity. Conversion capacity is expected to grow at an annual rate of 0.9
percent per year after 2020, slightly faster than the growth in distillation capacity over the
same period. The slower growth in conversion capacity versus distillation capacity from
2020 to 2030 may result in lower demand for resid post 2020. This, together with tightening
restrictions on bunker fuel specifications, which are assumed to have reached full impact by
2021, could lead to a widening lightheavy differential in the outer forecast period (Exhibit 7).

Exhibit 7

Global refining capacity outlook conversion 1

Million barrels per stream day Low-Demand case High-Demand case

42.6 1.6 46.4

0.9% p.a. 0.8
2.2% p.a. 1.8
0.8
0.2 0.3
0.8 0.5
-0.2 0.7 0.4
0.2 0
38.1 0.4 42.6 0.7
0.3
ex-FSU

ex-FSU
NA
Total

Total

global
NA

Total
Latin

Latin
2015

2020

2015

2020
FSU

Asia
Pacific

FSU

Asia
Pacific
Europe

ME

Europe

ME
America

Africa

America

Africa

20152020 increase 20152030 increase

1 Conversion units represents the sum of cokers, thermal crackers, visbreakers, FCCs, RCCs and hydrocrackers

SOURCE: McKinsey Refining Capacity Additions Database

9 The growing prominence of Asian refining

Volume and variety of crude
flows to Asia
Overall crude flows to Asia increased in 2015 (Exhibit 8) despite a decrease in flows from
West Africa. Crude flows to Asia from the Middle East increased by 350 thousand barrels/
day over 2014, primarily as a result of increased production in Iraq. Iraqi crude exports
continued to grow in 2015, with more than half going to Asia. The launch of the new Basrah
Heavy grade in 2015 also boosted exports.1 China, India, and South Korea have been the
biggest buyers of Iraqi crude. Asian refiners have selected Iraqi crude as a replacement for
Iranian crude and as a competitive alternative to Saudi grades.

Exhibit 8

Asian crude slate by origin 1

Million barrels/day

14

Middle East 3%
13

12

Asia 1%

3
West Africa -7%
2
Latin America 15%
FSU 10%
1
Other 11%
0
2010 10 11 13 14 2015

1 Includes consumption of domestic crude by Asian refineries and crude oil imports by the following crude oil-importing countries in Asia:
China, India, Japan, South Korea, Singapore, Thailand, Taiwan, Australia, Indonesia, Malaysia, Philippines, Pakistan and New Zealand

Note: SE Africa, North Africa, Europe, not specified

SOURCE: Energy Insights, JODI

1 ITC Trade Map

The growing prominence of Asian refining 10

The growth in volume and variety of crude flows to Asia is expected
to continue
The resumption of growth in North American supply is likely to redirect crude volumes from
the Atlantic Basin to Asian markets where demand is expected to remain relatively strong
(Exhibit9). Increasing competitiveness in supplying Asian markets is expected to provide Asian
refiners a more diverse mix of crude supplies and enhanced opportunity for price optimization.

Exhibit 9

Asian crude slate by origin

Increasing flow Decreasing flow Flat flow

Russia
Europe

North
Middle Northeast
America
East Asia

Africa South and

Southeast Asia

Latin
America

SOURCE: Energy Insights: Global Downstream Model

11 The growing prominence of Asian refining

Asias increasing product flows
A large proportion of products from the Middle East is likely to target the Southeast Asian
market, adding to the growing oversupply in the region. New capacity in the Middle East is
expected to partly meet growing domestic demand in the region and reduce the regions
imports from South Asia. At the same time, refiners could consider replacing traditional
export markets like Europe where demand is expected to fall.

