According to a recent report released by the New Energy Finance (bnef) of Bloomberg, the global refining capacity will continue to expand despite the demand and price shocks caused by covid-19. By 2025, the world’s new investment in downstream refining and integrated chemical capacity will reach an average of US $55 billion per year, which will boost the capacity of the global crude distillation unit (CDU) by 1.7% per year.
According to the report, the integration and modernization of China’s oil refining industry, the strategic expansion of Middle East exporters and investment in the growth of chemical demand will promote the expansion of refining capacity.
China is leading the global refining and petrochemical business with plans to integrate and modernize downstream industries. To address the problem of fuel surplus and shortage of petrochemicals, these integrated projects will aim to extract more petrochemicals from each barrel. The growth of large refineries will accelerate the phasing out of small independent refineries in China.
Downstream investment by major oil companies in the Middle East is driven by strategic ambitions to ensure future demand for crude oil exports and to gain a greater share of oil product margins in major growth markets. Major oil companies in the Middle East are also investing in major growth centers in the Asia Pacific region as they plan to significantly increase capacity in the region. Investment in downstream oil in low-cost and high demand growing regions such as the Middle East and India has become a strategic necessity. This is a natural hedge against the long-term risks of oil price fluctuations and oil demand in the energy transition.
In the long run, most of the capacity increase will focus on petrochemicals. The reason is that over the next five years, demand growth for chemicals is expected to outpace fuel demand growth. This trend is evident in the Asia Pacific region, where countries such as India and Indonesia are keen to reduce future dependence on chemical imports. Increased chemical production has proven to increase profitability, which encourages existing refineries to upgrade and increase chemical production.
Bnef predicts that the increase in global downstream capacity will far exceed the growth in demand for petroleum products. Assuming that all planned projects have reached the commissioning stage, the cumulative surplus of refining capacity will reach 5.2 million B / d.
With the further imbalance of downstream market, refining profit, producer profitability and operating rate will be under pressure. The covid-19 demand shock illustrates this in real time, with refining margins falling due to a sudden drop in demand for road and aviation fuels. Overcapacity will drag down downstream profitability for a long time.
Overcapacity and continued pressure on profit margins will lead to lower efficiency and higher cost refineries to cut production and possibly be forced to close. European refineries are particularly at risk as the recovery in oil demand lags behind other regions. Increasing large, efficient, complex and export-oriented projects in the Middle East and India will intensify competition in the European market.
These trends have led oil professionals to shift their strategy to refining assets. BP, for example, aims to reduce its refining output to 1.2 million B / D by 2025, 30% below the level in 2019. Shell has sold its Martinez refinery in the US and is exploring the sale of four more refineries in the US and Europe. At the same time, total is considering converting its grandpuits refinery in France into a biofuel plant after considering the sale of Lindsay refinery in the UK. As downstream competition intensifies, the high cost market is expected to be further disturbed.