oil refinery profits fail to spark investment

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    By Stuart Penson
    LONDON (Reuters) - Oil firms are reluctant to spend money on much-needed refining capacity in case profit margins slide back to the dismal levels that kept refining in the doldrums for decades.

    As the market screams out for more capacity to satisfy ballooning demand for fuel products like diesel, oil executives say big new investments are unlikely amid doubts about the sustainability of currently healthy refining margins.

    "People say this (high margins) is a blip, that it is not going to last," said Marcel van Poecke, managing director of Dutch refiner Petroplus International B.V.

    "Everyone is skeptical, so there's no new investment," he told an oil industry conference.

    Most analysts agree it is a squeeze on refining capacity - especially to process heavy, sour crude -- and not the availability of crude itself that is holding oil prices at historically high levels.

    Earlier on Tuesday, OPEC producers agreed to hold production quotas steady but make available spare capacity if it is needed in a world market short of refined product rather than crude.

    Claude Mandil, executive director of the Paris-based International Energy Agency, described the shortage of refining capacity as a "huge problem."

    "This is the main concern," he told Reuters on the sidelines of Tuesday's conference. "There is a need for companies to be a bit bolder in investing in new capacity," he said.


    At the weekend, Qatar said it planned to build a new refinery which could come on stream by 2010, while Kuwait said it may sign a memorandum of understanding to build a plant in the United States.

    But there are no signs of a global rush to build new refineries.

    U.S. oil major Chevron Corp acknowledged the need for more capacity but said planning difficulties were holding back investment.

    "There are strong signals that more refining capacity is needed," said David J. O'Reilly, Chevron's chairman of the board and chief executive. "But the permitting process takes time. To me that is the major issue," he told the conference.

    Robert Young of consultants CRA International said the time was right to build flexible refining capacity. He said refinery operating rates were at their highest levels since 1966.

    "It's a good to time to change the habit of spendthrift investment, but who's going to lead the industry who's willing to back the refineries?"

    India's Reliance Industries, which is spending billions on expanding its refining capacity, called on the rest of the industry to stop dithering and take the plunge.

    "We are now entering a new era in refining," said P.M.S. Prasat, president and chief executive of the firm's petroleum business. "We are moving from a low margin to a high margin regime."

    Prasat said that even if his firm's optimistic projections for growth in demand for refined products proved too bullish, refineries would still keep operating at more than 90 percent of capacity.

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