A large portion of the additional exports is projected to flow to Southeast Asia, the closest
market to the Middle East with significant demand growth for refined products and swing
refining capacity (Exhibit 10). Net import growth is expected to be 1.6 million barrels/day,
pushing Asian utilization down to 70 percent by 2025.1

Exhibit 10

Change in light product flows 20142025

Increasing flow Decreasing flow Flat flow

Europe

Northeast
Middle East S Asia Asia

Southeast Asia
West Africa

Australia/
New Zealand

SOURCE: Energy Insights: Global Downstream Model

1 Energy Insights: Global Downstream Model

The growing prominence of Asian refining 12

Asia is expected to become the top gasoline importer after 2021
Rising gasoline demand in Asia is projected to lead to a growing shortage in the region.
Lower demand in North America along with strong refinery utilization could push the region to
a net long position, with growing flows to Asia after 2025. Starting in 2020, European exports
could be increasingly backed out of the US and could shift to Southeast Asia to meet growing
demand in the region. This would keep overall European export levels flat. The Middle East
is expected to become the second largest gasoline-exporting region after Europe starting in
2020. Most of the exports would supply South and Southeast Asia (Exhibit 11).

Exhibit 11

Net gasoline imports Low-Demand Case

Million barrels/day

North America South America Europe FSU

Africa Middle East Asia

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

SOURCE: Energy Insights: Global Downstream Model

13 The growing prominence of Asian refining

Asia is expected to become net short of distillates in 2022
Growing oversupply of distillates (diesel and jet/kerosene) in North America could ensure that
this region could be the top diesel exporter globally. Starting in 2021, United States Gulf Coast
(USGC) could export an additional 700 kbd of diesel to Northwest Europe (NWE) to meet
growing demand resulting from the switch to a lower-sulphur marine bunker. The US is also
expected to export to Asia in 2022, as the latter region may become net short (Exhibit 12).

Exhibit 12

Net distillate1 imports Low-Demand Case

Million barrels/day

North America South America Europe FSU

Africa Middle East Asia

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

-2.5
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

1 Diesel and jet fuel

SOURCE: Energy Insights: Global Downstream Model

The growing prominence of Asian refining 14

Potential decline in utilization
and margins
Refinery utilization
With the rate of growth in refining capacity being 50 percent above the rate of growth in oil
demand, there could be excess supply.1 This could put downward pressure on utilization in
the three hubs (North America, Europe and Asia) till 2020 in both the low- and high-demand
cases (Exhibit 13). In 2021, high growth in demand for distillates due to tightening restrictions
on bunker fuel specifications is expected to lift both utilization and margins.

Low-demand case: Strong growth in product demand in Asia could keep utilization in
this region high. USGC may see consistently high utilization as it is expected to supply
product export markets as far as Asia in the outer years. Falling demand for transport
fuels could push down European utilization after 2028.2

High-demand case: The expansions expected through 2020 are anticipated to meet
the growing product demand. By 2021, however, several countries could see increasing
shortages of light products and consequently would require new capacity investments,
which are built into the high-demand case. Factoring in this 1.4 Mbd of additional refining
capacity, demand growth in light products (1.2 percent annually) is expected to rise
faster than the growth in refining capacity (0.7 percent annually) in the high-demand
case. This could keep utilization at historically high levels.3

1, 2, 3 Energy Insights- Global Downstream Model

15 The growing prominence of Asian refining

Exhibit 13

Utilization of regional hub refining capacity

Percent of stream day distillation capacity

USGC1 Europe2 Asia Pacific3

Low-Demand Case High-Demand Case

90 90

85
85
80

75 80

70
75
65

60 70
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030

2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
1 PADD 3
2 Singapore, Malaysia, Korea, Taiwan
3 Belgium, Netherlands, Norway, UK, France, Italy, Spain, Greece

SOURCE: Energy Insights: Global Downstream Model

The growing prominence of Asian refining 16

Refinery margins
Refinery margins in both cases could fall until 2020 before jumping back up in 2021 with
the global implementation of Marine Pollution 73/78 (MARPOL) in 202021 (Exhibit 14).
MARPOL puts restrictions on fuel specifications for bunker fuels.

