Excess refinery capacity is getting serious in China

Forecasts for excess capacity in Chinese refineries are getting serious. Utilization is expected to fall sharply due to the slowdown of economic growth, and rush of start-up of additional refineries.

Although exact number on the refinery capacity in China is not disclosed, industry sources estimate that nearly 800,000 barrels per day of new capacity was added in 2013. Accumulated refinery capacity in China at the end of 2013 could be 12.3 million bpd. Moreover, 1.1 million bpd capacity is expected to be added in 2014.

A strong increase of energy demand was anticipated in China after 2000 based on the steady economic growth in the country. Actually, Chinese petroleum consumption was accelerated in the later half of 2000s until 2010.
Despite Chinese refineries maintained their utilization rates above 80% at that time, shortages of product supply caused many social disruptions over the nation.

However, the growth of energy demand in China is slowing down rapidly after 2011.
Year-on-year growth of crude oil processing released by the National Bureau of Statistics fell from 14.5% in 2010 to 5.7% in the next year. The growth rate continued to shrink year by year to 3.4% and 2,5%, then slipped to 1.0% decrease in the first two months in 2014.

Even if gasoline production is sustained by steady car sales in the country, a growth of Chinese gasoline outputs fell to 4.9% on year in January-February in 2014 from 9.5% on year in 2013. Outputs of diesel that is the main petroleum product in China fell 2.6% from a year earlier in the first two months of 2014 after recorded a 0.3% on year tiny growth in 2013.

Despite the production is decreasing, commercial diesel inventory in China surged by 53% during the first two months in 2014, according to the Xinhua News. It suggests the current weak industrial activities in the country.

Under the such situation, many new refineries that were planned in the later half of 2000s are starting up.

Average utilization rate of Chinese refineries in 2013 was estimated at mid 70% based on official data provided by the government, but PetroChina sees much lower rate at 67%.

In 2014, the large increase of capacity and a further slump of petroleum demand may reduce the utilization rate to less than 60%.

About energy, Russia more relies on Europe

Europe's energy dependence on Russia is attracting attention again following the tension in the Crimea peninsula.

About 40% of petroleum supply in Europe comes from inside the region in 2012, while 28% is supplied from Russia. The amount of import from Russia is much bigger than 11% from the Middle East and 7.6% from North Africa. The 5.8 million barrels per day of Russian oil supply can not be replaced by the other source easily.

Around 45% of natural gas supply in Europe is also provided by local production. Russian exports are account for 23% of the natural gas supply into Europe.

Data show that dependence of petroleum is relatively larger than natural gas at moment.
Europe's petroleum dependence on Russia was not so large in 1990's, since oil production in the former Soviet Union region shrunk significantly during collapse of the Socialist Empire.

However, European countries have increased petroleum procurements from Russia due to the steady production recovery in the former Soviet region. Geopolitical tensions in the Middle East and competition of procurement with Asia and the United States in the area also encouraged Europe to increase oil imports from Russia.

About distribution of energy, Russia more relies on Europe.
In 2012, about 65% of total natural gas exports by Russia including liquefied natural gas to Asia headed to Europe.

About 67% of petroleum exports by the former Soviet Union area was shipped to Europe. As for only Russia, nearly 90% of its petroleum exports were directed to Europe.

Therefore, Russian economy could be damaged significantly, even if Europe reduces energy procurement slightly.

However, European countries cannot shift natural gas supply sources easily even if Qatar and other Middle Eastern nations already have huge LNG supply capacities. Number of LNG tankers and port unloading facilities are not enough.

On the other hand, petroleum supply could be changed relatively easily if refineries accept inconveniences by the difference of crude oil grades. In a sense, current tensions in Crimea or news reports about that seem like sales promotion for North American crude oil.

China keeps steady crude oil imports

Chinese crude oil imports in February rose 10.9% on year to 6.03 million barrels per day, according to the General Administration of Customs. The country's crude oil imports have increased by two digits from a year ago in three consecutive months.

The February's import figures were 18.1% lower than the previous month when scored the record high of 6.65 million bpd. But still remained above the 6 million bpd level.

The average crude oil imports during January and February rose 11.5% from the same period a year ago to 6.36 million bpd.

In February, China recorded the first trade deficit since March 2013 due to the slump of exports. The amount of processing trades in the month also slipped to the lowest level since February 2011. Those data suggest that industrial activities in China is slowing down.

China, however, maintains steady crude oil procurements. The country seems to be optimistic for the near term energy demand.

On the other hand, commercial crude oil stockpile in China as of the end of January had increased 3.6% from a month ago. It was the first increase since September 2013. It is also possible that the Chinese petroleum industry only began to stockpile toward the summer.

Slump in car sales depresses Indian oil demand

Crude oil processed in India fell 4.5% on year to 4.43 million barrels per day in January, according to the Ministry of Petroleum and Natural Gas. It was the fifth consecutive month of year-on-year decrease.

However, Indian electricity supply in the same month rose 5.7% from a year ago, recorded seventh months consecutive increase. Entire energy demand in the country seems not shrink.

