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.