TUNISIA - Towards Refining Over-Capacity In Asia.

India's Reliance Petroleum is among Asian refiners whose profits may shrink as increased fuel-making capacity causes a glut. The Union Bank of Switzerland (UBS) says in a report the profit from turning crude oil into fuels in Asia may fall as much as 44% in the next four years when new plants start production.

At a recent India Oil & Gas Conference in New Delhi, it was said demand for gasoline and other fuels may lag output as refiners invested in new plants. Reliance, spending US$6.1 bn to double the size of its refinery in India by 2008 and make it the world's biggest, will compete to sell fuel in the US, Europe and Asia. ConocoPhillips and Total are bidding to build export refineries in Saudi Arabia, while South Korean firms including S-Oil Corp are expanding. Capacity additions in India alone could pose a threat to future refining margins. If their output fails to reach Western markets, then this will head to the Asian market and margins will be affected.

As new plants start, refiners may lower operating rates to 89% and the average refining margin may fall to US$4.50/b in 2010 from US$8 in 2007, UBS says in its report. Surplus refining capacity in India, the Middle East and other parts of Asia may be the reason BP, Europe's largest oil company, pulled out of a proposed US$3 bn refinery project in India recently. India already has too much refining capacity.

Fuel demand in Asia-Pacific has exceeded capacity since 2003, boosting refin-ing profit. In 2005, world margins rose to a record after hurricanes in the US shut refineries and prompted imports from Europe and Asia. Jeet Bindra, president of global refining at Chevron said in New Delhi: "There has been a renaissance of sorts in refining investments. If all the refinery projects are completed, we might end up with overcapacity". Bindra said worldwide there were 500 refinery projects and 66 new refineries being planned. He said there will be 10m b/d of new refining capacity added in the next 5-10 years.

Reliance's new refinery will process 580,000 b/d of crude oil. India's refiners may add 1m b/d of capacity through 2010. China, the world's second-largest oil user after the US, may boost output by 2m b/d. Middle Eastern refiners may add 2m b/d by 2012. The expansions may force refiners in Asia to cut operating rates to 92% by 2010 from 97% in 2007, UBS said.

"India will remain long on oil products", said Ashok Sinha, chairman of Bharat Petroleum Corp, India's third-largest oil refiner, adding: "We need to look into developing our...overseas network or trading desk to sell our products".

OPEC Pricing Influence Falls: Political turmoil in the Middle East has wiped out about 2m b/d of potential oil production capacity worldwide since 2000, limiting OPEC's influence on the price. Saudi Arabia holds nearly all of the world's spare capacity of about 2m b/d. But the supply cushion would be twice as high if geo-political factors had not cut potential capacity in Iraq, Iran, Nigeria, Venezuela and Russia.

At its last ministerial meeting on March 8, OPEC agreed to keep output unchanged at near 25-year highs in a bid to bring down high prices and counter concern in the market about supply from Nigeria and Iran. Sabotage to export pipelines and problems in Iraq have kept output there over 1m b/d below the April 2004 target for post-war restoration of supply to 2.8m b/d. Iraqi output so far in 2006 has stood at about 1.75m b/d.

At its next ministerial meeting on June 1 in Caracas, OPEC is expected again to keep the output ceiling unchanged at 28m b/d through the third quarter of 2006, although Venezuela has been calling for output cuts to make sure WTI stays above $60/b. But this is potentially dangerous for OPEC as the cost of producing alternative fuels on a big scale is lower than $25/b. It will not be long before the volume of alternative fuels on the market has risen at the expense of OPEC's conventional oil. By 2010 the balance on the market will have begun to be different.

Inaugurating the 300,000 b/d Haradh field development, Saudi Petroleum & Mineral Resources Minister Ali Naimi recently reiterated the kingdom's commitment to market stability, saying: "Part of this is to maintain... not less than 1.5m b/d of surplus production capacity to meet growing demand or to cover unexpected shortfalls in supply". The full commissioning of the Haradh field takes capacity up to about 11.3m b/d.

Naimi expressed his comfort with current high oil prices, saying: "Today, we see prices at a level where everyone benefits and the consumer is not harmed". He said he was unconcerned about rising global stock levels, adding: "In these somewhat tense and uncertain times, it is only logical for consuming countries to build stocks. In normal situations, very high stocks would have a depressing effect on prices, but these are not normal times".

BP is spearheading Asia's latest attempt to develop a gasoline swaps market to improve the region's hedging options. Reuters on March 25 quoted a BP source as saying four or five counterparties had traded 92-octane grade gasoline swaps in 50,000-barrel clips in February. Deals include contracts from the front-month April out to September.

Reuters quoted its BP source as saying: "We think the market needs a tool to manage its gasoline risk that is better correlated than naphtha or Brent crude, which are currently the two alternatives. It's a view that Asian gasoline values will link more to the other markets of the world than that happened in the past".