Low-demand case: In the short term, margins in all regions are expected to fall until 2020
in line with growing refining overcapacity globally and a tightening resid market. Global
implementation of MARPOL in 202021 could support margins by USD 1 to 2/bbl in USGC
and Europe where additional demand for distillates for replacing fuel oil in bunkers could
provide an uplift to utilization. Continued exports of USGC products could keep prices of
US light products at an export netback relationship to NWE, and the margins trend could
be in line with Europe over time. Falling utilization and margins in Europe after 2028 could
have some impact on USGC, whereas Asian margins could continue to increase on robust
demand growth and rising crude prices.

High-demand case: The margin outlook for the next five years is similar to that of the
low-demand case. In 2021, however, when the implementation of MARPOL is expected
to achieve its full impact and when it is projected to push the resid markets to substitution-
based pricing for resid, margins in Asia are expected to jump by USD 7/bbl compared to the
low-demand case.

17 The growing prominence of Asian refining

Exhibit 14

Regional refining margin (variable cash) outlook1

USD/barrel

Singapore RCC USGC FCCA Europe FCC

Low-Demand Case High-Demand Case

24 24
History Forecast History Forecast
20 20

16 16

12 12

8 8

4 4

0 0
20162

20162
2010
2012
2014

2018
2020
2022
2024
2026
2028
2030

2010
2012
2014

2018
2020
2022
2024
2026
2028
2030
-4 -4

-8 -8

1 Dubai delivered to Singapore, Brent delivered to Rotterdam, WTI Houston

2 2016 includes first nine months of actual margins and three months of forecast

SOURCE: Energy Insights: Global Downstream Model

The growing prominence of Asian refining 18

Possible options for refiners and
strategies adopted
Possible options for refiners
With the imminent decline of utilization and margins, refiners are presented with certain
possible options. In Asia, refiners could take advantage of the growing diversity of crude
supply and improve their crude optimization strategies. To fully capture this opportunity, they
may need to ensure that they move beyond traditional crude procurement practices in a
number of areas. Refiners could think about:

Term agreements: In some cases, it could be advantageous to shift from long-term

procurement contracts to the spot market, allowing refiners to buy cargoes at lower prices

Market assessment: With more options resulting from a more varied set of sources,
refiners may need to understand pricing dynamics beyond the local region. This could be
particularly important when negotiating longer-term agreements

Optimization: The planning optimization function could need to cast a wider net not only
in considering crude types, but also in determining intermediate purchases and sales.
Optimization over multiple time horizons may become more critical as refiners regularly
consider crudes with very different transit times

Operational flexibility: Operationally, some refiners may gain significant value through
proficiency in managing more frequent and more dramatic crude slate changes to fully
capture all the opportunities provided by the market. This may require excellence in
logistics and operations scheduling and best-in-class management of crude transitions

Other than crude optimization, refiners may also consider:

Improving operational efficiency: To improve margins, refiners could aim to achieve

greater efficiency across multiple parameters by thinking about energy efficiency,
maintenance efficiency, procurement optimization, inventory optimization, and facilities
and services cost reduction

Exploring opportunities in downward integration: Refiners could also look at

opportunities in petrochemicals to increase profitability. This may require identifying
synergies, with the primary goal of margin maximization of the integrated site

19 The growing prominence of Asian refining

Strategies adopted by refiners
Refiners have acknowledged this potentially challenging environment and are responding
by adopting different strategies, depending on the market dynamics of their specific region
(Exhibit 15).

