Korean refiner S-Oil sees healthy margins in 2016 as demand tops capacity

By Meeyoung Cho

SEOUL, Jan 28 (Reuters) -- South Korea's S-Oil Corp. sees 2016 refining margins staying healthy and Asian refiners will benefit from growing oil demand during this year that outpaces increases in refining capacity, the company said on Thursday.

Surging refining margins for petroleum products helped boost fourth quarter 2015 net income to 80.6 billion won ($66.67 million) versus a loss of 272.2 billion won a year ago, the company said in an earnings statement to the Korea Exchange. Full year income was 676.6 billion won against a loss of 287.8 billion won a year ago.

Refining margins in 2016 will stay healthy as global incremental oil demand will outpace new refining capacity additions during the year, S-Oil, the country's third-largest refiner, said in the statement. The company cited forecasts calling for over 1 million bpd of new demand in 2016 against only 406,000 bpd of new refining.

Still, S-Oil considers major risks this year in the continuing Chinese economic slowdown and the potential for faster-than-expected US interest rate hikes that could limit oil demand, said Ju-wan Bang, S-Oil's head of finance, in a call on the earnings.

"With oil prices already low at $25-$26/bbl in terms of Dubai crude, we don't expect oil prices to make additional weakness and accordingly hurt the company's performance," said Bang.

"Yet if such risks continue long, it could slow down oil demand and worsen market margins," Bang said, referring to the Chinese economic slowdown and US rate hike factors.

S-Oil is currently maximizing gasoline output, as its margin is healthier than that of diesel, said Bang, adding that gasoline output will increase dramatically in 2018 once its expansion project is completed.

The company will add a residual fuel oil upgrading system and an olefin production system through 2018 that will produce 405,000 tpy of polypropylene, 300,000 tpy of propylene oxide, and 21,000 bpd of gasoline.

S-Oil plans to shut its No. 1 crude distillation unit (CDU) and a residue fluid catalytic cracking unit this year for maintenance, without providing exact timeline for the shutdown, it said in the statement. After the shutdown, it expects higher 18,000 bpd more diesel production.

S-Oil said on Wednesday that it had agreed to sell 1.34 trillion Korean won of oil products this year the trading arm of top shareholder Saudi Aramco, higher than sales of 1.2 trillion won contracted a year earlier.