Regional Energy Trade and Refining Industry in Northeast Asia · 1.Share of heavy fuel oil is less than 20% in Northeast ... Hydro Cracking 122 143 Reformer 157 782 ... sustainable

Regional Energy Trade and

Refining Industry in Northeast Asia

15th Northeast Asia Economic Forum

5-7 September 2006, Khabarovsk Russia

Kensuke Kanekiyo

Managing Director

The Institute of Energy Economics, Japan

The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan 財団法人財団法人財団法人財団法人日本日本日本日本能源能源能源能源経済研究所経済研究所経済研究所経済研究所 Copyright IEEJ 2006

1.1 Energy Outlook of Asia

1. Japan: Leveling off while fossil energy consumption decreases.

2. Developing Asia: More than double by 2030 as China’s presence and import dependence greatly increase.

1The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan 財団法人財団法人財団法人財団法人日本日本日本日本能源能源能源能源経済研究所経済研究所経済研究所経済研究所 Copyright IEEJ 2006

0

1000

2000

3000

4000

5000

6000

7000

8000

1971 1980 1990 2003 2010 2020 2030

Actual <= => Forecast

plus 4.3bill.toe1.1

2.7

0.40.10.0

Japan Korea China India Others

Bill.toe

Increase from 2003 to 2030

21%

13%

38%

8%

20%

23%

10%

55%

5%

7%

Other Asia

India

China

Korea

Japan

April 2006, IEEJ

Million toe

1.2 Petroleum Demand of NE Asia

2

Japan: Oil demand is on a declining trendKorea: Oil demand grows modestly as economy matures.China: Oil demand is increasing vigorously while domestic

production is leveling-off.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1965 1970 1975 1980 1985 1990 1995 2000

Million BD

Japan

Korea

Taiwan

Hong Kong

China

Japan Korea China

2004/1973 99.3% 966.4% 626.6%

2004/1995 91.4% 113.5% 197.2%

Oil Crisis

Asian currency crisis


1.3 Petroleum Outlook of NE Asia

1. Oil consumption of Northeast Asia (13 MMBD in 2005) will increase more than 5 MMBD by 2020.

2. Since China’ s domestic production would be more or less leveling off, oil import will also increase by 5 MMBD.


0

5

10

15

20

25

1990 2002 2010 2020 2030

14.1

15.4

Japan

Korea

China: Production

China: Import

Oil Import of Northeast Asia

MMBD

18.1

16.4

China 4.0

IEA 2.29.4

12.8

18.1

20.4Total Oil Demand

1.4 Refinery Capacity of NE Asia

1. Refinery Capacity (2004: 12.9 MMBD) Japan: reduced since the second oil crisis.Korea: increased substantially in the 1990s. China: increased but not catching up demand growth

2. Petroleum Product BalanceJapan and China: import position vs. Korea: export position


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1965 1970 1975 1980 1985 1990 1995 2000 2005

Million BD

Japan

Korea

Taiwan

China

Japan Korea China

2005/1995 90.5% 150.4% 164.1%

2005/1980 80.3% 427.3% 364.9%

Refining Capacity of Northeast Asia

Source: BP Statistical Review of World Energy

0

1

2

3

4

5

6

7

8

Japan Korea China

Consumption

Refining

Million BDRefining Capacity

vs. Consumption

2.1 Light-Heavy Spread of Oil Price

1. Quality differential between light and heavy crude oils may be in the range of $2-4/Bbl technically.

2. The spread expanded abnormally reflects lack of upgrading capacity.>> Cracking, desulfurization,hydro-treating etc.


0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Jan-97

May-97

Sep-97

Jan-98

May-98

Sep-98

Jan-99

May-99

Sep-99

Jan-00

May-00

Sep-00

Jan-01

May-01

Sep-01

Jan-02

May-02

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

US

Europe

Far East

Ｓｏｕｒｃｅ：　ＭＥＥＳ

$/Bbl AXL-AH Spreads (FOB, by loading month)

