New refining capacity continues to follow demand growth to developing regions, led by the Asia-Pacific
The trend for new refinery distillation capacity to be located in developing regions continues in this Outlook. The fundamental driver is the shift in demand growth to those areas and away from industrialized regions. Assessed project additions to 2021 total 7.3 mb/d, with further capacity requirements of 12.2 mb/d by 2040, for a total of 19.5 mb/d of new capacity projected as needed by the end of the timeframe. Of this, only just over 2 mb/d is in the US & Canada, Europe, and the Russia & Caspian combined. In contrast, 9.5 mb/d is projected for the Asia-Pacific region, 3.4 mb/d for the Middle East and the remaining 4.6 mb/d is split between Africa and Latin America.
The crude oil price drop has led to significant project deferrals yet excess medium-term capacity remains an issue
The recent crude oil price drop has had the effect of deferring some projects and related investments from the 2016–2018 period to the 2019–2021 timeframe. Nevertheless, assuming that the projects will materialize as assessed, allowing for some minor capacity ‘creep’ and for realistic maximum utilizations, total incremental potential refinery output by 2021 is 7.4 mb/d. This compares to an expected net incremental demand for refined products of 5.2 mb/d. Thus, the 2019–2021 period looks to be the one where an excess of refining capacity emerges, with implications for increased competition for product markets and, hence, for refinery margins and potential closures. By 2021, China looks to be in balance on incremental projects versus refinery demand, while Africa and Other Asia are in deficit, and all other regions are in surplus.
Slowing demand growth and rising non-crude supplies see the pace of required refinery capacity additions dropping inexorably in the long-term
The progressive reduction in demand growth rates over the long-term, together with increases in the supply of non-crude streams, steadily reduces the level of required refinery additions. Current assessed projects of 7.3 mb/d expected to be online by 2021 comprise nearly 40% of the total additions projected as needed to 2040. From a current pace of around 1.4 mb/d p.a. based on projects and creep, required additions drop to around 0.6 mb/d p.a. post-2025, and to 0.4 p.a. mb/d post-2035. Given the need for continuing closures, the long-term prospects are for an era in which there could be no net increase in global refining capacity, and even the possibility of a net shrinkage.
Capacity rationalization is a long-term requirement
Some 2.5 mb/d of net refinery closures are expected by 2020 and an estimated 4 mb/d by 2025. Added to this, further closures to 2040 of around 5 mb/d are indicated as needed if refining regions are to maintain utilization rates of at least 80%, a level considered as a minimum for viable operations. The implied annual closure rate for 2016–2040 of 0.3–0.4 mb/d is well below the 1 mb/d rate that applied from 2012–2015.
Europe is expected to see continuing closures as the region’s demand progressively declines and even as net product exports moderately increase. A long-term decline in domestic demand, after peaking around 2018, also makes US refineries vulnerable. However, model projections indicate that US refineries will remain sufficiently competitive over the longer term to be able to raise product exports as domestic demand drops, thereby mitigating – but not eliminating – reductions in crude runs and needed closures. For Japan and Australasia, substantial recent and announced closures are indicated as sufficient to avert the need for additional closures in the long-term provided refiners there can also moderately reduce imports and raise product exports.
In the developing regions, apart from selected closures planned for Middle East refineries prior to 2020, the main areas where long-term rationalization is indicated as needed are in Latin America and Africa.