Energy Industry Trends

Refiners Face a New Marketplace

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The U.S. Power Industry Faces Billion-Dollar Investment Decisions The Nuclear Dilemma: Q&A with CERA’s Jone-Lin Wang Refiners Face a New Marketplace

The times have certainly changed for the refining industry. In the 1990s, the story was grim as an underutilization of refining capabilities drove down profit margins and returns. And while some refiners took advantage of the opportunity to expand their operations, others cut back to limit their losses.

Today, the picture is very different. Fostered by the continuing trend of demand outpacing supply, crude oil prices have rapidly risen, improving margins for refiners. And with demand projected to continue to increase at a rapid pace, refiners are now gearing up to add capacity.

“Refining has typically been a pretty lousy business historically,” says Aaron Brady, associate director of global oil research with Cambridge Energy Research Associates, Inc. (CERA), an IHS company. “So there hasn’t been a lot of enthusiasm in the industry to add a lot of new capacity because it was always operating under a lot of excess capacity, which meant low margins and profits. But that’s starting to change now that the market has become quite tight in the downstream.”

In addition, refiners today are also facing a different marketplace that what they experienced only a decade ago. As demand shifts from a mixture of heavy products to light products such as gasoline, diesel, and jet fuel, refiners who want to capitalize on this market are looking to increase their complex refining capacity. By doing so, they can use a wider range of crude oil feedstocks from light sweet to heavy sour to create the lighter products currently in demand.

“If you have a lighter product slate, you have to build more complex refineries. Refineries that can take a barrel of crude oil and turn it mostly into light products, like gasoline and diesel. There are a lot of refineries around the world that just don’t have that capacity. They can take a barrel of crude oil but they still make a lot of heavy fuel oil that the market doesn’t need. But the refineries of the future are going to be mostly pretty complex refineries that can produce a lot of gasoline and diesel,” Brady says.

The Rush to Increase Refining Capacity
In the United States, refiners are already jumping on the expansion bandwagon. “What we’re seeing is an acceleration of the expansion rate over the next five years and some pretty ambitious plans to add a lot of capacity. However, in the United States it’s not going to be accomplished with new refineries, but by expanding the capacity of existing ones. On a dollar per barrel basis, it’s actually quite a lot cheaper to expand existing capacity than building a new refinery,” Brady explains.

Instead, most new “greenfield” refinery construction will be seen outside the United States, particularly in the Middle East, China, and India. Since most of these new plants will be complex refineries, which take longer to construct, Brady says that CERA doesn’t expect significant new refining capacity to become available until the end of the decade.

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