Exhibit 15

Strategies in a challenging environment

Crude-exporting countries
1
Expanding footprint in Asia

Developing, crude-importing countries with

National oil sufficient domestic refining capacity
companies 2
or Upgrading portfolio
Companies
playing Developing, crude-importing countries with
primarily in a 3 insufficient domestic refining capacity
single major Forming alliances
market
Developed, crude-importing countries with
4 refining overcapacity
Optimizing portfolio

Private International refining majors facing regional

international 5 or global overcapacity
players Divesting assets

SOURCE: Energy Statistics IEA/OECD 2015

The growing prominence of Asian refining 20

Refiners in crude-exporting countries are expanding their footprint in
crude-importing Asian countries
Background

Large exporters of crude like Saudi Arabia, Kuwait and Iran are facing growing
competition in international markets due to the all-time high production of crude oil

Possible outlook

Players like Saudi Aramco and Kuwait Petroleum that have sufficient capacity to meet
domestic demand are redirecting investments to other markets that are still building
capacity (like Indonesia and Vietnam) to potentially secure long-term crude offtake by
these markets

Players in crude-exporting countries (like Iran) that do not have sufficient capacity to
meet domestic demand are still looking to make domestic investments (Exhibit 16)

Exhibit 16

Major players Total capacity, kbpd Average NCI

Saudi
Saudi Aramco 2,9251 6.7
Arabia

National Iranian Oil

Iran 1,795 5.4
Company

Kuwait National
Kuwait Petroleum 1,015 6.4
Company

Abu Dhabi
UAE National Oil 500 4.0
Company

1 Includes Aramco JVs in Middle East

SOURCE: McKinsey Refining Capacity Additions Database

21 The growing prominence of Asian refining

Case Study: Saudi Aramco

In response to increasing competition in global crude markets, Saudi Aramco is building

partnerships with refiners in crude-importing countries to secure long-term crude offtake.

Background Possible strategy outlook

Saudi Aramco is a vertically In response to growing competition in crude, Saudi Aramco

integrated company with more than 5
million barrels/day of refining capacity
The companys crude production is
currently near all-time highs, driven by
the Saudi governments strategic
objective to maintain market share in
light of growing production from US
shale oil producers
However, with demand not growing
fast enough to absorb the new
supply, the company is facing
increasing competition among
producers, many of which are
targeting the same markets, e.g., in
Asia Pacific
is looking to create captive markets for crude offtake by
building new partnerships with refiners in crude-importing
countries; in March 2016, the Saudi Aramco CEO
announced that the company will continue to expand its
downstream investments in China, Malaysia, India, Vietnam
and Indonesia
At the same time, Saudi Aramco is looking to diversify its
business, chasing new profit margins in petrochemicals
(SaBuCo venture in Jubail, Saudi Arabia), fuel distribution (in
partnership with Pertamina in Indonesia), as well as
renewable energy and construction

SOURCE: Saudi Aramco corporate website press releases, strategy presentations; Press search

The growing prominence of Asian refining 22

Refiners in developing, crude-importing countries with sufficient refining
capacity are investing in building more complex refineries to produce
higher-profit products
Background

Countries like India and China have developed sufficient capacity for meeting domestic
demand (Exhibit 17)

Possible outlook

State-owned companies in these markets are focused on domestic demand, and are
investing in complexity to increase profitability

P
rivate players are also investing in complexity to increase competitiveness in export
markets

Exhibit 17

Major players Total capacity, kbpd Average NCI

Sinopec 5,387 7.0

CNPC 3,939 6.3

China
Teapot refineries1 2,500 5.6

CNOOC 480 6.9

Reliance 1,400 9.5

IOCL 1,325 8.0

India
BPCL 610 7.2

Essar 400 9.0

1 Includes independent refiners with only simple distillation capacity

SOURCE: McKinsey Refining Capacity Additions Database

23 The growing prominence of Asian refining

Case Study: Indian Oil Corporation Ltd (IOCL)

IOCL is expanding and optimizing its refining and marketing operations to meet growing
domestic demand and to sustain its position as the market leader.

