The four oil refineries in Korea breathed a sigh of relief last year as operating profits rose to 4.731 trillion won, recovering sharply from a deficit in the preceding year.
One of the primary reasons for the huge recovery was an improved refining margin, the figures improved after oil prices detracted from refined oil prices. Last year, refined oil prices climbed with the demand for oil rising while the price of crude oil remained low.
The situation continued into this year, with refineries’ Q1 operating profit amounting to 1.854 trillion won, up 90.7 percent YoY, with S-Oil leading the rebooted operation of the oil refineries. S-Oil’s Q1 sales amounted to 3.428 trillion won and operating profit 491.4 billion won, up 14.3 percent YoY, far above the 5.4 percent in the same quarter last year, as it is up 8.9 percent in Q1 this year, the highest rise in 12 years.
Leading the oil refinery out of its darkest hours were the excellent performances of the lube oil and petrochemical sectors. Their operating profits soared 39.2 percent and 22.7 percent, respectively, in Q1 of this year compared to only 0.4 percent and -1.1 percent in the same period in the preceding year.
S-Oil was able to pick up its operation this year thanks to improved oil refining facilities at its Ulsan oil refining complex from early last year. Named "the SUPER Project,” S-Oil’s 141.7 billion won upgrading program plans to continue to invest in the program this year, with some 221.3 billion won set aside.
The company expects its refining operation will likely contract in the coming months due to falling demand for heating fuel. But many refiners in the Asia-Pacific region will suspend their operations in the second quarter for routine maintenance, which would help S-Oil maintain its margin at healthy levels.
The refiner's petrochemical business posted a 46.1 billion won operating profit, up 63 percent from the fourth quarter of 2014, thanks to declining inventory losses and improved production facilities of basic lube oil and paraxylene, which were completed in March last year.
There was a 40 percent boost for lube oil and 10 percent for paraxylene.
Profit margins widened following the expansion of the production facilities because many oil refineries around the world put off expansion plans for lube oil and paraxyline production facilities as the global economy slowed, while demand for those products rose sharply, boosting the profit margins for those oil products.
The spread for basic lube oil rose to $288 per ton from $281, while that for paraxylene rose to $385 per ton from $332. CEO Al Mahasher played a key role in S-Oil’s decision to improve its oil refining facilities, especially the basic lube oil and paraxylene.
He persuaded the board of S-Oil, whose members included officials of Aramco, the major shareholder of S-Oil on the need for the project and got the approval at the end of 2014.
"An outlook for our petrochemical operation this year has become more positive, in line with an easing of the global paraxylene (PX) supply glut. A series of recent explosions at China's paraxylene chemical plants have helped alleviate the oversupply," the spokesman said.
S-Oil's lubricating oil division earned 73 billion won in operating profit in the first quarter, up 12 percent from 65.2 billion won three months earlier, thanks to growing demand for high-quality lubricants at home and abroad. The firm expects demand will continue to head upward.
From the middle of 2014, the oil refining industry’s performance stalled due to a steep fall in crude oil prices, which fell 44 percent as the industry suffered losses from its crude oil inventory.
That amounted to some 751.1 billion won for the whole sector, with S-Oil sustaining 289.7 billion won in losses.
But the oil refinery went ahead with its improvement project for its oil refining facilities to cut oil refining costs, expand oil refining capacity including basic lube oil and petrochemical products despite the drop in global oil prices.
The real impact from the SUPER Project will be seen in 2018 when projects to upgrade low-grade oil and the construction of olefin production facilities are completed.
Moody's anticipates that the company's core refining margins will soften modestly in 2016 compared to the levels registered in 2015, but will remain meaningfully higher than the levels seen in 2013 and 2014.
Given this assumption and the sizable inventory losses in 2015 that are unlikely to be repeated in 2016, Moody's believes S-OIL's operating income will grow by about 20 percent in 2016.
_S-OIL 나세르 알 마하셔.jpg)
