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ASIA REFINED PRODUCT MARKET

Grace Lee – Senior Analyst

Matthew Chew – Senior Analyst

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2

INTRODUCING PLATTS ANALYTICS

• A new division in Platts which delivers insight on what drives

supply and demand and how that impacts prices

• Builds on 100 years of expertise in price assessments and news

and analysis

• Capabilities developed internally and through the integration of

Bentek Energy, Eclipse Energy and PIRA Energy

• Does not produce benchmarks, is not involved in price

assessments

• Initial Asian offering: China Oil Analytics

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AGENDA

• Asian Refined Product Overview

• China – Regulatory Risks in the Horizon

• Southeast Asian Buyers – Indonesia, Vietnam

• India as the New Growth Engine

• Key Refining Hotspots

• Gasoline vs. Diesel

• Outlook for Asian Refining Margins

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Private & Confidential 4

CONSUMERISM FUELS ASIA OIL DEMAND GROWTH

-400

-200

0

200

400

600

800

1,000

1,200

1,400

2011 2012 2013 2014 2015 2016

b/d

KEY OIL PRODUCTS DEMAND GROWTH

LPG Naphtha Gasoline Diesel Kerosene Fuel Oil

Source: APPEA, NBS, China GAC, PPAC, KNOC, METI, BOE, EPPO, Handbook of Energy and Economic Statistics

Australia

China

India

Indonesia

Japan

South Korea

Singapore

Taiwan

Thailand

Pakistan

Philippines Vietnam

y = 0.9168x + 0.008 R² = 0.3653

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

20

16 K

ey

Oil

Pro

du

cts

De

ma

nd

Gro

wth

(%

)

2016 GDP Growth Rate (%)

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Private & Confidential 5

RECORD CRUDE RUNS IN 2016

• Crude runs of key Asian refineries grew to a new high despite closures in Taiwan, Japan

• Fewer refinery turnarounds, in part due to better straight-run profits and still robust cracking margins

• Heavier turnarounds in 2017 due to build up of “maintenance”

• Independent refiners in China allowed to process imported crude

• Start up of Paradip refinery in India as other refineries raised runs

• Another 800-900 kbpd of refinery capacity will commence operations

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Private & Confidential 6

PRODUCT CRACKS & TIME SPREADS

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Naphtha Gasoline Diesel Kerosene Fuel Oil

$/b

SINGAPORE PRODUCT CRACKS

2014 2015 2016 2017 Feb YTD

Source: Platts Analytics

-0.8

-0.4

0.0

0.4

0.8

1.2

Naphtha Gasoline Diesel Kerosene Fuel Oil

$/b

SINGAPORE PRODUCT M1-M2 TIME SPREADS

2014 2015 2016 2017 Feb YTD

Source: Platts Analytics

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Private & Confidential 7

GASOLINE: CHINA & INDONESIA

30

32

34

36

38

40

42

44

46

48

50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

barrels

Mil

lio

n

AGGREGATE GASOLINE STOCKS IN KEY ASIA REGIONS

2013 2014 2015 2016

Source: IE Singapore, China OGP, METI, KNOC, APPEA

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

2012 2013 2014 2015 2016 2017

kbpd SINGAPORE GASOLINE IMPORTS BY COUNTRY

China India Taiwan S KoreaJapan Malaysia Others % China

Source: IE Singapore

200

240

280

320

360

2014 2015 2016

kbpd INDONESIA GASOLINE IMPORTS

Source: BPS

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Private & Confidential 8

CHINA: POLICIES AND REGULATIONS

• Government reforms for the oil sector post leadership reshuffle

• GDP growth expected to slow to 6.5%, with debt, currency as key macro risks

• Current state means consumer fuels, including gasoline, LPG, naphtha, jet fuel continues to increase although growth rates are forecasted to slow

• Diesel demand expected to fall further but note of pick up in industrial activity at the end of 2016

• Fuel demand plunged last year as independent refiners switch to crude, but replacements have likely peaked

-250

-150

-50

50

150

250

350

Gasoline Gasoil Jet LPG FO Naphtha

kbpd CHINA APPARENT OIL DEMAND GROWTH

2016 2017ESource: NBS, GAC

2014 2015 2016

GDP Growth (%) 7.30 6.90 6.70

CNY / USD Exchange Rate (Avg) 6.14 6.23 6.64

Li Ke Qiang Index (%) 5.76 2.76 7.18

Steel, Coal, Cement Production (Mn Tons) 7,173 6,899 6,575

Automobile Sales (Mn) 23.49 24.56 27.94

Ethylene Production (Mn Tons) 17.04 17.15 17.81

Source: NBS

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Private & Confidential 9

INDONESIA: PROGRESS ON REFINING

• Largest regional importer of gasoline and third largest buyer of gasoil

• Economic growth, large population and supportive demographics underpin oil demand growth of 2-3%

• Oil demand > supply by 600 kbd

• Refining Development Master reinvigorated as Pertamina makes progress on refinery upgrades

• Expect new refinery additions from 2021 to lower gasoline imports by 12%, with diesel inflows insignificant

0

300

600

900

2013 2014 2015 2016

000 b/d

INDONESIA OIL PRODUCT IMPORTS

Gasoline Diesel LPG Kerosene Fuel OilSource: BPS

2014 2015 2016 2017

Population 252 255 259 262

GDP Growth (%) 5.0 4.9 5.0 5.3

Inflation (%) 6.40 6.36 3.66 4.15

Current Account (% GDP) -3.09 -2.06 -2.26 -2.33

Source: IMF, Statistics Indonesia

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Indonesia 2014 2015 2016 2017