Background Possible strategy outlook

IOCL is one of Indias largest state-
owned companies and operates 11
of the countrys 23 refineries
Unlike private refining companies that
target the export market, IOCLs
primary mandate is to serve the
countrys growing domestic market
demand (Indian fuel consumption
grew more than 10 percent in 2015
16)
Recovering from a loss of over USD 2
billion in 201415 as a result of crude
and product inventory losses, IOCL
registered a profit of about USD 1
billion in the first quarter of 201516
on the back of increasing refining
margins and full payback of subsidies
by the government
IOCL commissioned its 15 million tonnes per annum
greenfield refinery at Paradip in February 2016, which has
increased the companys total refining capacity to about 70
million tonnes per annum
The company is also exploring brownfield capacity
expansions at its Barauni, Gujarat, Mathura and Panipat
refineries, additional capacity developments on the west
coast of India, as well as investments in petrochemicals and
natural gas verticals
Since crude imports account for more than 90 percent of
IOCLs costs, the company is making efforts to reduce
these costs by expanding its crude oil basket and
optimizing the proportion of term and spot crudes for price
advantage
IOCL is focusing on improved customer service at its
service stations. The company is strengthening its market
presence by automation of dispensing units. It has
modernized more than 85 percent of eligible A &B site retail
outlets. It aims to achieve 100 percent modernization of the
rest of fuel stations in 2017

SOURCE: IOCL corporate website press releases, strategy presentations; Press search

The growing prominence of Asian refining 24

Case Study: Reliance

Strong refining margins and significant recent investments in downstream projects have
helped make recent quarters among the most profitable in the companys history.

Background Possible strategy outlook

Reliance Industries Limited owns the
worlds biggest refining complex, in
Jamnagar, India
The company imports more than 1
million barrels of crude per day,
converting it into fuel and petchem
products, many of which are meant
for export markets
Despite a fall in revenues between
2015 and 2016 (due to lower product
prices), high margins in Reliances
refining and petrochemical
businesses helped the company
achieve its highest quarterly profits in
eight years in the first quarter of 2016
Reliance is currently implementing its largest-ever
investment plan of USD 30 billion for 20142017, with cover
plans for four large key projects in refining and
petrochemicals
Many of these projects will be commissioned soon,
including a USD 4.8 billion petcoke gasification project at
the companys Jamnagar refinery, which will convert low-
value petroleum coke into high-value syngas, allowing the
company to replace expensive LNG imports with cheaper
petcoke gas
At the same time, increasing competition among crude
suppliers is giving Reliance more options for crude sourcing
The company has been replacing some of its expensive
Latin American crude purchases with cheaper Middle
Eastern crude, and is also looking to increase purchases
from Iran (which used to be Indias second biggest oil
supplier before the imposition of economic sanctions)

SOURCE: Reliance Industries corporate website press releases, strategy presentations; Press search

25 The growing prominence of Asian refining

Case Study: Sinopec

As a result of overcapacity and low domestic demand, Sinopec has increased its product
exports and plans to invest in upgrading its refineries to produce higher-value products.

Background Possible strategy outlook

Sinopec is an integrated national oil
company (NOC), and Chinas largest
refining player, with 26 refineries and
a total capacity of 5 million
barrels/day
Between 2014 and 2015, profits from
the companys refining and chemical
businesses grew, but were not
sufficient to offset losses from
Sinopecs exploration and production
(E&P) division, causing overall
operating profits to drop by 22
percent to about RMB 57 million in
2015
While refining capacity in China
continues to grow, domestic demand
growth for products has been
slowing, driven in part by a slowdown
in industrial growth
Continued growth in Chinese refining capacity coupled with
a slowdown in demand has led to Chinese companies
shifting more of their output to export markets, especially
industrial fuels like diesel and fuel oil; Sinopec, for example,
has seen its export quotas (which are issued by the Ministry
of Commerce and the General Administration of Customs)
almost double between the first quarter of 2015 and 2016
To further improve its competitiveness in export markets,
the company plans to invest about RMB 20 billion in 2016
in its mega refineries along the coastline regions; this
investment will also help upgrade the quality of refined
products to meet rising product standards (National V by
2018 )
Additional investments are being targeted towards the
manufacture of higher-value products, for example, about
RMB 11 billion for the Zhongtian Synergetic coal chemical
project, the Jinling propylene oxide and LPG project, and
the Maoming ethylene oxide project

