Refiners to invest $570 billion as they face a host of global uncertainties
Energize Weekly, June 5, 2019
More than $570 billion in new global oil refining investments are set to be made by 2025, raising total capacity by 15 percent to 116 million barrels a day, according to Bloomberg New Energy Finance (BNEF).
About 75 percent of the new capacity will be in the Asia-Pacific region and the Middle East, with two-thirds of the additions—categorized as “megaprojects” each with more than 300,000 barrels a day in capacity—being financed by national oil companies.
“These new refineries will affect the competitiveness of different regions and potentially lead to shifts in global product flows and the closure of uncompetitive capacity,” BNEF said.
In 2019, BNEF said that oil demand is projected to exceed 100 million barrels a day, with almost all of it in refined products such as gasoline and diesel.
Refiners make their money on the difference or “spread” between oil prices and the prices of refined products. This has fluctuated around $5 a barrel for the past 20 years, creating a “value pool” of as much as $250 billion a year, Bloomberg said.
“Looking forward, refiners are faced with a more challenging and complex market,” BNEF said. “Demand growth across different products is beginning to diverge, and significant capacity additions in Asia and the Middle East will impact margins and trade flows for fuels and petrochemicals.”
The refining sector is facing a series of shifts and uncertainties. One of the biggest is a change in crude supply toward lighter, sweeter grades.
The International Energy Agency forecasts that almost all incremental oil supply to 2040 will come from shale oil, which is of a lighter grade, and light natural gas liquids.
This will shift refiners impact profitability and threaten investments in complex, heavy crude plants, BNEF said.
The biggest near-term uncertainty is the new requirement reducing sulfur levels in marine fuels. The International Maritime Organization is requiring the sulfur content to drop to 0.5 percent from the 3.5 percent cap beginning in 2020.
“This will trigger a considerable shift in demand as the shipping market migrates to new, compliant fuels,” BNEF said.
Another uncertainty for the refining sector going forward is how quickly and to what level electrical vehicles will penetrate the market. Road fuels account for about half of all refined oil. “We expect this trend to have a growing impact on refined product demand over the next 10-20 years, forcing refiners to reduce fuel yields.”