Slumping fuel consumption during the pandemic is accelerating the long-term shift of refining capacity from North America and Europe to Asia, and from older, smaller refineries to modern, higher-capacity mega-refineries.
The result is a wave of closures, often centring on refineries that only narrowly survived the previous closure wave in the years after the recession in 2008/09.
Fuel consumption has been stagnant or falling across most of North America, Western Europe and Japan since 2007 as a result of efficiency improvements.
North American, European and Japanese refineries have been left battling to protect their share of a declining market, creating downward pressure on profitability.
The problem of overcapacity has been masked during periods of strong economic growth but exposed every time the business cycle turns down.
In contrast to Western Europe, North America and Japan, fuel consumption has grown rapidly across the rest of Asia over the last decade.
The region’s three sub-markets in West Asia (centered on the Gulf), South Asia (centered on India) and East Asia (China) have been responsible for more than two-thirds of worldwide oil consumption growth since 2009.
Asia has seen sustained growth in its refining capacity to match the growth in consumption; refineries are typically built near to consumption centers since it is operationally simpler to transport crude than products.
Asia and the Middle East account for 43% of worldwide refining capacity, almost exactly matching their 44% share in global oil consumption, with both shares up from 33% in 1999.
Asia’s refineries are more competitive because they are nearer growing markets; process large volumes with better economies of scale; and are equipped with more modern and sophisticated equipment.
In the 1960s and 1970s, new refineries were built at a minimum efficient scale of 100,000-250,000 barrels per day of crude capacity, but refineries commissioned in the 2000s and 2010s are generally 300,000-400,000 bpd or more.
New mega-refineries are often built with integrated petrochemicals units, enabling them to produce a higher share of higher value-added chemicals as well as lower-value fuels.
As a result, the new mega-refineries can squeeze a higher share of valuable products from the same crude at lower cost, outcompeting rivals in North America and Europe.
Facing a shrinking fuel market at home, North American and European refiners have found it increasingly difficult to compensate by growing fuel exports profitably.
And as the average size and complexity of new oil refineries has increased, the oldest, smallest and least complex refineries have become uneconomic.
The result is a wave of refinery closures, with jetties, tank farms and pipelines repurposed to become import terminals.
Most closures have been in North America and Europe, but smaller, older and fuel-only refineries in other parts of the world, including in Australia and the Philippines, have also been hit.
