Earlier this month, Royal Dutch Shell Plc unplugged its Convent refinery in Louisiana. Unlike many oil refineries that have closed in recent years, Convent was far from outdated: it’s pretty big for U.. S.. . Standards and sophisticated enough to convert a wide range of crude oils into high quality fuels. Shell, the third largest oil major in the world, wanted to radically reduce refining capacity and could not find a buyer.
When Convent’s 700 employees found out they were unemployed, their colleagues across the Pacific cheered on a new unit in the vast Zhejiang complex of Rongsheng Petrochemical in northeast China. It is only one of at least four ongoing projects in the country, 1 in total. 2 million barrels of crude oil processing capacity per day, according to the U. . K. . The entire fleet.
The Covid crisis has accelerated a seismic shift in the global refining industry as demand for plastics and fuels grows in China and the rest of Asia, where economies are rapidly recovering from the pandemic. In contrast, refineries in the U. . S and Europe are grappling with a deeper economic crisis, while the fossil fuel transition is clouding long-term prospects for oil demand.
America has been since the beginning of the oil age in the mid-19th. Century leader in refining, but China will dethrone the U. S.. . As early as next year, according to the International Energy Agency. In 1967, the year the monastery opened, the U. . S.. . had 35 times the refining capacity of China.
The rise of the Chinese refining industry coupled with several large new plants in India and the Middle East is reflected in the global energy system. Oil exporters are selling more crude to Asia and less to long-term customers in North America and Europe. As capacity increases, China’s refineries are becoming a growing force in international gasoline, diesel and other fuel markets. This is putting even older plants in other parts of Asia under pressure: Shell announced this month that it will cut the capacity of its Singapore refinery in half.
There are parallels to China’s growing dominance of the global steel industry at the beginning of this century, when China built a clutch out of massive, modern mills. Designed to meet growing domestic demand, they turned China into an export force by pressuring more expensive producers in Europe, North America and other parts of Asia and forcing older, inefficient factories to close.
« China will be putting another million barrels a day or more on the table for the next few years, » said Steve Sawyer, refinery director at industry advisor Facts Global Energy (FGE), in an interview. “China will overtake the U. S.. . probably in the next year or two. ”
As capacity in China, India and the Middle East will increase, it may take years for oil demand to fully recover from the damage caused by the coronavirus. That will put a few million barrels more refining capacity out of business per day, in addition to a record 1. This year, 7 million barrels of processing capacity per day have been mothballed. More than half of these closings were in the U. . S.. . according to the IEA.
About two-thirds of European refineries do not make enough money from fuel production to cover their costs, said Hedi Grati, director of refining research for Europe-CIS at IHS Markit. Europe needs to further reduce its daily processing capacity 1. 7 million barrels in five years.
« There is more to come, » Sawyer said, anticipating another 2 million barrels of refining capacity per day to close by next year.
China’s refining capacity has nearly tripled since the turn of the millennium as it tried to keep up with the rapid growth in diesel and gasoline consumption. The country’s crude oil processing capacity is projected to increase from 17 to 1 billion tons per year or 20 million barrels per day by 2025. According to China National Petroleum Corp. at the end of this year it was 5 million barrels. & Economics Technology Research Institute.
India will increase its processing capacity by more than half to 8 million barrels per day by 2025, including a new 1. Mega project with 2 million barrels per day. The producers from the Middle East are contributing to the Spree and are building new units with at least two projects with a total volume of more than a million barrels per day, which are due to go into operation 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 that will come on stream from 2019 to 2027 will be added in Asia, and 70% to 80% of that will be plastics-oriented, according to industry advisor Wood Mackenzie.
The popularity of integrated refineries in Asia is driven by the region’s relatively rapid economic growth rates and the fact that they are still net importers of raw materials such as naphtha, ethylene, and propylene, as well as liquefied petroleum gas, which are used to make various types of plastic. The U. S.. . is a major supplier of naphtha and LPG to Asia.
These new massive and integrated facilities are making the lives of their smaller competitors more difficult, who lack size, flexibility in switching between fuels, and the ability to process dirtier and cheaper crude oils.
According to Alan Gelder, vice president of refining and oil markets at Wood Mackenzie, the refineries to be closed are typically relatively small, not very refined, and were built in the 1960s. He sees an overcapacity of around 3 million barrels a day. « To survive, they need to export more products when their regional demand falls. Unfortunately, they’re not very competitive, which means they’re likely to close. « . ”
Global oil consumption is on the way to drop an unprecedented 8. 8 million barrels a day this year, an average of 91. 3 million a day, according to the IEA, which expects less than two-thirds of that lost demand to recover over the next year.
Some refineries were already closed before the pandemic, as global crude distillation capacity of around 102 million barrels per day far outweighed refined product demand of 84 million barrels in 2019, according to the IEA. The destruction of demand by Covid-19 has marginalized several refineries.
« What was expected to be a long, slow adjustment has turned into a sudden shock, » said Rob Smith, director at IHS Markit.
Increase the pain of the refineries in the U.. S.. . are regulations that push for biofuels. This encouraged some refineries to use their facilities to produce biofuels.
Even China could outperform itself. Capacity expansions exceed demand growth. An oversupply of oil products in the country can reach 1. According to CNPC, 4 million barrels a day in 2025. Even if new refineries are built, China’s demand growth could peak by 2025 and then slow down as the country begins its long transition to carbon neutrality.
« In an environment where the world already has adequate refining capacity, if you build more in one part of the world, you will have to shut down something in another part of the world to maintain balance, » said Sawyer of FGE. « This is the kind of environment we are in right now and we expect to be in at least the next 4 to 5 years. « . ”
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Petroleum, Oil Refining, Refining, Finance
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