[Plantagenet]

$this->bbcode_second_pass_quote('', 'i')nterest from state-backed companies from…Asian countries, whose priority is to guarantee secure energy supplies rather than shareholder returns, make assets…increasingly unaffordable.”

[seahorse3]

It seems that North Dakota building its own small refinery is analagous to NOC taking over production and refining.

[ROCKMAN]

Seahorse - Yep...though on a much smaller scale obviously. But the same deal: making your own is better than buying it from someone else.

[Plantagenet]

We've got two little oil refineries here in central Alaska, taking a little oil out of the Trans-Alaska pipeline before it all gets shipped off to those fuel wasters in the lower 48.

Its nice to know if the rest of the world goes to heck, we could pump our own oil and refine our own gasoline---we're almost self sufficient here in Alaska except for one little detail---food.


cute little Alaskan oil refinery

[Plantagenet]

$this->bbcode_second_pass_quote('pstarr', '')$this->bbcode_second_pass_quote('Plantagenet', 'I')ts nice to know if the rest of the world goes to heck, we could pump our own oil and refine our own gasoline---we're almost self sufficient here in Alaska except for one little detail---food.

[ROCKMAN]

More future oil exports removed from the market place. And this time not by China.

A subsidiary of Azerbaijan's state oil company SOCAR, has signed an agreement with a consortium that intends to build the Star refinery worth $4 billion in Turkey. The consortium consists of the Spain-based company Tecnicas Reunidas, Italian Saipem, South Korean GS Engineering & Construction and Japan's Itochu.

The Star refinery's processing capacity is expected to be 10 million tons of oil and it will be capable of refining such oil grades as Azeri Light, Kirkuk and Urals. Azerbaijan and SOCAR will be the largest direct investor in Turkey's history with their current and future projects reaching $17 billion. SOCAR is one of the world's most well-established oil companies.

[ROCKMAN]

Pstarr – “Why do you consider the oil to be out of the market?” Glad you asked. I’ve been wondering if folks understand this potential huge change in the oil marketing dynamic. Notice I’m talking primarily about the oil market and not the refined product market. More on products at the end.

Look at what I consider the poster child for this change: Saudi Arabia and their deal with the Chinese on that 400,000 bopd plant they are about to build on the Red Sea. The KSA will pay for and own a large portion of the plant. KSA is going to supply that refinery for many decades with oil it would have otherwise put on the open market for sale. So let’s say oil gets really short and a foreign refiner is willing to pay whatever it takes to get that oil from the KSA. How much would they have to pay? Remember the KSA has invested $billions in that plant. They did so by constructing a long term supply contract with China that has also invested $billions. They are converting that oil to refined products for which they are getting paid more. So that foreign refiner will have to give the KSA/Chinese the same profit they would get by selling the refined product. Which, presumably, would be the profit the foreign refiner would get. So logic would dictate that this refiner would have to give up their profit margin to get that oil.

Combined with the contractual terms with China do you see much chance of that happening? I don’t. I see very little chance of those 400,000 bopd being offered for sale in the open market for decades into the future. And this doesn’t take into account the oil China and other NOC’s own in the ground. China has plans to build the largest refinery on the continent in South Africa…a country with an insignificant amount of oil production. But just down the coast from Angola where China owns a significant piece of offshore oil fields. China will build the largest refinery ever in Egypt…another country with insignificant oil production. A country sitting right next door to Libya with a significant oil production base and future. And China has announced plans to help Brazil expand their refinery infrastructure. Brazil: a country many expect to become a major OIL exporter thanks to their DW oil discoveries. Why would a country, with the 6th largest economy on the planet, care about converting their oil to products that should rightfully be used to support the US economy? Why wouldn't they just ship that commodity that is becoming increasing more expensive and difficult to find to the US and other nations? And then there's National Bank of China funding a huge new refinery in BC to process Canadian oil and production and ship it to the west coast where those products will be loaded on to tankers. Tankers that could sail anywhere in the world. Isn't all that Canadian oil suppose to be exported to the US?

Time for folks to start connecting the dots.

And now those refined products coming out of the KSA/Chinese refinery on the Red Sea. Both countries are free to sell their share to whoever they want. Of course, both countries are net importers of refined products. That doesn’t necessarily mean they might not sell to other buyers…depends on the profit and logistics. But when the day comes that product supplies get tighter can you envision either country selling what the own instead of using it to support their economic stability? The Chinese and others are investing 100’s of $billions in refineries around the world when we currently have enough capacity today to supply 100% of the need. Why would anyone make such investments if they didn't have a method of securing future oil production that is currently going to other refineries around the world?

