Refining profits surged globally this year on fears of a potential gasoil shortage, as buyers avoided Russian supplies despite soaring feedstock costs elsewhere. AME’s full year 2022 forecast for the global average crack spread price is US$51/bbl.
Rapidly increasing crude oil prices
typically reduce product crack spreads, but this year, lower-than-average
inventories supported higher crack spread prices.
Despite the high crude oil input
costs for refineries, the price of refined products has risen more than 45%
this year, increasing the spread and beefing up the bottom line for refiners.
In January, the global crack spread
5-3-2 was US$18.9/bbl. The crack spread
price remained very high through the northern summer driving season peaking at
US$55.2/bbl in June as fuel demand peaked. The crack spread drifted lower from
late summer, then resumed an increasing trend in September. Inventories
of critical fuels were also at near historic lows.
AME forecasts average prices will
decline from US$34/bbl in 2023 to US$23/bbl in 2024, supported by a steady
rebound in China’s demand for petrochemicals and fuels. Refining margins will
see seasonal gains, and the two-year outlook is positive as mobility demand,
both for driving and flying, increases.
New capacity additions
in 2022 and increased global runs will outpace the demand growth for refined
products, leading to an unwinding of some of the refinery margin gains from
late last year.
Worldwide, refiners struggled to meet
global demand for diesel and gasoline, exacerbating high prices and aggravating
shortages from big consumers like the US and Brazil to smaller countries like
the Ukraine and Sri Lanka.
The Reformulated Blendstock for Oxygenate
Blending (RBOB) gasoline average price peaked
at US$166.9bbl in June, 64% higher than January’s average
of US$101.9/bbl. The US New York Harbour Ultra Low Sulphur Diesel (NY ULSD)
fuel average price was US$181.1/bbl, a 64% increase from US$110.6/bbl in
January.
Refiners globally are increasingly
focussed on ESG outcomes, targeting lower Scope 1 and Scope 2 emissions. They
are aiming to achieve CO2 reduction through operational efficiency gains,
increased production of renewable fuels such as ethanol and renewable diesel,
and CCS programs. The transition will require significant capital
investment and additional costs. This adds pressure on simple and small
refineries and will make them less competitive in the long run.

Struggling
to Meet Demand
AME forecast global refined product
demand will have grown by 0.4Mbpd this year, bringing total annual consumption
to 88.3Mbpd, up 0.5% from 87.9Mbpd in 2021. In 2023 demand is forecast to grow
0.1% or a further 0.1Mbpd to 88.4Mbpd.
The recovery of oil product demand in
China is the main growth driver in the near term. China’s continued
pursuit of a zero-Covid strategy provides potential downside for these
near-term forecasts. Industrial output has been down in the wake of recent
pandemic restrictions in Beijing, Guangzhou, and Shanghai.
In the next 2 years, refiners
worldwide will continue to navigate uncertain market conditions as further
upside is capped by plant closures and high crude oil costs. US refiners will
continue to reap higher margins while inventory levels are low, barring any
significant supply disruptions in the US’s Northeast and export markets.
In
Europe, refining margins will grow as supplies in the region tighten. Italy’s
demand for gasoline has exceeded 2019 levels, while French gasoline consumption
is increasing faster than diesel.
In 2022, the strongest demand growth
came from China, India, US, Germany, and Brazil. Refiners saw another
profitable year on strong demand for gasoline and diesel during summer peak
driving seasons.

The effects of energy transition on
refined product demand are becoming more evident. Large US refineries are
shifting some of their capacity to biofuels and other renewable fuels to
address ESG goals favoured by investors. At its Wyoming refinery, HollyFrontier
is converting a 52kbpd refinery from gasoline production to renewable diesel.
At the end of May, US refineries
operated at 93.2% capacity utilisation, the loftiest level since December 2019
and an exceptionally high rate for a season normally associated with plant
maintenance. By the end of November utilisation was 92%. Lacking the production
capacity to meet rising summer demand, US refiners played “Whack-A-Mole” to
address the market’s most pressing need, shifting plants to focus on gasoline
and diesel output.
Running
Full Tilt
AME forecast global refinery throughput will grow by a strong
1.3Mbpd this year to 89.6Mbpd, up 1.5% from 88.3Mbpd in 2021. Growth will
decline 0.7% in 2023 to 89.0Mbpd, narrowing the current market surplus.
Decline in supply over the next 2 years reflects the lack of
operating refineries across the globe currently. In the US, more than
1Mbpd of the country’s oil refining capacity has shut since
2020. Elsewhere in the world, capacity has shrunk by about 2.13Mbpd. And
with no plans to bring new US plants online, even though refiners are
reaping record profits, the supply squeeze is only going to get worse.