SOURCE: Sinopec corporate website press releases, strategy presentations; Press search

The growing prominence of Asian refining 26

Refiners in developing, crude-importing countries with insufficient
refining capacity are seeking JV partners with technical expertise to
build new capacity
Background

Fast developing markets like Indonesia do not have sufficient capacity to meet rapidly
growing domestic demand

Possible outlook

NOCs in these countries have announced a number of ongoing (and upcoming) projects
to build new capacity and increase self-sufficiency in refining, due to be commissioned
within the next five to 15 years

Due to limited budgets, however, these companies are looking to establish JV

partnerships with global players who can bring in capital as well as technical expertise

JV partners are also being sought based on their ability to bring security of crude supply,
given that these markets do not produce sufficient crude to meet domestic demand
(Exhibit 18)

Exhibit 18

Major players Total capacity, kbpd Average NCI

Indonesia Pertamina 1,025 5.5

Vietnam Petrovietnam 136 6.4

SOURCE: McKinsey Refining Capacity Additions Database

27 The growing prominence of Asian refining

Case Study: Pertamina
Pertamina has ambitious plans to upgrade its refining capacity to meet Indonesias growing
fuel deficit.
Background
Pertamina is Indonesias only major
refiner, operating six refineries with a
total capacity of about 800 thousand
barrels per day (kbpd) (or about 50
percent of the countrys demand); the
remainder of the demand is met
through imports
Many of these refineries were built
when Indonesian crude used to be
lighter and sweeter
As the countrys oil fields have
matured, a growing share of
domestic crude has had to be
exported for processing while
Pertamina has had to import crude
for its own refineries
SOURCE: Pertamina corporate website press releases, strategy presentations; Press search
The growing prominence of Asian refining
Possible strategy outlook
Pertamina has announced far-reaching plans to upgrade
existing refining capacity and build new capacity over the
next 10 to 15 years
In November 2015, the company signed a heads of
agreement with Saudi Aramco for the upgrading of its
Cilacap refinery to increase the Nelson Complexity Index
(NCI) from 3 to 9; the two companies had earlier also signed
a memorandum for similar projects in two other refineries in
Dumai and Balongan
Pertamina is also leading the development of two new
refineries in Tuban (to be developed in partnership with a JV
partner) and Bontang (planned for development using the
public-private partnership or PPP model)
Pertamina has recently announced plans to partner with
overseas refineries to process its crude entitlement in the
Middle East as a way to reduce the countrys import bill
28
Refiners in developed, crude-importing countries with refining
overcapacity are divesting domestic assets and looking for opportunities
to build capacity abroad
Background

Markets like Japan, Korea, and Taiwan are facing long-term overcapacity relative to
projected demand (Exhibit 19)

Possible outlook

Companies in these markets are shutting down unprofitable refineries, while exploring
foreign investments in other countries that are still building new refining capacity,
particularly in petrochemical projects

Exhibit 19

Major players Total capacity, kbpd Average NCI

JX Nippon Oil & Energy 1,426 8.0

IDEMITSU 555 6.2

Japan
TonenGeneral Group 556 8.6

COSMO 452 7.9

SK Energy 1,135 4.9

South
GS Caltex 775 6.2
Korea

S-Oil 669 4.9

CPC Corp., Taiwan 840 6.7

Taiwan
Formosa Petrochemical
540 6.7
Corporation

SOURCE: McKinsey Refining Capacity Additions Database

29 The growing prominence of Asian refining

Case Study: JX Nippon

As a result of falling demand and refining rationalization in Japan, JX is undergoing

consolidation at home and looking to invest in other markets in Southeast Asia.