Why?

[ROCKMAN]

pstarr – The Chinese don’t have to steal any refinery tech. What they don’t know how to do themselves can be had on the open market. Lots of those consultant companies around the world. Not exactly state secrets.

Maybe call it ELM on steroids. The exporters what to max their revenue, preserves reserves and reduce their product imports. But they need help so the Chinese show up with a fat checkbook and lots of exportable manpower. Add the Chinese obsession with obtaining access to future oil/product supplies. It really seems like a very simple, logical and predictable development of the POD. But for a variety of reasons US refiners are very handicapped and can’t even begin to compete. Of all the stories I’ve posted about this dynamic how many US companies have you seen mentioned?

[pwallmann]

Rockman - Let me see if I understand. Would you say that in the current situation if NOC's were controlling a larger portion of refined products things would be materially different? Or are you saying, as I'm understanding you, that in a future where (we assume) refineries face a dwindling supply of crude inputs, markets will not clear efficiently due to the incentive gap created by crude producers having their additional claim on the sale of refined products (via JV's)?

I guess my first question is trying to understand whether you are implying that these companies will necessarily constrain their sales to serve nationalistic purposes. ie, do you think these companies will forgo the global market and market prices to send product to domestic markets?

[ROCKMAN]

P – Different…yes. How different we can only speculate. But again consider current refinery utilization which is fairly high…typical around 90%. IOW every bbl of oil produced today has a refinery waiting for it. Now let’s just guess a number: 10 million bopd eventually going to these new refinery JV’s between the exporters and China et al. It follows that some refineries will not be getting 10 million bopd they are currently processing. It also follows that the markets supplied with the products from those refineries will lose much if not all of those products.

Maybe the exporters would ramp up production to continue to supply those original refineries in addition to the own refineries. And those old refineries can supply that much more product to the market place and thus reduce the price and thus profit margins including those from refineries just built in partnership with the oil exporters. Doesn’t make a lot of sense, does it?

I’ll guess that in the short term these new refineries JV’s will sell to buyers that will max their profit. I can easily imagine China selling all the products from their Egyptian refiner to the EU if the profit is right. I can imagine the Bank of China selling all the products they may have the call on from the new Canadian refinery they are financing in California if the profit is right. But what happens when the day comes there isn’t enough product to supply all the markets? Is China going to sell the products they control to other counties while their economy flounders?

Again, the calculus seems simple: for every bbl of oil shipped to one of these new JV refineries there will be one less bbl shipped to an existing refinery. And the market supplied by those existing refineries will lose that share of product. Maybe not a big loss for a few years but eventually it could be severe. It used to be strictly a matter of who owns the oil. Now it switches to who owns the oil AND who has control over its distribution and that of the product as well. You asked about "companies" foregoing profits. We're not talking about companies...we're talking about decisions made by the govts of other countries.

Today the US continue to buy oil much of the rest of the world can’t afford to buy. But what happens when some of that oil is no longer on the market to buy? Or more simply: if ain’t for sale you ain’t gonna be able to buy. I’m starting to feel that some folks may have a hard time envisioning a world where the US has the financial capability to buy all the oil it wants but can’t because it isn’t for sale. Because that’s what we’re really talking about IMHO.

[pwallmann]

Interesting, I find that line of thinking very persuasive. It will certainly be an interesting time. I think perhaps the most unreported story of the past few years, was the marginal consumer of oil (the effective price maker) shifting from the American consumer to the Chinese consumer (to my eye a very positive thing for humanity). This dynamic is flying under the radar as well, and some sort of "International Chinese Refining Capacity" index might be interesting with all of these JV's announced and being completed.

I'll have to let this marinade for a bit, but it seems like the implications of this shift in claims on oil production might lead to some interesting scenerios. I always thought the Chinese were using an expansion of international refining capacity as a very logical hedge on increasing oil prices (they would simply offset some of their import costs, by selling their refined products into whatever market they are operating in). But if supply constraints became tight enough, having actual claims on crude via JV's could proove to be extremely important.

