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Game-changing refineries poised to reshape the tanker market

The ongoing global push for decarbonisation, switch towards cleaner fuel, expanding fleet of EVs and rising fuel efficiency of vehicles are likely to decelerate the oil demand in the coming years, hampering the prospects of growth in the tanker market. Moreover, the upcoming oil refineries in key crude oil-producing countries will hurt the oil trade, squeezing tone-mile demand for oil tankers. Mexico’s Olmeca oil refinery, which is scheduled to run at full capacity (340,000 bpd) by the end of 2023 and Nigeria’s Dangote refinery, which is scheduled to commence operations in October 2023 before gradually reaching its full capacity, will be the main game changers for the tanker market in the short term.

Despite being major crude oil producers and exporters, Mexico and Nigeria rely on refined products imports to meet their demand. However, the commencement of these new refineries will reduce their dependence on imports, hurting the tonnage demand for product tankers. At the same time, increased domestic crude demand and a corresponding decline in crude exports from these two countries will squeeze tonne-mile demand.

Impact on crude tanker market

Mexico exports crude oil and imports refined products as domestic refinery runs are insufficient to meet local demand. As the Olemca refinery will now consume the domestic crude oil, Mexico’s crude exports, especially to its biggest partner, the US, will decline. Most Mexican crude oil moves to the US on medium-sized Aframax tankers and only a minor share of Panamax vessels. Assuming the round voyage of Aframax tankers from the Port of Coatzacoalcos to Houston sailing at 13 knots per hour, the higher domestic refinery runs will wipe out the demand by at least six Aframaxes in a year.

Meanwhile, Nigeria- the largest crude oil exporter in West Africa- caters to European and Asian crude oil demand. As Nigerian National Petroleum Corporation (NNPC) imports refined products from Europe through swap deals in exchange for crude oil, the start of Dangote refinery in October will dent the Nigeria-Europe crude trade.

Suezmaxes will be the most affected as these vessels are used to ship Nigerian crude to Europe. If we assume a round trip from the Port of Bony (Nigeria) to Rotterdam (TD20) with 13 knots per hour speed, the demand for around 25 Suezmaxes per year will be reduced as the Mega refinery in Nigeria comes online.

Impact on the product tanker market

The two new refineries will reduce the dependence on imports, hurting tonnage demand in the product tanker market. In the case of Mexico’s Olmeca oil refinery, which plans to produce about 290,000 barrels a day of road transportation fuels (170,000 bpd of gasoline and 120,000 bpd diesel), will cut the imports by half. As US is the main supplier of refined products to Mexico, exporting around 600,000 bpd of clean products, we expect the domestic capacity expansion to squeeze Mexican imports. Moreover, new coker units in Tula and Salina Cruz, which convert residual oil into light distillation products, are expected to come online by 2024, further reducing CPP imports by the North American country. On the other hand, US refiners will have to reduce the throughput by the equivalent amount if assumed ceteris paribus condition. While the distances for this trade are not quite long, losing such a big volume will still have a noticeable impact on MR tanker demand.

Dangote refinery, on the other hand, will start operating in phases from around 350,000 bpd in October 2023 to its full capacity of 650,000 bpd by mid-2024. The plant will produce 327,000 bpd of gasoline, 244,000 bpd of diesel and 56,000 bpd of jet fuel when it runs at full capacity. The giant refinery will not only wipe out Nigeria’s refined products imports, but it will also reduce imports of other West African countries from Europe as Nigeria will be in a net surplus of diesel and jet fuel.

When assessing the repercussions of this diminished trade activity on MR tankers, those frequently plying the Europe to West Africa route it becomes evident that there would be a reduction of more than 60 MR vessels in a year once the refinery reaches its full operational capacity. This shift in demand has the potential to significantly disrupt the product tanker market. However, there will be a slight increase in intra-Africa trade.

In short, the tanker market is poised for significant transformation as refineries ramp up their operations to full capacity, squeezing tonnage demand. Countries that have lost their primary buyers may experience lower refinery runs, putting pressure on the tanker market.
Source: Drewry

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