The global oil refining map is being redrawn. Simple, traditional refineries are being superseded by complex mega-plants. Meanwhile, the ailing downstream sector, particularly in Europe and the US, is either shutting down or shifting away from classic oil products to bio-refineries, and middle distillates are losing popularity to petrochemicals.
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Register NowMoving into 2021, oil will be pulled more decisively into the Middle East-Asia nexus.
The COVID-19 crisis has not so much pushed the industry away from crude but rather sped up the process of establishing a new oil order -- one that has been taking shape for many years.
A host of new refineries in Asia and the Middle East have either arrived online in 2020 or are due to come into operation over the next year or so, resulting in more than 3 million b/d in extra capacity. This is at a time when margins have collapsed and refineries elsewhere have either been closed or run at low utilization rates.
Most refining roads lead to China.
The 800,000 b/d Zhejiang Petroleum & Chemical (ZPC) refinery was launched in 2020 and will be joined by 1 million b/d in additional capacity from several other refineries in the country, according to Platts data.
China's share of CDU capacity in the region is set to have increased from 40% in 2010 to half of regional capacity by 2022, potentially even squeezing out other Asian refiners, from Australia to the Philippines.
Meanwhile, KPC's 615,000 b/d Al-Zour refinery in Kuwait and Saudi Aramco's 400,000 b/d Jazan refinery are lining up for 2021 start dates.
There is more to come from both China and the Middle East in 2022, while India is building a 1.2 million b/d mega-plant due mid-decade and Nigeria's Dangote refinery, which could be launched in the next couple of years, would add an extra 650,000 b/d.
Declines
On the other side of the ledger, capacity is on the decline in both Europe and the US.
Almost 2 million b/d of processing capacity has been taken out of the equation through shutdowns, idled units and conversions in 2020 or will be in 2021. That could double in the next couple of years, according to some analysts, with the bulk of the reductions coming from the West, amid the push of weak oil demand -- even the likely rebound in 2021 will leave consumption below 2019 levels in the most optimistic of scenarios -- and the pull of cleaner energy targets.
Gunvor's Antwerp, Finland's Naantali, Portugal's Porto and France's Grandpuits will not process crude again, and other refineries are likely to follow in the steps of Grandpuits and turn to renewables. The conversion to a biofuel plant and production of renewable fuels is one of the opportunities for European refiners, with Finland's Neste, Total and Italy's Eni already producing biodiesel at some of their existing conventional refineries.
While many of the plants being shut are often older simpler ones that lack the flexibility and scale to adapt, there are other factors at play.
Contrary to wide expectations that simpler refineries would be "the prime candidates for closure", some of them can be supported by "captive landlocked markets", whereas coastal sites are more exposed to international competition, such as the North American East Coast and Australia, the International Energy Agency said recently.
The US is likely to bear the brunt of this, with 1 million b/d of refining capacity shut down for good or turned into bio-refining by the end of 2021.
"Squeezed refiners need a demand outlet or face closure. Even assuming a rebound in refined product demand in 2021, growth in refining capacity (largely in Mideast/Asia) will be far larger," S&P Global Platts Analytics said, noting that a continued influx of biofuels and natural gas liquids supply will basically substitute the need for some refined products in 2021.
"This will squeeze margins of existing refineries, particularly if the demand recovery for transportation fuels is sluggish, and refinery closures are inevitable," Platts Analytics added, saying "refineries that focus on costs, local markets, and integration with petrochemicals or transformation into bio-refineries will be well-placed to survive."
Plastics
While transportation fuels such as diesel and gasoline could get back to some kind of normality in 2021, jet fuel is still likely to drag on the middle distillates pool for some time to come.
At the same time, petrochemicals are set to the star performers this decade and most of the new complex integrated plants being built are being designed with this growth in mind.
Petrochemical and plastics demand is highly correlated to population and GDP growth, and China and India will continue to drive consumption patterns. Asia is a net importer of feedstocks like naphtha, ethylene and propylene as well as liquefied petroleum gas, used to make various types of plastic. Platts Analytics notes that durable goods and packaging, key factors in supporting the petchems market through the pandemic, will be a driving force in 2021.
The trend looks set to continue throughout the decade. The IEA estimates petrochemicals will make up more than a third of oil demand growth even with the growing push towards recycling and away from single-use plastics.
For many industry watchers, 2021 is set to be the year when the downstream sector is no longer just heading in the direction of Asia and petrochemicals, but when it finally reaches its destination.