[pwallmann]

Rockman, I should rephase my original first question in the interest of clarity: is the crux of your argument the JV nature of these deals? Ie. if the Chinese were simply popping up refineries all over the place without tying in a local producer, would the same issues arise (that China is controlling the refined output)? I agree that since our current refining capacity is sufficient and since I think the general sense is that we're unlikely to see a huge upswing in crude prodcution, this would seem uneconomical. However, they'd just be a price taker like most pubco's operating refineries.

[ROCKMAN]

pw – Despite the communist origins I think the Chinese have a firm handle on the free market. They want to expand. Expansion requires capital. Getting into refining may be a simple multilevel ops. Yes…make a profit. Yes…utilize their capital, manpower and political influence. But also get control of more oil than they could do by buying it in the ground. And when it benefits them more to utilize the products in their homeland than to sell it on the open market they will. Another option just occurred to me: sell the product but not on the open market. Consider a scenario where China is trying to influence a foreign govt to take some actions (or inactions) that benefits China in some manner. And the economy of that foreign govt is suffering from a lack of access to hydrocarbons. That’s potentially a huge leverage.

And yes: it’s the JV aspect that has the huge impact. I’m sure the KSA would have been glad to have the Chinese build and pay 100% of the costs for the Red Sea refinery without pulling them into a JV. Then China would have to compete with the rest of the world on a price basis for that 400,000 bopd. In the world of major capex projects it’s called a “subscription” in general terms. Be it a refinery, LNG plant, pipeline, etc. those major investments that require the input of a huge amount of commodity won’t happen if a guaranteed supply of the commodity isn’t secured in advance.

One can always try to acquire those future supplies via contracts. But contracts aren’t always honored. Consider the $billions Royal Dutch Shell spent to upgrade the Motiva refinery in Texas. This was the largest expansion of a refinery in US history. So why did they feel secure to make such an investment? Half the costs was born by the KSA. Good bet the KSA will do whatever it has to do to make sure the plant is supplied.

I’m probably more sensitive to the supply side than many here. I’ve seen more than few companies lose big time by not being able to acquire a sufficient amount of a commodity to support their operation. Sometimes lose big enough to destroy them and be forced to sell out to another company. This was a big problem for NG pipelines and utilities about 35 years ago. Companies have learned their lesson. Recently plans for a $2 billion oil p/l from west Texas to L.A. was scrapped because they couldn’t get enough subscriptions from the producers. It will probably go by rail instead.

The situation maybe even more significant then we know. China is planning to build that huge refinery in South Africa. And SA doesn’t have much oil. No word that it’s a JV with any oil exporter. But that doesn’t mean there isn’t a deal backing it up. There are the press release they want us to read and then there are the ones they don’t write.

Think of it as a hydrocarbon based symbiotic relationship. And again consider why anyone one would invest 100's of $billions in refineries for which there is currently zero demand unless they are certain of the oil input.

[pwallmann]

Rockman, Thanks alot for the insight. I look forward to seeing how this dynamic plays out.

[ROCKMAN]

p - I'll guess that we won't see anything significant happen in these quarters for at least several years. It's going to take that long for the build outs to be completed. Then the key will be market demand at that time. If the global economy is doing good and demand is high some non-JV refineries might start sounding the alert as they can’t acquire enough oil to meet demand regardless of their ability to pay. OTOH if the global demand doesn't ramp up very quickly then there may be enough oil for whoever wants to buy it. But then the battle would start on the product marketing side. If oil demand isn't strong then product demand won't be either. If the new JV refineries are putting out a lot of product it could lead to a price war.

But this is where the new JV refineries might have the edge: the other refineries have to survive on just the margin from selling product. Some of the owners (the oil producers) of the JV refineries also get income from their oil sales. They could just eat the profit margin on the refining and pay themselves top $ for the oil. This is not unheard of. If you research how the major integrated US oil companies have functioned in the past, they've often let one or more segment of the company (production, refining or marketing) book the profits and another book a loss. Much depends on the tax laws in play.

And this only happens if there's a glut. If economies (like Chindia) keep growing and global production declines it may not only run prices up but initiate that preferential sale of products back to the home country of those JV partners. Then the serious geopolitics will kick into high gear IMHO.

[Plantagenet]

$this->bbcode_second_pass_quote('pwallmann', ' ')I think perhaps the most unreported story of the past few years, was the marginal consumer of oil (the effective price maker) shifting from the American consumer to the Chinese consumer (to my eye a very positive thing for humanity).