By Cameron Dueck
SINGAPORE, Dec 18 (Reuters) - Asian oil consumers are buying lighter, cleaner fuels as more people buy cars and governments try to cut urban smog, requiring large investments and a changing strategy from the region's refiners.
"Demand for transportation fuels and other products is changing as the economies in Asia grow and recover," said Victor Shum, senior partner at the Singapore offices of energy consultants Purvin & Gertz Inc.
Asia's climb up the oil quality ladder, matching evolutions in North America and Western Europe, is changing the types and quality of fuels used, forcing refiners to spend billions of dollars to extract those products from the same crude.
"All the new refiners that come up in Asia will have to have substantial cracking and conversion capability to crack fuel oil and to produce more lighter-end fuels. And the existing refineries will have to upgrade their facilities," said Hassaan Vahidy, Singapore-based analyst for energy consultants FACTS Inc.
Asia Pacific still relies on heavy, high sulphur Middle East crudes for about 80 percent of its oil needs.
Claude Mandil, executive director of the International Energy Agency, said emerging Asia would lead a global trend with about $120 billion in refinery investments needed over three decades.
"The bulk of the refining investment will come from non-OECD Asia, here," Mandil told reporters in Singapore.
SHIFTING FUEL DIET
Asia Pacific fuel oil consumption accounted for under 15 percent of all oil products in 2002, down from more than 21 percent in 1995, BP's 2003 Statistical Review of World Energy showed.
This shift is due more to rapid growth in transportation fuels -- gasoline, diesel and jet fuel -- than a decline in fuel oil, used in electricity generation and industrial plants.
"In Asia, gasoline is likely to grow and the same goes for diesel to a smaller extend. Road transportation fuels are the key to growth in the future," Vahidy said.
China has led the shift, with middle distillates, including diesel and jet fuel, holding a 33.3 percent market share in 2002, up from 29.4 percent in 1995 as more cars hit the streets.
China's car output was up 87 percent in the first nine months of 2003 from a year earlier as a booming economy made it the third-biggest car market after the United States and Japan.
Countries such as Australia, the Philippines and Sri Lanka are introducing tougher fuel specifications in 2004.
"There is no doubt that Asia will move into clean fuels, and follow the European standards, particularly for a reduction in sulphur," said Tony Anderson, general manager and chief executive officer of Singapore Refining Co, owned by Singapore Petroleum Co , ChevronTexaco Corp and BP Plc .
CAUTIOUS SPENDING
These changes are pushing Asian refiners to run primary crude distillation units at below capacity while cranking up secondary upgrading units to produce lighter fuels.
"Most of the secondary capacity is trying to be run at full capacity by most refineries," said David Kinder, general manager, strategy and portfolio - manufacturing for Royal Dutch/Shell's oil products, Asia Pacific and Middle East.
He said secondary refinery utilisation would grow by up to one percent a year, while demand for light products would grow by two to two and a half percent.
"So the balance that isn't achieved by (higher utilisation) will have to be achieved by new investments," Kinder said.
However, refining margins were weak through the late 1990s, and while profits improved in 2003, the industry remained lean.
"There will have to be more upgrading and there will have to be more hydro-treating capacity in the region. But with refiners having had five bad years and then asking for money to upgrade, it has to be a very cautious spend," SRC's Anderson said.
Japan's Kyushu Oil Co Ltd plans to spend about 10 billion yen ($85 million) to upgrade its refinery to cut fuel oil output by 20-30 percent and produce more gasoline.
Shell is nearly done installing a new hydro-desulphurisation (HDS) unit at its Geelong refinery in Australia, and has upgrded the HDS unit at its Clyde refinery.