What's New

Refineries are switching to biofuels or shutting down due to hostile regulations—but demand for oil products is growing. This could result in either a market imbalance that will make these products more expensive or a geographical imbalance, which those who care about supply security wouldn’t like.

A total of 101 out of 410 refineries around the world are at risk of getting shut down over the next decade, Wood Mackenzie analysts estimated recently, noting that this number represented 21% of global refining capacity. The reasons for this estimate include peak oil demand that would reduce demand for the output of refineries and high operating costs in places such as Europe, which collect carbon taxes from their energy industry.

Indeed, Wood Mac considers the inflated operating costs of refineries an especially important risk factor for their future prospects, as well as their investments in decarbonization. “Refineries without committed investments in low-carbon technologies, such as carbon capture, energy efficiency upgrades, or alternative fuels, are especially exposed,” the analysts wrote. “Those located in regions with established or escalating carbon pricing costs, including the EU, UK, and Canada, are under the greatest pressure.”

The carbon prices in these jurisdictions are scheduled to rise to three times above the global average by 2035, the analysts also noted, which will likely make the continuation of the life of some refineries in the EU, the UK, and Canada economically nonsensical—unless policies change.

At the end of last year, analysts and traders told Reuters they expected higher diesel prices this year because of refinery closures. At the time the report came out, refiners were experiencing depressed margins across geographies. But with several refineries slated for shutdown this year, things were going to change—which suggests demand for fuel remained stable if not actively growing.

Yet some have forecast demand will grow this year, even as three large refining facilities close: the Grangemouth refinery, Scotland’s only crude processing facility, which is set to close in the second quarter of 2025; LyondellBasell’s Houston oil refinery, and the Los Angeles refinery of Phillips 66, scheduled for closure by the end of next year.

These three represent refining capacity of some 1 million barrels daily. Meanwhile, however, around 800,000 bpd in new refining capacity is set to launch in Asia, strengthening the argument that operating costs are a crucial factor, and so are carbon taxes: Asian countries have nowhere near the stringent carbon tax legislation that the UK, the European Union, and California have. So, these 800,000 bpd in fresh capacity would certainly compensate for the closures, but they are capacity abroad, not at home, and many have come to view this as a potential problem for supply security—hence the EU’s intention to invest directly in LNG production across the world, for instance.

In this context, it is interesting that the Wood Mac analysis points to Europe and China as homes to most refineries that are at risk of closure. While in Europe the top reason seems to be the carbon tax and its effect on operating costs, for China, the chief factor is decarbonization and more specifically the electrification of transport.

Many observers have argued that China’s concerted electrification push and the diversification into LNG-powered trucks would kill a lot of oil demand. Indeed, consumption data suggests there has been an impact. Yet a new refinery just started operating in China a few months ago, and more recently, its second unit started up, adding a fresh 400,000 bpd to the country’s total capacity. It seems demand is not quite dead yet and will not be for some time—especially for those who make their refineries petrochemical complexes, too.

The refining and petrochemical facilities have the best chances of survival, according to Wood Mackenzie. This is because most forecasts for fuel demand, albeit based on policies that are not as immutable as most assume, see a drop in that over the medium term. Most forecasts for plastics, on the other hand, are rather brighter, regardless of climate policies.

If closures proceed as predicted, which is quite likely in the current political context in places such as Europe, the EU, and Canada, there is a risk of fuel shortages emerging, as reported by the U.S. Energy Information Administration in the March edition of its Short-Term Energy Outlook. The reason: while refineries are shutting down, demand for fuels, notably diesel, has repeatedly surprised to the upside. To tackle the potential shortage, the EIA said the U.S. might have to curb fuel exports—because energy supply security is important.

It appears, then, that demand is not the primary reason for refinery closures. With EV sales disappointing and a “revolution” in the electrification of transport never quite really happening, demand for fuels looks rather stable—and still growing despite the unquestionable rise in EVs on roads. So, refinery closures appear motivated by other factors, notably operating costs. These are rising due to openly hostile policies to the energy industry—and the resulting closures are threatening the security of fuel supply and significantly increasing the risk of boosting reliance on imported fuels.

By Irina Slav for Oilprice.com