Oil refineries are struggling as the worst demand-crash in decades cascades through the industry, leaving plants around the world at risk of closure. Demand for fuel remains depressed and stockpiles are bulging, while the crude refiners’ process has become more expensive following deep Opec-led supply cuts. That is squeezing margins for the plants, which convert the crude into products such as diesel, jet fuel and petrol.
Europe is considered most at risk because facilities are generally older and governments have embarked on initiatives to phase out some fossil fuels from transport. But analysts at UBS said almost 3m barrels a day of refining capacity
– equivalent to about twice as much as the UK consumes or roughly 3 percent of the global total – needs to be removed from the global market by the end of 2021to restore the sector’s profitability. Small US refineries and some capacity in Asia-Pacific could also be forced out, the analysts add.
Newer refineries tend to be more complex and efficient, allowing them to process a wider variety of crude oils at a lower cost. But plants built in the 1950s and 1960s, as mass-market adoption of motor vehicles took off, look vulnerable – especially in the context of a lot of new capacity coming on stream in developing countries, from Nigeria to Kuwait.
“We had too much refinery capacity before Covid,” said Robert Campbell, head of global oil products for Energy Aspects, a consultancy. “We’vecertainly got too much now.”
Demand for fuel has started to recover from the depths of lockdowns in April and May – when global consumption was down by more than 20 percent – but few see it reaching pre-outbreak levels before late 2021. Some plants are already losing money, once total costs of operating are factored in. Analysts say the outlook for the industry is reminiscent of the period after the financial crisis when profit margins recovered only after a number of facilities shut for good.
Predicting which refineries could close is difficult, as governments often place plants on life support owing to concerns over the security of supply and job losses. But industry figures say plants such as Essar’s refinery in Stanlow in the north west of England and Eni’s Milazzo in Sicily may struggle, along with Grangemouth, Scotland’s sole motor fuel refinery. Commodity trader Gunvor is already looking to mothball its plant in Antwerp.