The year 2012 was a period in which, despite weak global growth, the demand/supply equilibrium was preserved and refinery margins increased due to temporary cutbacks in refining production.
The world’s leading central banks continued to buy the bonds of struggling European economies in the year 2012 to bolster economic confidence across the world, and financial fragility was prevented from spreading due to new support mechanisms and bailout funds. The European economies slashed their expenditures to lower debt ratios and thus continued to contract, which in turn had a negative impact on economies exporting goods and services to Europe. China, whose economy has been losing steam since 2009, gradually cooled down its economy in 2012, and global market confidence started to recover. The fresh liquidity injected by developed economies found its way to the emerging nations, and the currencies of the latter started to appreciate in the final quarter of 2012. According to IMF data, developed countries grew by 1.3% and emerging countries by 5.1% in 2012.
As a result of measures adopted by the Central Bank of Turkey, the growth of the Turkish economy decelerated faster-than-expected in the first half of 2012. In this period, the fluctuations in oil and energy prices fueled the current account deficit and inflation, whereas the rising foreign exchange rates and interest rates as well as the Central Bank’s decision to pursue its tight monetary policy by raising the reserve requirement ratios and interest rate corridor applied downward pressure on domestic consumption. In turn, the fall in consumption lowered demand for imported foreign goods, thus lowering the current account deficit in the second half of the year. This outcome, combined with falling inflation in the final quarter of 2012, prompted the Central Bank to relax its tight monetary policy by lowering interest rates with a view to bolstering demand. As a result, the Turkish economy enjoyed a relative recovery in the final quarter and grew by an estimated 3% in the year 2012 as a whole.
Crude oil prices and developments in the world refining industry
The price of Brent crude oil started the year 2012 at US$ 106.55 per barrel, but closed the first quarter at US$ 123 per barrel due to escalating geopolitical tension in the petroleum producing nations of the Middle East and Africa. The global economic slowdown had brought the price down to US$ 94 per barrel by the end of the second quarter. In the third quarter of the year, new economic measures on a global level, interest rate cuts, and the decision by leading world central banks to continue quantitative easing and asset purchases increased the crude oil price to US$ 111. With rising geopolitical tensions and recurrent global economic woes cancelling each other out in the final quarter, the crude oil price capped the year at US$ 110.
As world economic growth fell by 0.7 percentage points over 2011 to bottom at 3.2% in the year 2012, world oil consumption increased by a meager 1.1% from 88.82 million barrels per day in 2011 to reach 89.84 million barrels per day in 2012 (an increase of 1.02 million barrels).
The world refining production surplus, which had peaked at 3.06 million barrels per day in the wake of the 2008 economic crisis, rapidly fell to 0.86 million barrels per day in 2010, since state-supported bailout packages bolstered demand for petroleum products. As austerity measures introduced in 2011 and 2012 to resolve the European sovereign debt crisis weakened the growth momentum, the fall in the surplus production decelerated and only regained its pre-crisis levels by year-end 2012.
Nevertheless, falling consumption owing to severe austerity measures implemented across Europe in 2012 accelerated the restructuring process in European and US refining companies and those refineries which were unable to sustain profitability either stopped operations or were transformed into trading terminals. The daily refining production capacity fell by 0.50 million barrels in 2011, followed by a noteworthy 1.49 million barrels in 2012. On the other hand, the price of heavy crude rose faster than that of light crude in 2012 due to sanctions, which in turn had a negative impact on Mediterranean refining margins. However, as global product inventories were kept low and numerous refineries stopped production, and fires devastated North and South American refineries in the third quarter and disrupted operations, the prices of gasoline, diesel and jet fuel in international markets soared. All of these factors joined together to bring the Mediterranean refining margin up from US$ 1.17 in 2011 per barrel to US$ 4.21 in 2012, representing an increase of US$ 3.04.
