Earlier this month, Royal Dutch Shell PLC pulled the plug on its Convent refinery in Louisiana. Unlike many oil refineries shut in the past few years, Convent was far from obsolete: It was fairly big by US standards, and sophisticated enough to turn a wide range of crude oils into high-value fuels.
Yet Shell, the world’s third-biggest oil major, wanted to radically reduce refining capacity and could not find a buyer.
As Convent’s 700 workers found out they were out of a job, their counterparts on the other side of the Pacific were firing up a new unit at Rongsheng Petrochemical’s giant Zhejiang complex in northeast China.
It is just one of at least four projects under way in the country, totaling 1.2 million barrels a day of crude processing capacity, equivalent to the UK’s entire fleet.
The COVID-19 crisis has hastened a seismic shift in the global refining industry as demand for plastics and fuels grows in China and the rest of Asia, where economies are quickly rebounding from the pandemic.
In contrast, refineries in the US and Europe are grappling with a deeper economic crisis while the transition away from fossil fuels dims the long-term outlook for oil demand.
The US has been top of the refining pack since the start of the oil age in the mid-19th century, but China is expected to dethrone the US as early as next year, the International Energy Agency (IEA) has said.
In 1967, the year Convent opened, the US had 35 times the refining capacity of China.
The rise of China’s refining industry, combined with several large new plants in India and the Middle East, is reverberating through the global energy system.
Oil exporters are selling more crude to Asia, and less to long-standing customers in North America and Europe. As they add capacity, China’s refiners are also becoming a growing force in international markets for gasoline, diesel and other fuels.
That is even putting pressure on older plants in other parts of Asia: Shell announced this month that it would halve capacity at its Singapore refinery.
There are parallels with China’s growing dominance of the global steel industry in the early part of this century, when China built a clutch of massive, modern mills. Designed to meet burgeoning domestic demand, they also made China a force in the export market, squeezing higher-cost producers in Europe, North America and other parts of Asia, and forcing the closure of older, inefficient plants.
“China is going to put another million barrels a day or more on the table in the next few years. China will overtake the US probably in the next year or two,” said Steve Sawyer, director of refining at industry consultant Facts Global Energy.
ASIA RISING
Yet while capacity will rise is China, India and the Middle East, oil demand could take years to fully recover from the damage inflicted by the pandemic.
That would push a few million barrels a day more of refining capacity out of business, on top of a record 1.7 million barrels a day of processing capacity already mothballed this year.
More than half of these closures have been in the US, according to the IEA.
About two-thirds of European refiners are not making enough money in fuel production to cover their costs, said Hedi Grati, head of Europe-CIS refining research at IHS Markit.
Europe still needs to reduce its daily processing capacity by a further 1.7 million barrels in five years.
“There is more to come,” Sawyer said, anticipating the closure of another 2 million barrels a day of refining capacity through next year.
Chinese refining capacity has nearly tripled since the turn of the millennium as it tried to keep pace with the rapid growth of diesel and gasoline consumption.
The country’s crude processing capacity is expected by 2025 to climb to 907 million tonnes a year, or 20 million barrels per day, from 17.5 million barrels at the end of this year, China National Petroleum Corp’s Economics & Technology Research Institute has said.
India is also boosting its processing capability by more than half to 8 million barrels a day by 2025, including a new 1.2 million barrels per day mega project.
Middle Eastern producers are adding to the spree, building new units with at least two projects totaling more than 1 million barrels a day that are set to start operations next year.
PLASTIC DRIVE
One of the key drivers of new projects is growing demand for the petrochemicals used to make plastics.
More than half of the refining capacity coming on stream from last year to 2027 would be added in Asia, and 70 percent to 80 percent of this would be plastics focused, industry consultant Wood Mackenzie has said.
The popularity of integrated refineries in Asia is being driven by the region’s relatively fast economic growth rates and the fact that it is still a net importer of feedstocks such as naphtha, ethylene and propylene, as well as liquefied petroleum gas, which are used to make various types of plastic.
The US is a major supplier of naphtha and liquefied petroleum gas to Asia.
These new massive and integrated plants make life tougher for their smaller rivals, which lack their scale, flexibility to switch between fuels and ability to process dirtier, cheaper crudes.
The refineries being closed tend to be relatively small, not very sophisticated and typically built in the 1960s, said Alan Gelder, vice president of refining and oil markets at Wood Mackenzie.
Gelder expects excess capacity of about 3 million barrels a day.
“For them to survive, they will need to export more products as their regional demand falls, but unfortunately they’re not very competitive, which means they’re likely to close,” he said.
DEMAND TRAP
Global oil consumption is on track to slump by an unprecedented 8.8 million barrels a day this year, averaging 91.3 million a day, according to the IEA, which expects less than two-thirds of this lost demand to recover next year.
Some refineries were set to shutter even before the pandemic hit, as a global crude distillation capacity of about 102 million barrels a day far outweighed the demand for 84 million barrels of refined products last year, according to the IEA.
The destruction of demand due to COVID-19 pushed several refineries over the brink.
“What was expected to be a long, slow adjustment has become an abrupt shock,” IHS Markit director Rob Smith said.
Adding to the pain of refiners in the US are regulations pushing for biofuels. That encouraged some refiners to repurpose their plants to produce biofuels.
Even China might be getting ahead of itself.
Capacity additions are outpacing its demand growth. Oversupply of oil products in the country could reach 1.4 million barrels a day in 2025, China National Petroleum Corp said.
Even as new refineries are built, China’s demand growth might peak by 2025 and then slow as the country begins its long transition toward carbon neutrality.
“In an environment where the world has already got enough refining capacity, if you build more in one part of the world, you need to shut something down in another part of the world to maintain the balance,” Sawyer said.
“That’s the sort of environment that we are currently in and are likely to be in for the next four to five years at least,” he added.
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