The cause of the slowing down of petroleum demand in India is estimated to be the slump in automobile sales.

Indian passenger car sales in 2013 fell 9.6% on year to 1.81 million units due to rising fuel prices and high interest rates. It was the first annual sales decrease since 2002.

Passenger car sales in January also slipped by 7.6% from a year ago to 160,289 units, according to the Society of Indian Automobile Manufacturers. Consumers in the nation are very reluctant to buy cars.

The sluggish petroleum demand in India, however, is unlikely to depress the global crude oil market, since estimated main part of the near term growth of world petroleum demand has already shifted from the emerging market to advanced nations.

Half of Japan's thermal power capacity exceeds useful life

Japanese people are discussing about the resumption of nuclear plants after the result of last week's Tokyo gubernatorial election and the Chubu Electric Company's application for a state safety assessment of the No. 4 unit at its Hamaoka nuclear power plant.

Fears of electricity supply shortage encourage people who support the resume of nuclear units.
Kansai Electric Power Company has been spending the first high electricity demand season without nuclear units. Although the company had expected a very severe situation, its spare supply capacity has been secured enough. KEPCO's spare capacity slipped below the 8% of stable level only once since the beginning of this winter. Meanwhile, Tokyo Electric Power Company's spare capacity has dropped below 8% four times in this season. However, both two major power companies have not recorded less than 5% of spare capacity.

One of the major reasons why Japanese utility firms have avoided the critical situation is declining electricity demand in the country. Efforts of saving power and changes of industrial and social structures have cut Japan's power consumption. Electricity demand in the nation basically has shown year-on-year decrease after the severe earthquake in March 2011. The tendency is likely to continue.

On the other hand, people who request the resume of nuclear units often mention about the overuse of aging thermal power units.

Utilization rates of thermal power units by Japanese electricity companies have increased from around 40% to about 60%. It rises toward 70% during the high demand season.

Generally speaking, the 60% utilization rate is not much high. But thermal power units in Japan had been used to make up the demand gap between day time and midnight. Therefore, power companies do not have enough system to maintain high utilization rates at thermal power units for long hours.

Moreover, thermal power units that account for about half of entire thermal power generation capacity in Japan have more than 30-years age. Units that account for 20% of the total capacity have more than 40-years age. Those units seem to have exceeded their useful life.

The serious power supply shortage caused by accidents at thermal power units might be seen in Japan in the near future. Power companies need to replace their aged thermal power units urgently or to resume nuclear units.

Will US petroleum exports rise further?

Petroleum exports by the United States posted another record high in December. Petroleum exports from the country have renewed historical records frequently in the past several months.

Petroleum exports and domestic crude oil production in the U.S. show steady upward trends apparently in contrast with the shrinking of petroleum imports.

The petroleum demand in the U.S. has peaked out in mid-2000s. Meanwhile, increasing domestic crude oil production that is boosted by the shale revolution has reduced crude oil imports into the U.S. and made the region’s crude oil prices cheaper than international markets. Lower crude oil prices led U.S. petroleum products exports more competitive.

However, petroleum demand in the U.S. has been recovering since the second quarter of 2013. The U.S. Energy Information Administration forecasts that the country's petroleum demand could be firmer towards the end of 2015.

Keystone pipeline has started operation of its extension part towards the Gulf of Mexico, it is likely to ease the high crude oil stockpile level in the U.S. Midwest. The discount of the U.S. crude oil against the European benchmark is also expected to shrink.

Therefore, EIA does not predict that the U.S. will export petroleum at far above 2 million barrels per day level over the next 2 years. Further breaking record of export might not be seen in the near future.

In the U.S., the cancellation of crude oil export ban is being discussed aggressively. The country has prohibited export of domestic produced crude oil since 1975. But current supply and demand situation suggest that crude oil export might not begin significantly even if the U.S. government lifts the ban.

On the other hand, the resume of crude oil export may push U.S. crude oil prices up towards international prices. It could accelerate conversion of energy use to natural gas in the country.

China's shale gas production is surging, but...

Chinese National Energy Bureau expects that the country will produce 1.5 billion cubic meter of shale gas in 2014. It is more than 7 times amount of last year's production. China only produced 25 million cf of natural gas in 2012, but the current rapid growth of production is likely to raise the output to 6.5 bcm in 2015.

However, the growing shale gas output is still ignorable levels, since total natural gas production in China was 107 bcm in 2012. Shale gas production in China can not make up for the slowing down of total gas output.

In the United States, shale gas production already accounted for 35% of total natural gas supply in 2012.

In China, the growth of conventional gas production is not able to catch up with the increase of consumption. In addition, the growth of shale gas output is not enough. Therefore, imports are surging especially in 2010s.

But China's annual natural gas imports were equivalent to 3.2 million tonnes of liquefied natural gas in 2012. Japan imported 87 million tonnes of LNG in the same year. The huge difference suggests that severe competitions between China and Japan over the procurement of natural gas are unlikely to be seen in the near future.