Population 91 92 93 94

GDP Growth (%) 6.0 6.7 6.2 6.2

Inflation (%) 4.09 0.63 2.05 3.65

Current Account (% GDP) 5.12 0.47 0.38 0.11

Source: IMF

Private & Confidential 10

VIETNAM: RISING CAPACITY

• Second largest importer of gasoil, overtaking Indonesia; also a major gasoline buyer

• Economic growth of 6-7%, supported by manufacturing growth

• Nghi Son refinery to commence operations in 4Q may see country becoming self sufficient in gasoline

• Jet fuel and diesel imports could reduce by 70% and 40%

• Bound by ASEAN Free-Trade Agreements, which should support imports from member countries and states with ASEAN trade pacts

0

70

140

210

280

350

2014 2015 2016

000 b/d VIETNAM OIL PRODUCT IMPORTS

Gasoline Diesel LPG Kerosene Fuel Oil

Source: Vietnam Customs

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INDIA: ASIA’S NEW GROWTH ENGINE

• Oil product demand up by 10.2% in 2016 led by LPG (11%), gasoline (12%) and gasoil (5.4%)

• Gradual deregulation of oil products with targeted subsidies (kerosene, LPG)

• Government-led infrastructure projects and initiative to raise manufacturing’s share in GDP

• Demonetization policy not expected to impact oil demand long term

• Improved income heralds higher demand for air travel

2014 2015 2016 2017F

Population (million) 1,276 1,293 1,310 1,327

GDP Growth (%) 7.2 7.6 7.6 7.6

GDP Per Capita (US$) 1,601 1,604 1,719 1,852

Oil Demand Growth (%) 3.4 8.4 10.2 6.8

Source: IMF, PPAC, Platts

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INDIA: KEY DEVELOPMENTS IN REFINING AND PETROCHEMICALS

Paradip: 300 kb/d refinery commissioned in early 2016 with 700 kTa polypropylene plant to be completed by end 2017

Haldia: 35 kb/d delayed coker unit in existing 150kbd refinery to be commissioned by end 2017

Kochi: Expansion of 200 kb/d refinery to 300 kb/d to be completed in early 2018

Bathinda: Expansion of 180 kb/d refinery to 225 kb/d to be completed in mid-2017

Jamnagar: Expansion of 1.24 million b/d refining and petrochemical complex to be completed by end 2017

Chennai: Residue upgrading project at existing 200 kb/d refinery to be completed by end 2017

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KEY ASIAN REFINING HOTSPOTS

(+) India: Paradip

ramps up, Kochi will

be expanded and

upgraded in 2017; will

domestic demand

keep up or are exports

set to rise?

(+) Indonesia:

Progress on new

expansions, but

hurdles remain for

new greenfield

capacity

(-) Australia:

Closures halted due

to rebound in

refining margins

and mining activity

(-) Japan: Closures and

consolidation amidst

ongoing structural decline in

demand

(+) Vietnam: Nghi

Son to start in

3Q17, reducing

import

requirements

(+) China: Continues

to build capacity in

2017; independents

denied product export

quotas. Will excess

capacity be unleased

on the export market

as demand slows?

(+) Malaysia:

RAPID scheduled for

2019, potentially shifting

net balances significantly

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GROWTH IN GASOLINE DEFICIT SLOWS; GASOIL SURPLUS SHRINKS

• Surplus expected to fall in 2017 on reduction in gasoil yield and heavier maintenance season

• Continued recovery in China’s manufacturing sector could provide potential upside to regional balance

• Gasoline demand growth expected to slow down from 5.5% in 2016 to 3.8% in 2017

• New refineries and capacity expansions continue to focus on light distillates production

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GASOIL CRACKS RECOVER

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GASOIL HOTSPOTS IN 2017

Thailand And Vietnam

China

India

Japan

Australia

Korea

Malaysia and Singapore

Indonesia

Taiwan

Indonesia and Australia: Robust mining activity on stable coal prices

Japan: Structural decline to continue despite slight pick up in industrial activities

South Korea: Fuel diversification – LPG fueled taxis and increasing popularity of diesel cars

Thailand and Vietnam: Severity of monsoon season on irrigation demand

India: Impact of demonetization policy on industrial activity and infrastructure development

China: Economic restructuring and consolidation in mining and steel sectors

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SUMMARY

• Demand: As China slows, India has taken up the baton as the key engine of demand growth, but what would be the dampening effect of demonetization?

• Supply: Increase in refining run rates to slow in 2017 after record runs in 2016 on heavier maintenance season and Japan consolidation

• Refining margins expected to remain supported in 2017, but can they withstand the arrival of new capacities further out?

• South East Asia has been the key import market in Asia, but will this remain the case post 2020?

-200

-100

0

100

200

300

400

500

LPG Naphtha Gasoline Jet-Kero Gasoil Fuel Oil

ASIA PACIFIC OIL PRODUCT Y-O-Y DEMAND GROWTH

2014 2015 2016 2017 E

Source: Various Country Statistics, Platts

000 b/d

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THE END

Thank You graceyn.lee@spglobal.com

matthew.chew@spglobal.com