In the June quarter, several European and US refiners returned
plants shut down for maintenance in the previous quarter and boosted capacity
use. In Europe, the focus for the sector shifted to crude supply following the
EU’s decision to ban Russian tanker imports of crude oil and refined fuels.
Europe intends to reduce Russian imports by about 3.3Mbpd by year’s end.
In the
US, Marathon Petroleum, its largest refiner, ramped up exports to 300kbpd.
Barrels moved mainly to Latin America and Europe to meet the rising demand for
both diesel and gasoline during the summer driving season.

Closures
and Production Cuts
In the US, the massive Houston refinery, operated by
LyondellBasell Industries, built in 1918, is scheduled to permanently close by
the end of 2023, but could shut down earlier if a “major equipment failure”
spreads to major units. The refinery processes 268kbpd of oil and produces
92.6kbpd of diesel fuel, 89kbpd of gasoline and 44.5kbpd of jet fuel.
In
China, weaker throughput in July extended a rare decline in China's refinery
processing seen in the first half of 2022 as strict COVID-19 lockdowns and fuel
export controls continued to curb their production. During the first seven
months, refineries processed 380.3Mt, down 6.3% on a year before and equal to
about 13.1Mbpd.
Prolonged
outages at large state-run refineries such as Sinopec Shanghai Petrochemical
Corp's 320kbpd crude facility and PetroChina Wepec's 200kbpd plant weighed on
national production.
Meanwhile, new closures loom
in Europe. Shell plans to end crude processing at the Wesseling site within the
Rhineland refining complex in 2025 as the facilities are repurposed for
non-fossil fuel feedstocks and renewable hydrogen production. Petroineos's Grangemouth
refinery in Scotland has seen its capacity reduced by 30% to around 150kbpd
after the closures of a crude distillation unit and the fluid catalytic
cracker.
The
Livorno refinery in northwest Italy will stop refining crude and suspend all
related activities by the end of 2022. The production of lubricants and
ancillary activities will continue for the foreseeable future. ExxonMobil
permanently shut its Slagen refinery in Norway in June to convert the site into
a fuel import terminal.
New
Fields, Restarts and Expansions
Global
refinery supply is responding to energy transition mandates. With global
pressure to reduce fossil fuel consumption, stricter CO2 emission mandates, and
a surge in electric vehicle usage, refiners are already envisaging less demand
for refined products production.
Refiners
are shifting the product slate derived from a barrel of oil to 60%-80% chemical
production over fuel production, up from the traditional range of 10%-15%. This
can be achieved through “crude oil to chemicals” technology. Notable
projects dedicated to petrochemicals include Hengli Petrochemicals and Zhejiang
Petroleum and Chemical in China which is already achieving conversion levels of
45%.
Pakistani
conglomerate Ameer Group will invest US$4.67bn to build a new deep conversion
oil refinery in the Sindh province. The Pakistan State Oil (PSO) refinery will
have a production capacity of up to 400kbpd of oil.
The PSO refinery will
process 90% of imported crude oil and 10% local crude oil. Petroleum products produced
from the full conversion process will comply with EURO-II specifications which
mandate reduced levels of carbon emissions for both petrol and diesel vehicles.
Phillips
66 has made a Final Investment Decision (FID) to move forward with the Rodeo
Renewed project to convert its San Francisco refinery into one of the world’s
largest renewable fuels facilities. The US$850m project will begin
commercial operations in 2024.
The
converted facility will use waste oils, fats, greases, and vegetable oils to produce
an initial 50kbpd of renewable diesel, gasoline, and sustainable aviation fuel
(SAF). Production of these fuels is projected to reduce life cycle CO2
emissions by approximately 65% and cut criteria pollutant emissions at the site
by 55%.
Chinese
private-sector refiner Shenghong Petrochemical launched the 320kbpd crude
distillation unit (CDU) at its Lianyungang refinery in Jiangsu province in May.
The unit is the largest capacity CDU in Asia, and will produce about 65kbpd of
gasoline, 10kbpd of diesel and 37kbpd of jet fuel at full capacity. The CDU is
expected to take in several tens of thousands of tonnes of crude as feedstock,
with output expected to be available to the market in August.
Saudi
Aramco is making its biggest ever investment in South Korea to
develop one of the world's largest refinery-integrated petrochemical steam
crackers through its S-OIL affiliate, in line with the company's strategy to
maximise the crude to chemicals value chain.
The US$7bn Shaheen project aims to convert crude oil into
petrochemical feedstock and would represent the first commercialisation of
Saudi Aramco and Lummus Technology's TC2C thermal crude to chemicals
technology, which increases chemical yield and reduces operating costs.
