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Middle East Refining in a Global Context: Challenges and Pitfalls

Dr. Fereidun Fesharaki, Chairman

MERTC Annual Meeting 2017

January 23 & 24, 2017

Manama, Bahrain

This presentation material contains confidential and privileged information intended solely for Meeting participants. The dissemination, distribution, or copying by any means whatsoever without FGE’s prior written consent is strictly prohibited.

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Evolution of Market Surplus: 2017 vs. 2016

0.73

-0.15

0.53

1.40

-0.2

0.3

0.8

1.3

1.8

2.3

2.8

2016 Surplus OPEC OutputGrowth

US ProductionChange

Other Non-OPECOutput

Demand Growth 2017 Surplus

mm

b/d

Oil Market Surplus (2017 vs. 2016)

0.29

0.14

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Base-Case Brent Crude Outlook

Nominal prices shown before 2016 and real prices for forecast.

20

40

60

80

100

120

140

US$

/bbl

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Asian Demand Moderating, But Still Solid Growth

-400

-200

0

200

400

600

800

1,000

1,200

1,400

2012 2013 2014 2015 2016

kb/d

Asia Pacific Main Product Demand Growth

Rest of Asia South Korea Japan India China

Total Oil Demand Growth,* kb/d

2013 2014 2015 2016 2017

China 537 489 548 330 377

India 54 246 290 333 292

Japan -174 -238 -181 -172 -113

South Korea

3

3

116 166 106

Rest of

Asia 280 88 225 312 243

Total 700 587 998 993 905

*Including other products and direct crude burn for Japan

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Refining: Good News, Bad News, Good News

• Great margins in 2015. Pull back early 2016, then rebound. Why?

• Lower crude prices help refining margins.

• Demand surge + refinery cancellations/deferrals/closures tighten balance.

• But…

• Chinese exports surging.

• Complex Mideast refineries fully onstream and condensate splitters coming.

• Overall: Picture better than it looked a few years ago…with big potential boost from IMO bunker spec change!

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Refinery Additions and Closures, 2016-2025 Asia Grassroots Refineries

Australia

Lytton (2022) -101 kb/cd

Australia

Geelong (2022) -105 kb/cd

Japan

Various (2017) -386 kb/cd

Malaysia

RAPID (2020) +279 kb/cd

Vietnam

Nghi Son (2018) +186 kb/cd

South Korea

Seosan* (2016) +102 kb/cd

* Condensate splitter

Taiwan

Dalin* (2017) +47 kb/cd

China (additions)

2016 PetroChina Yunnan 260 kb/cd 2020: Sinopec Zhanjiang 300 kb/cd Sinopec/USI Zhangzhou 320 kb/cd 2021: Sinopec Caofeidian 240 kb/cd CNPC/PDVSA Jieyang 400 kb/cd 2023: Sinopec Caojing 400 kb/cd

China (closures)

Sinopec Gaoqiao (2023) -226 kb/cd

Addition Closure

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Major Refinery Projects in the Middle East (up to 2025)

Iran 2017 PGS Phase 1 (112 kb/cd),* NIORDC PGS Phase 2 (112 kb/cd),* NIORDC 2018 PGS Phase 3 (112 kb/cd),* NIORDC 2020 Abadan upgrade (net -38 kb/cd), NIORDC 2023 Pars Condensate Splitter (112 kb/cd),* NIORDC 2022-2025 Siraf Condensate Splitter Complex (224 kb/cd - 4 out of 8),* SRIC + Private Sector

Iraq 2022 Bazian (47 kb/cd), KRG Karbala (130 kb/cd), INOC/ORA

Kuwait 2017 Shuaiba (-186 kb/cd), KNPC MA/MAA Clean Fuels Project (net +60 kb/cd), KNPC 2021 Al-Zour (572 kb/cd), KNPC

Oman 2017 Sohar (76 kb/cd), ORPIC 2023 Duqm (214 kb/cd), Oman Oil /IPIC

Saudi Arabia 2019 Jizan (372 kb/cd), Saudi Aramco

Bahrain 2021 Sitra (93 kb/cd), BAPCO

Qatar

2016 Ras Laffan II* (136 kb/cd), QP

UAE 2023 Fujairah (186 kb/cd), IPIC JV

* Condensate splitter

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Asia Pacific Net Refinery Capacity Additions

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

mm

b/cd

Other Asia

Japan

India

China

Net Additions

Incremental Refining Capacity Additions in the Asia Pacific, 2010-2020

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ME and Asia Net CDU Capacity vs. Demand Growth

(500)

0

500

1,000

1,500

2,000

kb/d

Middle East and Asia CDU Capacity vs. Demand Growth

Incremental CDU Capacity Incremental Products Demand

Note: Data for 2016-2020 is based on Firm & Likely CDU additions–weighted for risk of delays (base case)

Incremental CDU Capacity > Incremental Products Demand

Incremental CDU Capacity < Incremental Products Demand

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Middle East Refining Complexity Rising Swiftly

15%

20%

25%

30%

Cracking-to-CDU Ratio

4%

6%

8%

10%

12%

14%HDC vs. FCC/RCC-to-CDU Ratio

FCC/RCC-to-CDU Ratio HDC-to-CDU Ratio

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China’s Gasoil Exports Rise, Pressuring Regional Cracks…China’s Robust Gasoline Demand Growth Should Contain Exports

0

50

100

150

200

250

300

350

400

kb/d

China’s Gasoil Net Exports

2013 2014 2015 2016

0

50

100

150

200

250

300

350

kb/d

China’s Gasoline Net Exports

2013 2014 2015 2016

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Global Spare Capacity Eroded Away… Demand increasing, investment slowing, stalling

• There are potential projects post-2020 which may yet come to fruition (in 2021 onwards) in Asia, but it is too early to be confident.

• Less spare capacity will support refinery margins.

15

16

17

18

19

20

21

0

20

40

60

80

100

120

Spare capacity

Installed capacity/ crude run

Crude capacity, mmb/d

Africa Asia Pacific Europe FSU Latin America

Middle East North America Crude run Spare Capacity (RHS)

12

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East of Suez Net Product Balances Expected to Continue Tightening After the Wave of Middle East Refinery Projects Starts Up

-2,000

-1,500

-1,000

-500

0

kb/d

Asia

Naphtha Fuel Oil

-1,500

-1,000

-500

0

500

1,000

1,500

kb/d

Asia

Gasoline Jet/Kero Gasoil

-1,200

-1,000

-800

-600

-400

-200

0

kb/d

Naphtha Fuel Oil

East of Suez

-1,500-1,000

-5000

5001,0001,5002,000

kb/d

Gasoline Jet/Kero Gasoil

East of Suez

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2020: IMO Bunker Spec Changes Will Have a Big Impact Middle distillate and fuel oil balances will undergo significant change

• In 2020, without flue gas desulfurization, bunker fuel will be limited to 0.5% S max

‒ Vs. 3.5% S max today (typically 2.5%)

• Shippers will need to burn compliant fuel or fit flue gas scrubbers

‒ 0.1% S within ECAs, 0.5% S elsewhere ‒ LNG, LPG, methanol, etc.

• Decision to invest in scrubbers/alternate fuel will be a function of:

‒ Distillate/fuel oil price differential ‒ Cost of installation including downtime ‒ Age of ship ‒ Fuel availability ‒ Enforcement of the rules and penalties

associated with non-compliance ‒ View on future legislation; will there be a

focus on NOX, PMs? Will FGDS be a stranded investment?

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