In the year 2013, the world economy is expected to grow by 3.5% and petroleum demand is expected to expand by 0.9% to reach 90.7 million barrels per day. Oil prices are not expected to change significantly from their 2012 level, due to the ongoing weakness of the world economy and sluggish oil demand. Nevertheless, the expected continuation of the low interest rate and quantitative easing policies by developed economies and the ongoing geopolitical risks in the Middle East could push the oil prices higher during the year. Around 1.6 million barrels per day of new capacity is expected to be added to the world refining capacity in 2013, as in the previous year. However, since less capacity than in 2012 will be driven out of the market in 2013, the global refining margin is expected to fall, albeit to a limited degree.
On the other hand, the capacity of the pipeline which carries the US WTI (West Texas Intermediate) crude oil from inner regions to coastal areas will grow in the year 2013, which in turn will bring WTI’s price advantage vis-a-vis Brent down from its level of US$ 20 as of year-end 2012. Accordingly, the capacity utilization rate of US refineries is expected to fall and gasoline importation to increase. As such, the Mediterranean market, which is currently a net importer of gasoline, will enjoy more favorable refining margins in the year 2013.
Developments in the Turkish petroleum products sector
As per EMRA’s communiqué issued in September 2011, at least 2% of gasoline consists of bioethenol produced from domestic agricultural products as of January 1, 2013. From January 1, 2014, at least 1% of diesel will likewise consist of biodiesel. In the following years, the percentage of biofuel will gradually be increased to 3%. However, since, at the present, around 70% of total biodiesel is supplied by the importation of foreign oil and oil seeds and because the resulting biodiesel price is higher than the pre-tax diesel price, bearing this in mind, the implementation will be reviewed and it is expected that the percentage of biodiesel blending will probably be reduced. In accordance with the new communiqué over which discussions continue, if implemented in 2013, from 2014 onwards, biodiesel will be blended into diesel at a ratio of three parts per thousand.
As measures adopted in the second half of 2012 to drive non-standard or non-registered products out of the market (such as the return scheme for base oils) began to take effect, Turkey’s diesel consumption expanded by 6.1% (faster than GDP growth) to reach 15.6 million tons. On the other hand, Turkish gasoline consumption decreased by 6.6% to 1.85 million tons since diesel is preferred over gasoline due to their tax advantage.
In a similar vein, fuel oil consumption in heating, various industries and electricity generation dropped by 13%, as natural gas consumption increased due to the combined effect of prices and taxes.
Tüpraş in 2012
Although the price advantage of heavy crude decreased owing to the sanctions imposed against Iran in 2012, as oil prices picked up due to global economic recovery in the second half of the year and unplanned refining disruptions hit North and South American refineries in the third quarter of 2012, refining margins started to rise. Coupled with an increase in domestic diesel and jet fuel demand, these developments brought total capacity utilization up by 3.6% to 83.5% (78.7% if only crude oil is taken into account), which resulted in 22.4 million tons of saleable products.
In spite of the rise in the price of heavy crude oil during the year, Tüpraş capitalized on the improvement in the white product price ratios in the Mediterranean market to offer competitive prices to its customers. By optimizing its production and sales in 2012, the Company managed to increase its domestic sales by 4.5% to 19.6 million tons, and exported 5.9 million tons of products; which increased overall sales by 6.5% to 25.4 million tons. Tüpraş’s diesel market share, which hovered around an average of 51.5% in 2011, increased to 53.1% in 2012 despite intense competition stemming from the importation of diesel to the Mediterranean market. Meanwhile the Company brought its gasoline market share from 91.5% to 96.4%.
Tüpraş’s net refining margin fell by US$ 1.98 per barrel from its 2011 level to US$ 3.31 per barrel in 2012, owing to the decline in the value of inventory stemming from falling crude oil and product prices in the second quarter of 2012, the relative increase in the price of heavy crude oil, and rising energy costs triggered by natural gas price increases. Thanks to product optimization efforts, efficiency-enhancing practices, and savings policies, however, Tüpraş reached a 2012 net profit of US$ 815 million meeting its targets.