Background Possible strategy outlook

JX Nippon Oil and Energy is Japans
largest refining company, having a
total capacity of about 1.5 million
barrels/day (40 percent of the
countrys refining capacity)
The company is facing challenging
conditions at home, with domestic
fuel demand likely to drop by 30
percent between 2015 and 2030
JX has been in consolidation mode
for a few years, having shut down its
180 thousand barrels/day Muroran
refinery in 2014 in response to the
Ministry of Economy, Trade and
Industrys ordinance to increase the
cracking-to-crude distillation capacity
ratio from 10 percent to 13 percent or
higher by 2014
In light of overcapacity at home, JX is looking to continue its
consolidation journey by merging with TonenGeneral by
April 2017; the merger is targeted to improve profitability by
over USD 800 million annually within five years
At the same time, the company has expressed its interest in
investing in refining and marketing businesses in Southeast
Asian countries like Vietnam and Indonesia
In April 2016, JX purchased an 8 percent stake in Vietnams
state-run company Petrolimex (which holds 55 percent of
the retail petroleum market share in Vietnam). JX and
Petrolimex had also previously signed a memorandum of
agreement for a 200 thousand barrel/ day refinery in Van
Phong, expected to come on-stream in 2024
JX had also previously partnered with Pertamina to upgrade
the companys refinery in Balikpapan, but dropped the plan
in January 2016 after the two companies failed to agree on
an investment estimate

SOURCE: JX Nippon corporate website press releases, strategy presentations; Press search

The growing prominence of Asian refining 30

International refining majors in Asia facing global or regional
overcapacity are shutting down less profitable refineries
Background

International majors with refining assets in Asia dominate in countries like Singapore and
Australia that do not have strong NOCs

Possible outlook

With many of these refineries being export oriented, development of new refining
capacity in their export markets is leading to growing competition among these players
and to shutdowns of older or less profitable refineries

The impact of refining overcapacity is likely to worsen as more refineries come on-stream
in markets like China, Indonesia, and Vietnam, potentially leading to even more capacity
rationalization in the medium term (Exhibit 20)

Exhibit 20

Major players & Asian footprint Total capacity 1, kbpd Average NCI

Singapore,
ExxonMobil Thailand, Australia, 875 5.8
New Zealand

Singapore, Brunei,
Shell Malaysia, 644 4.5
Philippines

Singapore,
Chevron 300 5.9
Thailand, Australia

British Australia, New 7.3

175
Petroleum Zealand

1 Represents the equity stake in the refining capacity in different Asian countries

SOURCE: McKinsey Refining Capacity Additions Database

31 The growing prominence of Asian refining

Case Study: Shell
Shell is consolidating its refining asset base in Asia to focus on fewer, more competitive
assets.
Background
Shell has a diverse set of refining
assets in Japan, Brunei, Malaysia, the
Philippines, and Singapore; most of
these countries, however, are self-
sufficient in refining capacity, setting
the stage for an increasingly
competitive market for the companys
exports in the region
In 2015, Shell suffered a setback in
Bukom Singapore (the companys
largest refinery worldwide) when a fire
in the crude distillation unit (CDU)
knocked off almost 40 percent of
refining capacity
SOURCE: Shell corporate website press releases, strategy presentations; Press search
The growing prominence of Asian refining
Possible strategy outlook
Shell is implementing a refining streamlining program,
having declared in 2014 that in the companys view far too
many of our competitors, mainly governments actually,
continue to invest in capacity that the market doesnt need
In line with this strategy, the company sold 51 percent of its
stake in Malaysias Shell Refining Company in 2016 to a
unit of Chinas Shandong Hengyuan Petrochemical
Company; more divestitures can be expected as the
company seeks to sell up to USD 30 billion of assets
globally across the value chain
At the same time, Shell is investing in upgrading its core
refining assets to make them more competitive; upgradation
of the Bukom refinery fluid catalytic cracking (FCC) was
completed in early 2015, boosting production of ethylene by
more than 20 percent
However, the 960 thousand tonne/year ethylene cracker at
Bukom was shut down in late 2015 to rectify extensive
corrosion problems; no schedule for restart has yet been
announced
32
December 2016
Copyright McKinsey & Company
Designed by Visual Aids India
www.mckinsey.com