Global oil refining capacity dropped for the first time in 20 years in 2020 and again in 2021, exacerbating tight markets and volatile prices for fuels such as gasoline and diesel, according to a new report by the International Energy Forum (IEF) and S&P Global.
The 'Oil Refining Industry Insights' report finds that global fuel markets are expected to stay tight for years as new capacity takes time to ramp up and investments are muted by demand outlooks that show global petroleum demand plateauing.
"I am concerned that investors are holding back from new refinery investments based on decarbonisation forecasts that may not be borne out in reality," said IEF Secretary General, Joseph McMonigle.
In both the short-term and medium-term, the balance for global fuel markets will be fragile, underscoring the need to maintain robust inventories and contingency plans to deal with supply disruptions, the report finds.
"The global refining industry is stretched, so unexpected disruptions have a disproportionate effect on prices. Governments urgently need to review their contingency plans to ensure they can cope with the inevitable and I believe more investment will be needed," Mr McMonigle said.
A record 3.8 million bpd of crude distillation capacity closed between 2020 and mid-2022 as the pandemic weakened margins, accelerated refinery closures, and encouraged the conversion of refineries to biofuels or distribution terminals, the report says.
Refining margins ballooned earlier in 2022 to a record US$35 - 50/bbl vs a more normal US$10/bbl. The report finds that Russia and China both have available refining capacity, but sanctions limit Russia's exports and domestic policies limit China's.
Sanctions and embargoes have displaced nearly 3 million bpd of Russian products that are not easily rerouted, and Chinese exports are down 30% from 2019 levels, as the government has prioritised domestic markets.
More than 2 million bpd in new refining capacity is scheduled to come online by the end of 2023, but history shows delays and operational challenges are to be expected.
Looking to the medium-term outlook, the report finds significant uncertainty over future demand for conventional refining capacity. Despite high margins, investors are reluctant to commit to new projects because the transition to electric vehicles (EVs) could make them stranded assets.
Passenger EV sales are forecasted in different scenarios to rise sharply as policy support continues, costs decline, and more models come to market. Plug-in vehicle sales are forecasted to grow from 6.6 million in 2021 to 35.7 million in 2030. This would replace 4 million bpd of gasoline and diesel demand by the end of the decade, and cause hydrocarbon fuels' share of the transport market to plateau by 2028, the report says.
Energy transitions and decarbonisation policies mean that the downstream sector will need to reduce yields of gasoline and diesel and increase petrochemicals, the report finds. So, investors are looking beyond the current use cases for how refineries can be repurposed for the transition.
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