Located
at S-Oil's existing site in Ulsan, the new plant is planned to have the
capacity to produce up to 3.2Mt of petrochemicals annually and include a
facility to produce high-value polymers. The project is expected to start in
2023 and be completed by 2026.
BP
globally are looking at decarbonising its refineries. Responding to expected
increase in demand for Sustainable Aviation Fuel (SAF), BP Australia’s former
Fremantle Kwinana oil refinery will be the core of a multi-billion-dollar
energy transition plan. The plant will produce renewable diesel and aviation
fuel from next year.
The
project could be the first commercial scale production of SAF. Demand for SAF
is expected to surge as airlines jump on board the quest to reach net zero
emissions. The renewable fuels plant will use waste oil, tallow and used
cooking oil to produce 8-10kbpd of a combination of SAF and renewable diesel.
Mergers
and Acquisitions
UAE (Uniper)
Troubled
German utility Uniper is seeking buyers for an oil refinery in the UAE as the
German utility seeks to stem a US$41bn loss from being forced to buy gas to
replace lost Russian supplies. The
company has received interest from several parties, including Vitol Group, and
a sale could be agreed as early as this year. Uniper produces shipping fuel at
the refinery with a capacity of 80kbpd located in the UAE port of Fujairah.
United States (NEXT)
NEXT
Renewable Fuels is developing a 50kbpd renewable diesel and sustainable
aviation fuel refinery in Oregon, the first greenfield renewable diesel
refinery on the US West Coast in more than 40 years. The refinery, when
operational, will be one of the largest producers of renewable diesel and sustainable
aviation fuel in North America.
NEXT
Renewable Fuels is combining with Industrial Tech Acquisitions II, Inc., a
special purpose acquisition company (SPAC), to form NXTCLEAN Fuels, Inc. Both
boards of directors of NXT and ITAQ have approved the transaction. The
transaction is expected to close in the second quarter of 2023, subject to
shareholder approvals and other customary closing conditions.
United States (Chevron Phillips, QatarEnergy)
Chevron
Phillips Chemical Company LLC and QatarEnergy are proceeding with the
construction of an US$8.5bn integrated polymers facility in Orange, Texas, US. The companies have made a positive final
investment decision (FID) on the project and created a joint venture company,
Golden Triangle Polymers Company LLC.
Construction
of the Golden Triangle Polymers plant will begin immediately near Chevron
Phillips Chemical’s existing facility in Orange. Chevron Phillips Chemical will
own the majority share of the joint venture, with a 51% stake, while
QatarEnergy will own 49%.
The plant, which is
expected to begin operations in 2026, will include a 2,080ktpa ethane cracker
and two 1,000ktpa high-density polyethylene units. The project is targeting to
have approximately 25% lower greenhouse gas emissions than similar facilities
in the United States and Europe.
United States (Exxon, Par Pacific)
Exxon
Mobil Corp has agreed to sell its Billings, Montana, refinery, and related
pipeline properties to Par Pacific Holdings Inc for US$310m. The sale ends a years-long effort by the US
oil giant to further reduce its refining footprint and concentrate production
on plants along the US Gulf Coast and in the Midwest. It also has been selling
oil producing properties to boost returns.
The deal
for the 63kbpd refinery is expected to close in the second quarter of 2023. Par
Pacific was one of several independent refiners eyeing the plant and looking to
invest some of this year's record refining profits to expand its assets.
Included
in the sale are the Silvertip Pipeline, Exxon's interest in the Yellowstone
Pipeline and Yellowstone Energy LP and its interests in products terminals in
Montana and Washington.
Par
Pacific will pay for the Billings purchase with cash on hand and existing
credit lines. Under the deal, Par
Pacific will continue supplying fuel to Exxon and Mobil-branded stations in the
region. US refining capacity has fallen by 1Mbpd since 2019, primarily because
of plant closures amid reduced demand following lockdowns during the COVID-19
pandemic.
United States (Cenovus, BP)
Cenovus Energy agreed to acquire the remaining 50% stake
in BP-Husky Toledo Refinery in Ohio from its joint venture
partner BP.
The deal forms part of BP’s efforts to reshape its oil and gas
portfolio in North America and reduce greenhouse gas emissions across its
operations. As per the deal terms,
Cenovus will pay US$300m in cash as consideration along with the value of
inventory. The transaction is expected
to close before the end of this year, subject to closing conditions.
The BP-Husky Toledo Refinery is
equipped to process up to 160kbpd of crude. It produces gasoline, diesel, jet
fuel, propane, asphalt, and other products. Cenovus expects the transaction to provide an additional throughput capacity
of 80kbpd bringing its total refining capacity to 740kbpd. Upon completion of the sale, BP’s US refining
portfolio will include two facilities that are strategically located to serve
customers in the Midwest and Pacific Northwest.