According to a new report from S&P Global and the International Energy Forum (IEF), global markets for refined oil products are on track to remain tight into the middle of the decade, with the global downstream industry facing significant near-, medium- and long-term challenges stands. .
Global oil refining capacity fell for the first time in 20 years in 2020 and again last year, driven by pandemic-weakened margins, accelerated refinery closures and motivated switches to biofuels or distribution terminals, according to a report by Oil Refining Industry Insights, the latest week was released.
S&P Global Commodity Insights predicts that there are no quick fixes to the forces creating a tight refined oil products market today and into the future. Causes of current market conditions include headwinds from unprecedented restructuring following record refinery shutdowns in 2020-2021, to sanctions on one of the world’s largest fossil fuel exporters, to China’s strategic shift to reduce petroleum product exports. All of this is happening as owners face an uncertain future for refinery demand as the world transitions to lower-carbon energy sources.
Based on the numbers
- Refining margins for key products rose to a record $35-50/barrel in summer 2022 compared to the normal $10/barrel – underscoring the severe bottlenecks in the industry.
- More than 2 mb/d of net capacity is slated to come online by the end of 2023, but history shows that delays and teething problems could slow progress. Additionally, these are likely to be the last large fuel-focused greenfield refineries to be built, as the energy transition will limit the need for conventional refinery capacity expansion in the future.
- Russia and China are the top two countries with available refining capacity, but sanctions limit Russia’s exports and China’s domestic politics.
- High refining margins in the past led to more investment, but that’s not the case now. Expectations that the energy transition could reduce the need for refineries have deterred investment.
Additionally, due to renewable fuel policies, some refineries, particularly in the US and Europe, are choosing to become biofuel producers (using hydrotreating plants to produce renewable diesel and other means) rather than shutting down entirely. Importantly, the volumetric output of a remodeled refinery is typically much lower than when processing crude oil into fuels for transportation. Based on announced projects deemed “firm”, transitions will be accelerated from 2023-24. Conversion capacity will nearly triple by 2025, expanding from 50 kb/d in 2022 to 147 kb/d in 2025.
According to the report, downstream capital expenditures must reach $190 billion by 2030 to expand refining capacity, expand petrochemical feedstocks, and preserve existing assets. It forecasts that between 2022 and 2027 only 2.3 mb/d of global net refinery crude distillation unit (CDU) capacity will come online.
The Russia/Ukraine Influence
Russia’s invasion of Ukraine is spurring an unprecedented restructuring of the global trade in refined products, and more obstacles loom on the horizon. According to the report, the diversion of traditional exports of petroleum products from Russia is more complicated than crude oil.
- Russia is one of the largest global exporters of fuels, and before the invasion exported a total of ~2.9 mb/d of refined products, of which the EU imported 2.2 mb/d while the US imported 0.4 mb/d.
- The most likely alternative markets for Russian products, especially diesel, are Africa and Latin America.
- However, the transit time for product shipments from Russia to West Africa and Latin America is 25-30 days compared to 8 days to Europe. Already high freight rates and the threat of an insurance ban mean these deals can be uneconomical for both buyers and sellers.
In addition, an EU embargo on imports of Russian crude oil via pipelines will come into effect on December 5, 2022, and a ban on imports of refined products of Russian origin will apply from February 5, 2023. There are several exceptions to the embargo, but it will largely cut 90% of Russia’s crude oil imports and nearly all product imports.
EV penetration is accelerating, offsetting demand of 4 mb/d by 2030
Sales of passenger electric vehicles are expected to rise sharply in the coming years as policy support continues, lithium-ion battery costs fall, and more electric vehicle models hit showrooms.
- Plug-in vehicle sales are expected to increase from 6.6 million in 2021 to 35.7 in 2030. This is projected to replace 4 mb/d of gasoline and diesel demand by the end of the decade and result in hydrocarbon fuels taking a share of the transportation fuel consumption plateau by 2028.
The rocky road of the refinery
As the refining industry steers toward a less carbon-intensive future, it will be a rocky, bumpy road, in large part due to an evolving and fragmented landscape of decarbonization policies. However, the downstream industry is innovative and resilient, and there is little doubt that successful companies will be leaner, more efficient and better adapted to the evolving markets and fuels of the future.
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.