As the 700 Convent workers discovered they were out of work, their counterparts across the Pacific were setting up a new unit at the giant Zhejiang complex of Rongsheng Petrochemical in northeast China. It is just one of at least four projects underway in the country, totaling 1.2 million barrels per day of crude processing capacity, the equivalent of the entire UK fleet.
The Covid crisis has accelerated a seismic shift in the global refining industry as demand for plastics and fuels increases in China and the rest of Asia, where economies are rebounding rapidly from the pandemic. In contrast, refineries in the United States and Europe are grappling with a deeper economic crisis as the shift away from fossil fuels darkens the long-term outlook for oil demand.
America has led the refining pack since the oil era began in the mid-19th century, but China will dethrone the United States as early as next year, according to the International Energy Agency. In 1967, the year the convent opened, the United States had 35 times the refining capacity of China.
The rise of the refining industry in China, combined with several new large factories in India and the Middle East, is spilling over into the global energy system. Oil exporters sell more crude in Asia and less to long-time customers in North America and Europe. And as they add capacity, Chinese refiners are becoming a growing force in international gasoline, diesel and other fuel markets. It even puts pressure on older factories in other parts of Asia: Shell also announced this month that it will halve the capacity of its Singapore refinery.
There are parallels with China’s growing dominance of the global steel industry at the turn of this century, when China built a clutch of massive, modern factories. Designed to meet booming domestic demand, they have also made China a force in the export market, squeezing higher-cost producers in Europe, North America and other parts of Asia. and forcing the closure of older and inefficient factories.
“China is going to put another million barrels a day or more on the table in the next few years,” said Steve Sawyer, refining director at industry consultant Facts Global Energy, or FGE, in an interview. “China will overtake the United States. probably in a year or two. “
Asia on the rise
But as capacity increases in China, India and the Middle East, demand for oil may take years to fully recover from the damage inflicted by the coronavirus. That will push a few million barrels per day of more refining capacity into bankruptcy, on top of a record 1.7 million barrels per day of processing capacity already put on hold this year. More than half of those closures took place in the United States, according to the IEA.
About two-thirds of European refiners are not making enough money in fuel production to cover their costs, said Hedi Grati, head of Europe-CIS refining research at IHS Markit. Europe still has to reduce its daily processing capacity by an additional 1.7 million barrels in five years. “There’s more to come,” Sawyer said, predicting the shutdown of an additional 2 million barrels per day of refining capacity next year.
China’s refining capacity has nearly tripled since the turn of the millennium as it tried to keep pace with rapidly growing diesel and gasoline consumption. The country’s crude processing capacity is expected to climb to 1 billion tonnes per year, or 20 million barrels per day, by 2025, from 17.5 million barrels at the end of this year, according to the Institute of economic and technological research of China National Petroleum Corp. .
India is also increasing its processing capacity by more than half to 8 million barrels per day by 2025, including a new megaproject of 1.2 million barrels per day. Producers in the Middle East are adding to the frenzy by building new units with at least two projects totaling more than one million barrels per day expected to start operations next year.
One of the main drivers of new projects is the growing demand for petrochemicals used to make plastics. More than half of the refining capacity commissioned from 2019 to 2027 will be added in Asia and 70 to 80% of that capacity will be focused on plastics, according to industry consultant Wood Mackenzie.
The popularity of integrated refineries in Asia is driven by the region’s relatively rapid economic growth rates and the fact that it remains a net importer of raw materials such as naphtha, ethylene and propylene as well as gas. liquefied petroleum, used to make various types of plastics. The United States is a major supplier of naphtha and LPG to Asia.
These massive, integrated new factories are making life harder for their smaller competitors, who lack scale, the flexibility to switch between fuels, and the ability to handle dirtier, cheaper crudes.
Closed refineries tend to be relatively small, not very sophisticated, and typically built in the 1960s, according to Alan Gelder, vice president of refining and oil markets at Wood Mackenzie. He sees excess capacity of about 3 million barrels per day. “In order for them to survive, they will have to export more products as their regional demand decreases, but unfortunately they are not very competitive, which means they are likely to close.
Trap on demand
Global oil consumption is on track to decline an unprecedented 8.8 million barrels per day this year, averaging 91.3 million barrels per day, according to the IEA, which expects less two-thirds of that lost demand will recover next year.
Some refineries were scheduled to close before the pandemic even struck, as a global crude distillation capacity of about 102 million barrels per day far exceeded the demand of 84 million barrels of refined products in 2019, according to the IEA. The destruction of demand due to Covid-19 has pushed several refineries to the brink of collapse.
“What was supposed to be a long, slow adjustment turned into a brutal shock,” said Rob Smith, director of IHS Markit.
In the United States, there is also the pain of refiners, in particular regulations in favor of biofuels. This has encouraged some refiners to reuse their factories to produce biofuels.
Even China can get ahead of itself. The capacity additions exceed the growth in demand. An oversupply of petroleum products in the country could reach 1.4 million barrels per day in 2025, according to CNPC. Even if new refineries are built, growth in demand from China could peak by 2025 and then slow as the country begins its long transition to carbon neutrality.
“In an environment where the world already has sufficient refining capacity, if you build more in one part of the world, you have to shut down something in another part of the world to maintain balance,” said Sawyer of FGE. sort of environment we find ourselves in now and likely to be in at least the next 4-5 years.