Fuel for Thought: Oil demand optimism is bittersweet for global refining industry

The oil refining industry could struggle to return to full health over the next two years as analysts predict that the recovery in oil demand will allow new plants to begin to outpace shutdowns, bringing capacity additional to the besieged sector.

The downstream sector has undergone a metamorphosis. Over the past 18 months, a demand slump caused by COVID-19 has seen a series of North Atlantic refiners begin to go green or close and several refiners in Asia and the Middle East have suspended their plans. Low margin pressures and new, cleaner energy strategies have accentuated already emerging trends.


Limetree Bay’s recent closure of a 200,000 bpd refinery in St. Croix, US Virgin Islands, shortly after start-up, is the latest casualty.

Meanwhile, TotalEnergies is looking to turn its Grandpuits plant in France into a bio-refinery, having converted another – La Mède – a few years ago. And Phillips 66 plans its oil refinery in Rodeo, California to become the largest renewable fuel facility in the world.

But this rationalization may not be enough. Even with forecasts that global oil demand could far exceed 2019 levels by the end of next year.




Middle East-Asia Nexus

In the Middle East, Asia and even Africa, plans to build additional refining capacity remain on track, although some have been delayed by the adverse effects of the pandemic. These regions are still committed to converting crude into transportation fuels and petrochemicals in a context of continued urbanization.

S&P Global Platts Analytics estimates nearly 3 million bpd of cumulative refining capacity will return by the end of 2022 (compared to the end of 2019), noting a sharp turnaround after shutdowns outpaced additions in 2020.

“Global refining cycles are increasing toward 2019 levels, but utilization rates will lag as capacity growth at new refineries outpaces shutdowns,” Platts Analytics added.

China is leading the way in terms of net additions, which include the second phase of the Zhejiang Petroleum & Chemical complex and the expansion of the Zhenhai refinery, as well as the commissioning of the Yulong Petrochemical and Guandong Petrochemical and Shenghong Petrochemical complexes. China alone could add more than 2 million bpd over the next two years, according to some analyst estimates.

Elsewhere, the 400,000 bpd Jazan, Al-Zour and 230,000 bpd Duqm refineries in the Middle East and the 650,000 bpd Dangote refinery in Africa are set to come on stream within the next two years.

User Challenge

“Refiners who have braved the impact of the pandemic so far by reducing operating rates and closing parts of their sites will eventually have to decide whether or not they can resume normal operations,” the IEA said. in its June oil market report.

With global utilization rates expected to reach “just” 78% of capacity in 2022, there remains a “high likelihood” of further closures, he said.

Platts Analytics notes that while refining cycles have increased over the shutdowns, utilization rates are expected to remain low for the foreseeable future, particularly in Europe. Indeed, while many petroleum product inventories have returned to balance, there remains a glut of middle distillates as the recovery in transportation fuels leads to an uneven and pandemic-plagued recovery.

This balancing act will likely continue throughout the decade, with analysts suggesting that more than 7 million bpd of refining capacity could come on stream over the next five years across the Asia- Middle East, focusing in particular on growing demand for petrochemicals and putting additional pressure on older, more traditional refineries.


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Felix J. Dixon