Linette Lim Channel NewsAsia 30 Nov 12;
SINGAPORE: Oil refining companies are expected to see a profit squeeze.
Overcapacity in the sector and slower demand from developed economies are weighing down their margins.
Analysts said this means dimmer business prospects for refineries and other downstream oil and gas players.
OCBC Research, for instance, has an underweight call on the sector.
Global oil refining margins are under pressure, with more refining capacity being created.
This after oil refining majors expanded their capacity with new investments following the oil boom in recent years.
At the same time, oil demand growth, particularly in the developed economies, has slowed.
This is due to flagging economic growth rates, saturated car ownership rates, as well as the use of fuel-efficient technology like electric vehicles.
As a result, the world's net refining capacity is forecast to grow by 8.7 million barrels per day by 2016.
However, demand is expected to grow by seven million barrels per day, said the International Energy Agency.
Ravi Krishnaswamy, vice-president of Energy & Power Systems Practice at Frost & Sullivan (Asia-Pacific), said: "We see a massive build-up in the Eastern hemisphere, so looking at China and India, they've been rapidly expanding. India was about 193 million tonnes per annum last year. They're expected to go up to about 300 million tonnes in the next six to seven years."
Almost all of the oil refining capacity growth is from developing Asia, and analysts said this trend is likely to continue.
"It is mainly funded by national oil companies as part of a greater government initiative. Although global refining margins are relatively low compared to the past, they are less sensitive to near term market price movements, so we expect the refining capacity to continue to increase in the near future," said Low Pei Han, an analyst at OCBC Investment Research.
This is expected to push refining margins on brent crude oil marginally down next year to around US$6 per barrel.
Singapore's Economic Development Board has recently said that it has no plans to attract any more green-field refinery investments, according to an analyst report by OCBC Research.
Analysts said this means Singapore-based downstream oil and gas players such as engineering, procurement and construction companies will be under greater pressure to look overseas for business opportunities.
They added that the SGX-listed companies that could be impacted include PEC, Rotary Engineering and Ezra.
- CNA/fa
