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Refinery Projects Outlook 2012: ‘Cracking’ times for Eastern markets, February 29, 2012

Refinery Projects Outlook 2012: ‘Cracking’ times for Eastern markets, February 29, 2012

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Published by Gaurav Sharma
IJ report by Gaurav Sharma on refineries infrastructure finance
IJ report by Gaurav Sharma on refineries infrastructure finance

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Published by: Gaurav Sharma on Oct 01, 2012
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All content © Copyright 2012 Emap Limited, all rights reserved. 
Refinery Projects Outlook 2012: ‘Cracking’ times for 
Eastern markets
Gaurav Sharma
Refineries are key components of the petroleum products supply chain with 10 percent of the average price of retailed distillates being attributed to refining costs.However, given the wider macroeconomic climate, refinery infrastructureinvestment continues to face severe challenges in developed jurisdictions andWestern markets. Concurrently, the balance of power in this subsector of the oil & gas infrastructure market is rapidly tipping in favour of the East.
Even if refinery investment of state-owned Chinese oil & gas behemoths, which rarelyapproach the debt markets, is ignored
there is a palpable drive in emerging economieselsewhere in favour of refinery investment as they do not have to contend with overcapacityissues hounding the EU and North America.
Refineries project finance valuation 2005-2011 © Infrastructure Journal 2012
All content © Copyright 2012 Emap Limited, all rights reserved. 
For some it is a needs-based investment; for others it makes geopolitical sense as theirWestern peers holdback on investing in this subsector. The need for refined products is oftenseen superseding concerns about low refining margins, especially in the Indian subcontinentand Asia Pacific.IJ data, empirical, anecdotal evidence and direct feedback from industry participants do notfundamentally alter our view of tough times ahead for refinery infrastructure. As crackingcrude oil remains a strategic business, investing in refinery infrastructure reflects thissentiment, investor appetite and financiers' attitudes.
Examining project data: It’s not all rosy (or cosy)
According to IJ‟s current data series which commenced in 2005, investment in refinery
infrastructure via private or semi-private financing continues to remain muted; a trend whichbegan in 2008. In fact, 2011 has been the most wretched year since our journal beganrecording refinery project finance data.
Number of refinery project finance transactions 2005-2011 © Infrastructure Journal 2012
Updated figures suggest the year 2010, which saw the artificial fillip of Saudi Arabia‟s mega
Jubail refinery project (valued at US$14.04 billion) reach financial close, has been the best
year so far for refinery project finance valuation despite closing a mere two projects.However, industry pragmatists would look at 2008 which saw ten projects valued at US$9.39billion as a much better year.
All content © Copyright 2012 Emap Limited, all rights reserved. 
From there on it has been a tale of post global financial crisis woes with the market strugglingto show any semblance of a recovery and most of the growth coming from non-OECD jurisdictions. In 2009, three projects valued at US$4.79 billion reached financial close,followed by two projects including Jubail valued at US$15.04 billion in 2010, and another twoprojects valued at US$1.49 billion in 2011. By contrast, the pre-crisis years of 2005, 2006and 2007 averaged US$6.71 billion in terms of transaction valuations.
Top five refinery project finance transactions 2005-2011 (Source: Infrastructure Journal 2012)
A general market trend in favour of non-OECD project finance investment in refineries isobviously mirrored in the table of the top deals between 2005 and 2011 (above). Of the five,four are in non-OECD countries
led by Jubail Refinery (Saudi Arabia) valued at US$14.04billion which closed in 2010, followed by Guru Gobind Singh Bhatinda Refinery, India (valuedat US$4.69 billion, financial close
2007),Jamnagar 2 Refinery,India (US$4.50 billion,
financial close
2006) and Paradip refinery,India (US$2.99 billion, financial close
Only one deal from an OECD nation, which is a very recent member of the club, made it to
the top five, namely Poland‟s
billion which reached financial close in 2008.Switching from project finance to corporate finance for refinery projects does not make theinvestment scenario any better. In fact, the situation gets worse as the corporate financemarket unlike the project finance market is or rather was heavily reliant on transactions inNorth America and Europe which have steadily declined.
The year 2008, saw refinery projects‟ corporate finance valuation at US$3.09 billion followed
by a valuation of US$3.49 billion in 2009. The bulk of the investment over both years wenttowards corporate financed refinery (and ancillary) asset acquisitions. While not particularlyhealthy, the market performance for both years was acceptable to say the least
somethingwhich cannot be attributed to the two years that followed.In 2010, corporate finance valuation came in over a third lower on an annualised basis atUS$963 million followed by a massive dip to US$325 million in 2011; the latter being on theback of a solitary refinancing deal in the US
the Western Refining Refinancing whichreached financial close in March 2011.
Western capacity ‘non’ utilisation and crude margins
What haunts European and North American refinery project financiers, and has done so for awhile now, barring a brief period between 2005 and 2007, is refining overcapacity and
uncertain margins. Starting with the former, oil giant BP‟s 2011 Statistical Review of World

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