The oil downstream: vertically challenged?
Ample global refining capability
Much, if not most, of the new capacity will be greenfield mega-refineries, designed to capture oil demand growth in the booming emerging markets, and to capture economies of scale with high degrees of sophistication.
A structural global refining surplus is re-emerging, with significant capacity growth expected over the next five years, particularly in Asia, the Middle East, and in Latin America.
In general, on a global basis, the net impact will be reduced utilization rates and generally weak refining margins. Net capacity growth (additions less closures) over the next five years could be as much as 25 – 28 million barrels per day (b/d) or 25% – 30% higher than existing capacity, with a compound annual growth rate (CAGR) of more than 4% per year.
However, not all of the planned expansions will be sanctioned, nor will they necessarily be completed on schedule.
Nevertheless, the key factors of this growth include:
- The vast majority of the planned expansions are national oil company (NOC) sponsored and thus less-sensitive to return pressures, with government-sponsored mandates with other objectives.
- Much, if not most, of the new capacity will be greenfield mega-refineries, designed to capture economies of scale with high degrees of sophistication.
- Old refineries rarely die; rather than close, international oil company (IOC) owners tend to try to "wait it out" or will try to find new owners for marginal plants, or convert to terminals or storage facilities.
- Other new owners may have strategies that sustain marginal plants. Depreciation will be reset, with different strategic objectives and time horizons. Similarly, some new market entrants may be existing refiners looking for access to new markets.
- Sluggish oil demand growth in developed economies will result in the marginalization of some Organisation for Economic Co-operation and Development (OECD) refining; there will be location advantages to refining in regions with strong demand growth.
- Alternative fuel substitution and/or refinery bypass is increasing, with more renewable fuels, biofuels, gas to liquids and natural gas liquids coming into the supply pool from non-refinery sources.
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