This year's half-dozen new crude distillation units (CDUs) look set to herald the start of another refining growth boom for the region, stung by years of low margins and overcapacity after a mid-1990s expansionary phase.

Encouraged by the fattest profit margins in nearly a decade and signs that China's sizzling economy should keep demand growth strong for years, refiners across the region appear set to add at least 2.3 million bpd of primary capacity by 2010.

(For a table of refinery expansion, click [nSP289045])

"In places like China, a huge amount of new capacity will be required. We think they'll probably have to go even faster than their current plans," said Satvinder Roopra, vice president of downstream oil at industry analysts Wood Mackenzie.

Taking into account small increases in existing capacity, higher utilisation and new refining capacity for plans on the board, Asia will add some 6 million bpd of supply by 2015, Roopra says. But demand grows by twice that number.

"There is significant scope for new refineries and significant scope for new trade movements into the region," he said.

With global oil demand growth set to outpace capacity expansion again this year as European and US plants face environmental hurdles, Asian refiners are in prime position to capitalise on years of healthy profit margins.

"The tension on refining should... heighten rather than relax in 2005," SG Commodities Research said in a report. "Taking into account the direct impact on refining margins, we expect margins to improve an average 10.5 percent."

CHINA IN FOCUS

China, which had to bump up diesel and fuel oil imports to feed last year's 9.5 percent economic expansion, will at best maintain the status quo this year, with some 375,000 bpd of new crude distillation capacity, the survey showed.

Minor de-bottlenecking operations could add more than 100,000 bpd, analysts say, although this is less certain.

The International Energy Agency (IEA) has forecast growth of 360,000 bpd this year, much slower than 2004's demand surge, although most other analysts see a bigger increase leading to greater import needs, particularly for diesel.

Total Asian capacity looks set to grow more quickly than the region's oil use this year, forecast to expand by 560,000 bpd, as India's expansion easily outpaces its modest demand growth.

Capacity in India has doubled over the last six years, turning the country into a major oil products exporter, a position it looks set to consolidate this year with two new CDUs and the Essar Oil refinery adding 360,000 bpd of capacity.

But analysts caution that the projects in India are often delayed and that state refiners are grappling with costly quality upgrades to meet tighter fuel specifications.

"India is long on capacity so that's part of the rational reason for delays in some projects," said Victor Shum at consultants Purvin & Gertz in Singapore.

CLEAN FUELS FIRST, CAPACITY NEXT

In Japan and Australia, where demand growth is modest and environmental restrictions tightening, refiners have pumped money into sulphur-reducing units rather than upgrading capacity to gain from strong margins.

South Korea, India and China are adding more advanced kit this year to keep pace with the changes.

Globally some 850,000 bpd of desulphurisation and hydrotreating capacity will be installed over 2005, the IEA said, superceding investment in upgrading units in the West.

"There is clearly a need for more upgrading capacity and that situation will have to be resolved over time, but first and foremost people will have to meet tighter sulphur regulations," said the IEA's Lawrence Eagles.