When Convent’s 700 workers found they were out of work, their counterparts across the Pacific were powering up a new unit at Rongsheng Petrochemical’s giant Zhejiang complex in northeast China. It is just one of at least four ongoing projects in the country, with a total of 1.2 million barrels per day of crude processing capacity, equivalent to the entire UK fleet.
The Covid crisis has accelerated 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 rapidly recovering from the pandemic. By contrast, refineries in the US and Europe are grappling with a deeper economic crisis, while the transition from fossil fuels dampens the long-term outlook for oil demand.
The United States has been at the helm of the refining group since the beginning of the oil era in the mid-19th century, but China will dethrone the United States next year, according to the International Energy Agency. In 1967, the year Convent opened, the United States had 35 times the refining capacity of China.
The boom in China’s refining industry, combined with several large new plants in India and the Middle East, is having an impact on the global energy system. Oil exporters are selling more crude to Asia and less to old customers in North America and Europe. And as they add capacity, China’s refineries are becoming a growing force in the international markets for gasoline, diesel and other fuels. That even puts pressure on older plants in other parts of Asia: Shell also announced this month that they will cut the capacity of their Singapore refinery in half.
There are parallels to China’s growing dominance in the global steel industry at the beginning of this century, when China built a handful of massive modern mills. Designed to meet growing domestic demand, they also made China a force in the export market, putting pressure on higher-cost producers in Europe, North America, and other parts of Asia and forcing older, inefficient plants to close. .
“China is going to put another million barrels a day or more on the table in the next few years,” said Steve Sawyer, director of refining at industrial consultancy Facts Global Energy, or FGE, in an interview. “China will overtake the US probably in the next year or two.”
Asia on the rise
But while capacity will increase in China, India and the Middle East, it can take years for oil demand to fully recover from the damage inflicted by the coronavirus. That will take a few million barrels a day more refining capacity out of business, on top of a record 1.7 million barrels a day of processing capacity already suspended this year. More than half of these closures have occurred in the United States, according to the IEA.
About two-thirds of European refineries are not making enough money on fuel production to cover their costs, said Hedi Grati, Europe-CIS head of refining research at IHS Markit. Europe still needs to reduce its daily processing capacity by an additional 1.7 million barrels in five years. “There is more to come,” Sawyer said, anticipating the closure of another 2 million barrels per day of refining capacity until next year.
China’s refining capacity has nearly tripled since the turn of the millennium as it tried to keep up with the rapid growth in diesel and gasoline consumption. The country’s crude processing capacity is expected to rise to 1 billion tons a year, or 20 million barrels per day, by 2025 from 17.5 million barrels at the end of this year, according to the Institute for Research on Economics and China National Petroleum Corp. Technology.
India is also increasing its processing capacity by more than half to 8 million barrels per day by 2025, including a new 1.2 million barrels per day megaproject. Producers in the Middle East are joining the spree, building new units with at least two projects totaling more than a million barrels per day that will begin operations next year.
Driven by plastic
One of the key drivers of the new projects is the growing demand for petrochemicals that are used to make plastics. More than half of the refining capacity coming online from 2019 to 2027 will be added in Asia and 70-80% of this 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 remains a net importer of raw materials such as naphtha, ethylene and propylene, as well as liquefied petroleum gas, which is used to make various types of plastic. The United States is a major supplier of naphtha and LPG to Asia.
These massive, integrated new plants make life more difficult for their smaller rivals, who lack their scale, flexibility to switch between fuels and the ability to process dirtier and cheaper crudes.
The refineries that are closed tend to be relatively small, not very sophisticated and typically built in the 1960s, according to Alan Gelder, vice president of refining and oil markets at Wood Mackenzie. You see an excess capacity of around 3 million barrels per day. “For them to survive, they will need to export more products as their regional demand declines, but unfortunately they are not very competitive, which means they are likely to close.”
Demand trap
Global oil consumption is on track to fall into an unprecedented drop of 8.8 million barrels per day this year, averaging 91.3 million per day, according to the IEA, which expects less than two-thirds of this lost demand to be get back next year.
Some refineries were scheduled to shut down even before the pandemic hit, as a global crude distillation capacity of around 102 million barrels per day far exceeded demand for 84 million barrels of refined products in 2019, according to the IEA. The destruction of demand due to Covid-19 pushed several refineries to the brink.
“What was expected to be a long, slow adjustment has turned into an abrupt shock,” said Rob Smith, director of IHS Markit.
Adding to the pain of refineries in the United States, there are regulations that drive biofuels. That encouraged some refineries to reuse their plants to produce biofuels.
Even China may be getting ahead of itself. Capacity additions are outpacing growth in demand. An excess supply of petroleum products in the country may reach 1.4 million barrels per day in 2025, according to CNPC. Even as new refineries are being built, China’s demand growth may peak by 2025 and then slow down as the country begins its long transition to carbon neutrality.
“In an environment where the world already has enough refining capacity, if you build more in one part of the world, you need to shut down something in another part of the world to keep the balance,” said FGE’s Sawyer. kind of environment that we currently find ourselves in and are likely to find ourselves in for the next 4-5 years at least. “
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