Tüpraş carries out all of its operations in the framework of the HSE-Q Management System which comprises ISO 9001, ISO 14001 and OHSAS 18001 Quality, Environment and Occupational Safety Standards. The HSE-Q policy lays the foundation of Tüpraş’s health, safety and environment principles. The Company monitors changes in national and international legislation to meet health and safety standards in its operations and processes, and creates fresh standards whenever deemed necessary. In this vein, Tüpraş identified strategies and actions to be implemented to meet general or partial criteria. Within this scope, the Company developed its “New Business Leave System” and “Change Management System” based on the best practices across the world, and made improvements to amend the weak or faulty aspects of the current system in all of its refineries.
Along its principles of maximizing technical safety standards in refineries, protecting the environment with sustainable methods in all refining operations, and minimizing environmental risks, Tüpraş managed to bring its accident frequency rate down from 2.2 in 2011 to 1.5 in 2012, although the latter was a period of intensive physical investment.
Tüpraş has been implementing cost-cutting and productivity-enhancing projects since 2008 to save energy and lower emissions. In this spirit in 2012, the Company succeeded in lowering its average energy intensity index (EII) from 104.2 in 2011 to 103.4 in 2012. In the SEVAP Industrial Energy Efficiency Competition 2012 organized by the Ministry of Energy and Natural Resources, Batman Refinery came first in the SEVAP-2 category with its project entitled “Project to Increase Steam Generation Productivity”.
The Tüpraş R&D Center established in 2010 prioritized product development projects and accordingly stepped up efforts to develop high quality asphalt, biofuel and catalyst. During the year, Tüpraş R&D Center implemented a total of 11 TEYDEB- and one European Union-approved projects. In 2012, the Ministry of Energy and Natural Resources conducted a survey among 141 R&D centers operating in Turkey and ranked Tüpraş second in the advanced R&D Center category, fourth in the industry-university partnership category and sixth in the scientific publication category.
Residuum Upgrading Project and other ongoing investments
In order to increase its refining complexity and to achieve a refining configuration which can produce with zero fuel oil in parallel with the domestic demand for petroleum products, Tüpraş carries out numerous investments including the RUP. The US$ 2.4 billion RUP will transform approximately 4.2 million tons of surplus black products, whose domestic demand dwindles every year, into over 3.5 million tons of more valuable and eco-friendly white products at Euro V standards such as gasoline and diesel. Planned to be commissioned in November 2014, this investment will increase Izmit Refinery’s white product yield to above 80%. In 2012, the Company made investment expenditure of US$ 974 million, US$ 777 million of which was earmarked for the RUP. In the RUP, 89% of engineering activities, 66% of equipment manufacturing, 29% of field operations and 54% of the overall project is complete as of year-end 2012. With loan agreements worth US$ 2.1 billion signed for the RUP, Tüpraş was deemed worthy of “Deal of the Year 2011” award by Euromoney-Trade Finance Magazine and “The Best Structured Finance Deal in EMEA” at the 2011 EMEA Finance Achievement Awards. In addition, Tüpraş topped Istanbul Chamber of Industry’s list of “Turkey’s Top 500 Private Companies” and won the Export Champion Award 2011 of the Turkish Exporters Assembly in the national and industrial categories by exporting US$ 4.3 billion in products. In order to lower logistic and operational risks in crude oil and product transport and to slash costs, Tüpraş added two product tankers with capacities of of 55 thousand and 6.3 thousand tons to its fleet in 2012.
While meeting Turkey’s fuel oil demand in the safest fashion and at the highest quality, Tüpraş shall rapidly complete its investments designed to optimize sustainable profitability, add to its long list of operational and financial achievements thanks to its strong human resources, and thus continue to create value added for its shareholders, business partners and Turkey.