Business Insights
The global refining industry has been devastated by the severe fuel demand destruction caused by lockdowns due to the coronavirus pandemic. Refiners have resorted to three possible options: (1) slashing throughput and recovery, (2) accelerating plans to convert plants into terminals or biofuel production, and (3) idling or even closing units.
In the first part of this three-part series, we discuss refinery runs reduction around the world as reported in various issues of Worldwide Refining Business Digest Weekly.e, which continuously monitors refinery operations worldwide.
As a result of the lost demand, many refineries across the globe will likely cut utilization rates dramatically, which may pose a challenge for refiners depending on plant configuration. At the same time, many refineries will likely try to maintain rates even when margins are weak, which may especially be the case when crude deliveries cannot be deferred. This strategy will likely result in a product stockbuild and could possibly weigh on utilization rates in the future.
Prior to the outbreaks in major OECD countries, plants were operating at relatively high levels and the rates were carried over from the end of 2019 to 1Q 2020 before making a nosedive in April 2020. Canada registered the sharpest drop in refinery utilization rates of the countries and region covered in the chart below, followed by OECD Europe and then by the US, Japan, and South Korea.
(Source: IEA, May 2020)
In the US, average refinery utilization in the fell from 88% in 1Q, which was on par with year-earlier levels, to 71.5% in 2Q, which was 20% lower on the year. In PADD 1, which has been dealing with the loss of Philadelphia Energy Solutions 335K-b/d refinery, refineries reduced weekly crude inputs by 46% on the year to 567K b/d in 2Q and have kept rates and similar levels since. On the other hand, refineries in PADD 2 and PADD 3 increased runs starting in May when lockdown measures were eased. As a result, average throughputs in PADD 2 (3.1MM b/d) and PADD 3 (7.3MM b/d) were only 16% and 19% lower on the year compared to the same period in 2019. Meanwhile, throughput at PADD-4 refineries has recently recovered to 97% of average levels in the past 10 years while runs in PADD 5 in the first week of July were 27% lower compared to levels in 2019.
Across the Atlantic, a number of European refiners reported massive cuts to utilization rates during the first six months of the year. Eni's domestic refineries only processed 7.21MM mt of crude in H1, which was a 29% year-on-year drop, as the refiner's overall utilization rate, including its facilities outside of Italy, averaged 67%, compared to 87% in H1 2019. Austria's OMV ran its refineries at 86% utilization in H1, compared to 97% during the first six months of 2019. Total processed 1.347MM b/d in H1, which was a 22% year-on-year drop. The refiner's domestic utilization rates fell 56% on the year to 230K b/d due to its 99K-b/d Grandpuits refinery remaining offline (and possibly being converted into a bio-plastics plant) and an extended shutdown at its 119K-b/d Feyzin refinery.
The Petroleum Association of Japan reported data indicating that refinery runs were down by almost 7.0% in the first 12 weeks of 2020. Further cuts are reportedly being considered. In South Korea, refinery utilization was at a six-year low for the month at 82.8% in Feb. as reported by Korea National Oil Corp.
There are various views and projections of future refinery recoveries by market watchers: IEA, Turner Mason, Fitch Ratings, Facts Global Energy, Oil Analytics, and Wood Mackenzie.
According to the Paris-based IEA, the impact of the coronavirus pandemic on fuel demand will weigh on the global refining sector for the foreseeable future. In 2020, global refinery utilization rates are projected to be around 72%, which will be the lowest level since 1983, as the 550MM-bbl stockbuild earlier in the year will necessitate the lower refinery runs. The Agency is projecting that global refining runs will fall 6.4MM b/d on the year to 75.1MM b/d for the entirety of 2020 but will later increase by 4.7MM b/d in 2021. Earlier, the IEA's forecasts were for a 5.4MM-b/d year-on-year decline in 2020 and a 5.3MM b/d year-on-year increase in 2021, but the Agency adjusted its projections due to OECD throughput being revised downward from 34.8MM b/d to 34.0MM b/d in 2020 and from 36.9MM b/d to 35.6MM b/d in 2021.
The IEA also estimates that oil demand will fall by 7.9MM b/d on the year. So far, demand for transport fuels in Asia-Pacific has recovered faster compared to Europe and the Americas after experiencing a less severe drop in comparison to H1. However, there will still be a 6.5K-b/d stockbuild at the end of the year as refineries will not be able to adjust yields to balance the market in light of the lost demand caused by the pandemic. Even though global utilization rates are expected to recover to 77% in 2021, levels will still be below the long-term average rate of around 80%. At the same time, the IEA projects that the majority of refinery shutdowns in the near term will involve complex facilities due to the slowing demand growth for light products and the increasing share of lighter grades in the overall crude supply.
US consultancy Turner, Mason, & Co. (TM&C) expects that the economic downturn resulting from the pandemic and tensions between the US and China will have a stronger impact on fuel demand. In fact, the consultancy also does not expect a second wave of COVID-19 occurring in the autumn in the US, citing empirical evidence. While there have been new cases in Europe and Asia, the measures taken to control the virus have varied by country as many European countries are not expected to reimpose lockdowns. Fuel demand in China has already reached near pre-pandemic levels while Indian and Latin American countries are recovering slowly but steadily. In the US, fuel demand is expected to pick up after the summer driving season, easing the year-on-year deficit. By 2023-2025, the gap in demand is expected to narrow.
However, the consultancy also forecasts a 1MM b/d in excess refining capacity through 2024 that must be shut down to balance the market. So far, 1.471MM b/d in refining closures have been announced, but only a portion of the closures are permanent. In the US, refinery utilization has reached 80% in Aug. after falling to 70% in April. TM&C expects refinery utilization will recover into 2021, contingent on fuel demand recovery and permanent refinery closures. Jet fuel demand, which was hardest hit by the pandemic, is expected to recover faster than post-Sept. 11 in 2001. Nevertheless, US fuel demand growth is expected to remain negative until 2025.
Discussing a rebound in demand, a note from Fitch Ratings read, "Although refiners have historically shown an ability to adjust quickly to drops in demand, a key consideration is the depth and unknown duration of the current downturn." Analysts at Cowen stated, "A rapid demand recovery seems increasingly unlikely, while a slower opening of the economy will have to contend with high unemployment and reduced air travel."
According to consulting firm Facts Global Energy, the pandemic has already reduced demand for gasoline and jet fuel by 50.0% and 70.0%, respectively, across the globe.
Jan-Jaap Verschoor, analyst at Oil Analytics, further believes that global oil processing rates have already fallen by 5.0MM b/d as NWE refiners using sweet grades have lowered runs by 2.0MM b/d. On the other hand, China and Korea, two countries there were hit by the coronavirus earlier in 2020, have been ramping up refining activity with the former expected to increase refining by 77.0% in 2Q, compared to 63.0% two months prior.
Finally, the coronavirus-induced collapse in fuel demand will likely accelerate shutdowns of refineries on the verge of closure around the world. According to analysts at Wood Mackenzie, approximately 1.4MM b/d of European refining capacity (9% of the region's total) could be shut down by 2022-2023, with plants in France, the Netherlands, and Scotland being at high risk.
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