2.2 Era of High Energy Price

6

1. Oil price has surpassed LNG price : the gap is widening.

2. Coal price is going up, but still absolutely low.

3. Electricity tariff has decreased reflecting slow investment, though it would rebound sooner or later.


0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1990 1995 2000 2005CY

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

Crude Oil FOCNaphtha ＬＰＧＬＮＧ Coking CoalSteaming Coal EP Tariff Japan®CityGas Japan®

Crude Oil

$50/Bbl

($8.69/MMBTU)

LPG

$500/ton

($10.51/MMBTU)

Steaming Coal

$50/ton

($1.98/MMBTU)

Crude Oil

$25/Bbl

($4.34/MMBTU)

Japanese EP & City Gas Tariff

1990=100

Crude Oil

$75/Bbl

($12.84/MMBTU)

$/MMBTUImport Energy Price CIF Japan and EP and City Gas Tariff

March-2006

2.3Facts and Concerns

Facts

1. Petroleum demand of Northeast Asia will increase 5 MMBD by 2020 mainly in China, while it is declining in Japan.

2. Incremental crude oil for processing must be imported, increasing input of heavier and high sulfur crude.

3. Light-heavy price differential among crude oils has been widening, enabling expensive counter measures.

Concerns

1. Refining capacity should be expanded to satisfy demand.2. Refineries should prepare for increase of imported crude.x Deep-water ports to receive very large tankers (VLCC)x Sophisticated facilities for cracking and desulfurizationx Oil stock piling against import disruptions


3.1 Petroleum Demand Structure

8

1. IEA forecasts that petroleum demand on Northeast Asiawill increase mainly in transport sector.

2. This tendency may be enhanced by diversified energyprice increases.


0

2

4

6

8

10

12

14

16

18

1971 2002 2010 2020 2030

Non-EU

Others

Transport

Industry

Million Barrels

per day Oil Demand of Northeast Asia

39.9%

49.6%

2030/2002

Industry 133%

Transport 225%

Others 173%

Non-EU 167%

3.2 Heavy Fuel being driven out

9

LPG Gasoline Naphtha

Jet/Kero Gas oil Heavy fuel

KoreaJapan China

Middle Dist 38.6% 29.5% 44.5%

Residue 10.2% 13.9% 16.5%

1. Share of heavy fuel oil is less than 20% in Northeast Asian market.

2. With higher oil prices driven by rise of transport fuel demand, heavy fuel oil demand shall be further erodedgiving way to natural gas, coal and nuclear.

��Oil based IPPs, once burgeoned, are now burdens!


3.3 Demand Trends among Products

10

0

20

40

60

80

100

120

1965 1970 19751980 1985 1990 1995 2000

Kerosene

Jet Fuel

Fuel A

Gas Oil

Million KLMiddle Distillates

0

20

40

60

80

100

120

1965 1970 1975 1980 1985 19901995 2000

Naphtha

Gasoline

Milllion KL Light Products

Japanese oil demand is on a decliningtrend. Among others,

1. Heavy fuel oil demand is decreasingfaster. Especially, oil based IPPs are being knocked down.

2. Light products (gasoline & naphtha)demand is relatively steady.

3. Middle distillates demand isturning downward.

1) Energy conservation campaignin freighter business.

2) Inferior price competition inheating sector.


3.4 Middle Distillates being driven out

11

Higher energy price will 1. Enhance energy conservation in general. 2. Intensify price competition among fuel sources outside the transportation sector.Power (coal & nuclear) >>Natural Gas

>> LPG & Middle Distillates

0

20

40

60

80

100

120

140

160

1965 1970 1975 1980 1985 1990 1995 2000

Million TOE

LNG

Indigenous Natural GasImported LPG

Refinery LPG

Kerosene

Fuel Oil A

FOA 18.3%

Kero 16.5%

Ref LPG 3.2%

Import LPG 9.2%Indigneous 1.9%

LNG 50.9%

2004: 148.5MMTOE

Japanese Demand for Gas and Middle Distillates

Price CompetitivenessPower (Nuclear & Coal) >> LNG>> Oil & LPG


3.5 Motor Fuel Quality Regulation

12

ppm

1000 China

USA500

300

Europe150

China (3 Major Cities)Japan

100

50

Japan10 (Voluntary Control)

