Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The COVID-19 pandemic ushered in the global Petroleum Refining Industry's third wave of consolidation, and more closures are on the way as newer, more efficient refineries are brought online, squeezing margins amid an uncertain future demand picture for transportation fuels, according to Oil 2021, a report by the International Energy Agency (IEA) (Paris, France), which was released March 17. Expected growth in demand from the Chemical Processing Industry emerged as the only bright spot in the IEA report.

Refining throughput in 2020 fell nearly 10% to 74.4 million barrels per day (BBL/d), a level not seen for a decade, the report said. Annual average refinery margins plunged to their lowest levels in at least two decades, even as crude prices fell to 16−year lows, it added. In 2020, refinery margins fell faster than Brent crude prices, limiting the ability of refiners to benefit from falling crude oil prices.

"The speed and depth of the recovery is likely to be uneven, both geographically and in terms of sectors and products," the report said. "Gasoline demand is unlikely to return to 2019 levels, as efficiency gains and the shift to electric vehicles eclipse robust mobility growth in the developing world. Aviation fuels, the hardest hit by the crisis, are expected to slowly return to 2019 levels by 2024, but the spread of online meetings could permanently alter business travel trends."

Oil 2021, IEA's six-year outlook for the global crude oil and refined products industries, said the global refining industry "is struggling with excess capacity." Demand destruction from the COVID-19 pandemic, new capacity and the expectation of a "long-term structural decline in demand are creating an overhang that can only be eradicated through massive closures."

The report details what it said is a third wave of worldwide refinery rationalization. Around the world, refining companies have announced the shutdown of about 3.6 million BBL/d of capacity, but a total of at least 6 million BBL/d of closures will be required to allow utilization rates to return to above 80%.

The first and largest wave of refinery capacity reductions came in the first half of the 1980s, when 12 million BBL/d of worldwide capacity was closed. The IEA report noted that half of the closed capacity was located in Europe. Following the financial crisis of 2008, another 7 million BBL/d of global refining capacity was closed "as refinery economics deteriorated. A decline in transport fuel demand in OECD countries due to macroeconomic factors, and the tangible impact of fuel efficiency standards were mostly to blame."

As the world closes older, smaller and less-efficient refineries, new capacity is being added in China, the Middle East and India, the report said. Chinese petrochemical companies are expected to add about 2 million BBL/d of new refining capacity between 2019 and 2024 as the country strives to reach self-sufficiency in base petrochemical materials.

Over the 2020-2026 period, Oil 2021 said, refinery closures are expected to be greatest in Asia (outside China), North America and Europe. New facilities, on the other hand, are predicted to be concentrated in the Middle East and China. On a net basis, about 5 million BBL/d of new refining capacity is expected to be brought online over that period.

The IEA said the global refinery rationalization was underway before the COVID-19 pandemic, but that pandemic accelerated the trend. In 2020, global average refinery utilization rates fell to approximately 73%. So far, planned shutdowns for 2020-26 amount to 3.6 million BBL/d, of which 840,000 BBL/d is in the process of being converted to bio-refineries, the report said, adding that for capacity utilization rates to reach 80%, another 2.4 million BBL/d of shutdowns are required.

The report observed that shutdowns generally affect the smaller refineries that cannot attain the necessary scale to operate profitably. Since 2012, the average size of permanently closed refineries has been about 100,000 BBL/d, which has had the effect of modestly increasing the average size of operating refineries, to about 154,000 BBL/d in 2020 from roughly 147,000 BBL/d in 2012. The average size of new greenfield projects coming online between 2020 and 2026 is 185,000 BBL/d, while the average size of refineries slated for closure over that time is approximately 110,000 BBL/d, the report said. By 2026, it added, new larger facilities and the closure of smaller plants will boost the average size of operating refineries to about 160,000 BBL/d.

For the refining sector, IEA wrote in the report, "the pandemic also offered a glimpse of the future, when clean energy transitions are expected to dramatically affect transport fuel demand, and petrochemicals become the only growing, or stable, oil demand segment. In 2020, as transport fuel demand fell by 13%, the petrochemical sector remained resilient."

Oil 2021 noted that about 33% of global oil demand growth over the 2019-2026 period is expected to be met by products that bypass the refining sector, such as NGLs and biofuels. "Refiners are increasingly looking at petrochemical integration to offset declines in transport fuels, and renewable diesel and electrolysis hydrogen production projects for refinery needs or for external users."

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