Per Saket Sundria, Gerson Freitas Jr. and Rachel Graham on 11/22/2020
(Bloomberg) – Earlier this month Royal Dutch Shell Plc pulled the plug at its Convent refinery in Louisiana. Unlike many oil refineries that have closed in recent years, Convent was not obsolete: by American standards, it is quite large and sophisticated enough to turn a wide range of crude oil into high-value fuels. Still, Shell, the world’s third-largest oil company, wanted to radically reduce refining capacity and couldn’t find a buyer.
As 700 Convent workers learned they had lost their jobs, their counterparts on the other side of the Pacific fired on a new unit at the giant Zhejiang complex in the Rongsheng Petrochemical area of northeast China. It is just one of at least four ongoing projects in the country, with a total crude oil refining capacity of 1.2 million barrels per day, equivalent to the entire UK fleet.
The Covid crisis has accelerated a seismic turnaround in the global refinery industry as demand for plastics and fuels grows in China and the rest of Asia, where economies are rapidly rebounding from a pandemic. In contrast, refineries in the U.S. and Europe are facing a deeper economic crisis, while the shift from fossil fuels diminishes the long-term prospects for oil demand.
America has been at the forefront of refining since the beginning of the oil age in the mid-nineteenth century, but China will overthrow the U.S. from power as early as next year, according to the International Energy Agency. In 1967, the year the monastery opened, the United States had 35 times the refinery capacity of China.
The rise of China’s refinery industry, combined with several new new plants in India and the Middle East, resonates with the global energy system. Oil exporters sell more crude oil to Asia and less to long-term customers in North America and Europe. As they add capacity, Chinese refineries are becoming an increasing force in the international markets for gasoline, diesel and other fuels. It is even putting pressure on older plants in other parts of Asia: Shell also announced this month that it will halve the capacity of its refinery in Singapore.
There are parallels with China’s growing dominance in the global steel industry at the beginning of this century, when China built massive modern mills. Designed to meet growing domestic demand, they have also made China a force in the export market, squeezing out more expensive producers in Europe, North America and other parts of Asia and forcing it to close older, inefficient plants.
“China will put another million barrels a day or more on the table in the next few years,” Steve Sawyer, director of processing at Facts Global Energy or FGE, an industrial consultant, said in an interview. “China will overtake the United States probably in the next year or two.”
But as capacity grows in China, India and the Middle East, oil demand could take years to fully recover from the damage caused by the coronavirus. This will throw several million barrels per day more processing capacity out of business, in addition to the record 1.7 million barrels per day of processing capacity already changed this year. According to the IEA, more than half of those closures were in the United States.
Approximately two-thirds of European refineries do not make enough money on fuel production to cover their costs, said Hedi Grati, head of research at Europe-CIS refining at IHS Markit. Europe still needs to reduce its daily processing capacity by an additional 1.7 million barrels in five years.
“More is coming,” Sawyer said, predicting the closure of a new 2 million barrels a day of processing capacity by next year.
China’s refinery capacity has nearly tripled since the turn of the millennium as it has tried to keep pace with the rapid growth in diesel and gasoline consumption. The country’s oil refining capacity is expected to rise to 1 billion tons per year, or 20 million barrels per day, by 2025, from 17.5 million barrels at the end of this year, according to the China National Petroleum Corp. Institute of Economics and Technology. .
India is also strengthening its processing capabilities by more than half to 8 million barrels per day by 2025, including a new mega project of 1.2 million barrels per day. Middle Eastern manufacturers are adding an increasing reward by building new units with at least two projects totaling more than a million barrels a day that should start operating next year.
One of the key drivers of new projects is the growing demand for petrochemical products used for plastic production. More than half of the processing capacity running from 2019 to 2027 will be added to Asia, and 70% to 80% of that will be focused on plastics, according to industry consultant Wood Mackenzie.
The popularity of integrated refineries in Asia is driven by the region’s relatively rapid economic growth rates and the fact that it is still a net importer of raw materials such as oil, ethylene and propylene, as well as liquefied petroleum gas, used to produce various plastics. The United States is a major supplier of oil and LPG to Asia.
These new massive and integrated factories make life difficult for smaller rivals, who lack their scale, flexibility to switch between fuels, and the ability to process dirtier, cheaper oil.
Closing refineries tend to be relatively small, not too sophisticated, and were typically built in the 1960s, according to Alan Gelder, vice president of the refining and oil market at Wood Mackenzie. It sees a surplus capacity of about 3 million barrels per day. “To survive, they will have to export more products because their regional demand is falling, but unfortunately they are not too competitive, which means they are likely to close.”
Global oil consumption is falling 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 lost demand to recover next year.
Some refineries had to close even before the pandemic hit, as the global crude oil distillation capacity of about 102 million barrels per day far exceeded the demand of 84 million barrels of refined products in 2019, according to the IEA. The devastation of demand due to Covid-19 has pushed several refineries over the edge.
“What was expected to be a long, slow adjustment came as a sudden shock,” said Rob Smith, director at IHS Markit.
Pain in U.S. refineries is contributed by regulations that require biofuels. This has encouraged some refineries to convert their biofuel production plants.
Even China may be ahead of it. Capacity additions outpace demand growth. According to the CNPC, the oversupply of petroleum products in the country could reach 1.4 million barrels per day in 2025. Even as new refineries are being built, demand growth in China could peak by 2025 and then slow as the country begins its long transition to carbon neutrality.
“In an environment where the world already has enough processing capacity, if you’re building more in one part of the world, you have to turn something off in another part of the world to keep your balance,” Sawyer of FGE said. “We’re in that environment right now and we’ll probably be in the next 4-5 years.”