2000 2003 2005 2008 2010

ppm

2000China

USA500

Japan

300 Europe

150China (3 Major Cities)

100

50Japan(Voluntary Control)

10

2000 2003 2005 2008 2010

Gasoline Gas Oil

1. The Japanese oil industry realized “Sulfur Free(<10ppm)”for both gasoline and gas oil as of January 1, 2005.

2. With worsening metropolitan environment, China is goingto improve motor fuel quality abruptly.


3.6 Refining Facility: China/Japan

13

16.03.5Reforming Ratio

94.47.8Desulfurization Ratio

%

25.6

%

29.2Cracking Ratio

4622355Hydro Treating / Desulfurization

143122Hydro Cracking

782157Reformer

966892FCC

147306Coking/ Residue Cracking

170840Vacuum Distillation

1000BD

4897

1000BD

4528Topping Unit

JapanChina

1. In China, cost effective cracking methods such as FCCare mainly used.

2. Desulfurization and hydro-treating capacity is extremelysmall, which are necessary to upgrade motor fuel quality.


3.7 Challenges: Asia and Japan

14

1. Issues for Asia1) Petroleum demand in China and India will grow fast.Securing stable oil product supply is essential forsustainable development.

2) Improving motor fuel quality is urgent environmental requirement.

�� Huge investment and sophisticated technologies!!

2. Issues for Japan1) Total demand continues to declineHeavy fuel oil & IPP use: declines fastMiddle distillates: continues to decline

2) Core demand : Transport Fuel and Petrochemical Feedstock

�� Increasing idle capacities �� Thorough cracking of residue�� Excessive supply of middle distillates


4.1 Product Supply Structure

15

Cracking the residue thoroughly shall result in:

1. Decrease of LPG and Naphtha import2. Increase of Middle Distillates export3. Decrease of Heavy Fuel export for deeper processing

-20 -10 0 10 20 30 40 50 60 70 80

Fuel Oil

DGO/AFO

Jet/Kero

Naphtha

Mogas

LPGProduction Import Export

Demand declining

Japan's Product Supply Structure (2005): Million KL

Demand declining

Thorough Cracking of Residues


4.2 Refining Business Trend

16

1. Oil demand will converge to lighter products�� Noble use of conventional oil�� Reflecting price spread among energy sources subject to difficulties of producing light petroleum products(ex. GTL, Coal liquefaction, bio-diesel, etc.)

2. More FCC with advanced hydro treating will be introduced�� FCC gasoline�� Olefins for petrochemicals�� Middle distillates with wide range of property(ex. Sulfur content, Cetane number, Viscosity, etc.)

3. In the Asian market, wide range of middle distillates will become available from Japan and Korea. This will�� Mitigate investment requirements in emerging market�� Require standardized grades for smart trading�� Require segregated tanks for handling


4.3 Advanced Residue Conversion

17

Vacuum ResiduePetro Cokes

Pitch Oil

Atomos Residue LighterProducts

ElectricitySynthetic GasGTL/DME

Crude

MoreLighterProducts

Hydrogen

Vacuum Gas Oil

Topper

Vacuum

Advanced Hydro Cracking

Gasification

LPG & Naphtha

Middle distillates

RFCCHydro Treatment

Coking

Solvent Extraction

Hydrogen


4.4 Noble Use of Middle Distillates

18

1. Deep cracking of residue, reflecting petroleum product demand tendency, will produce wide range of middledistillates with different characteristics.

2. Minimizing quality give-away after costly cracking, standard specifications should be defined corresponding to quality groups.

3. Two or three standard grades may be set. For example,

1) High quality diesel for high speed motor vehicles.Extra LS (50ppm max) and high cetane number (50+)

2) Regular gas oil for low duty engines.Regular sulfur ( 500ppm max) and cetane number (45+)

3) Heating oil: Low sulfur but low cetane number


Thank youfor

your kind attention

The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan

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Documents

Regional Energy Trade and Refining Industry in Northeast Asia · 1.Share of heavy fuel oil is less than 20% in Northeast ... Hydro Cracking 122 143 Reformer 157 782 ... sustainable