This significant shift, attributed to weakening refining margins, stricter environmental laws, and evolving energy demands, particularly impacts European and Chinese refineries.
A recent report by energy consultancy Wood Mackenzie highlights the risks facing the global oil refining industry, with more than a fifth of the world's capacity at risk of closure. The analysis, which scrutinized 465 refining sites, identified 121 sites that may be vulnerable to shutting down. This represents 20.2 million barrels per day (bpd), or 21.6% of the global capacity as of last year.
Refining margins are expected to weaken as demand declines and the imposition of carbon taxes creates additional financial burdens for refiners. Europe and China are identified as the regions facing the highest closure risk, with Europe's refiners expected to see a drop in net cash margins from 2030 due to the reduction of free carbon emission allowances. Moreover, demand for transport fuel in developed countries is predicted to start decreasing from next year.
Wood Mackenzie's report indicates that "China will see liquid demand peak by 2027 and start to fall as the country actively electrifies their road transport." While non-OECD countries might continue to see demand growth beyond 2030, global demand for transport fuels falling will also affect them.
Europe's trade with Nigeria, valued at $17 billion annually, could suffer as the Dangote Refinery, with a processing capacity of 650,000 bpd, commenced operations earlier this year. This facility is poised to satisfy Nigeria's demand for refined petroleum products and export surpluses.
Oil majors are responding to the changing market dynamics by announcing the transformation of European oil refineries into biofuels-making facilities, as seen with Eni's refinery in Livorno, Italy, and Shell's refinery in Wesseling, Germany.
According to Reuters on March 28, the Wood Mackenzie analysis also pointed out that nearly 30 European refineries have closed since 2009, with about 90 remaining operational. These closures have been driven by competition from newer, more complex plants in the Middle East and Asia, along with the impact of the COVID-19 pandemic.
Emma Fox, a senior oils and chemicals analyst at Wood Mackenzie, mentioned that increasing operating costs could make closures the only viable option for some refineries. The Dangote refinery's emergence could end the long-standing gasoline trade from Europe to Africa, intensifying the challenges for European refineries.
In China, smaller-scale independent refineries known as 'teapots' face heightened regulatory pressures and competition from larger, often state-owned, integrated sites.
The global oil refining industry is undergoing a significant transformation due to environmental regulations, the rise of electric vehicles, and biofuels. The potential closure of a substantial portion of the refineries poses a restructuring challenge for the sector, with economic and strategic implications for regions reliant on these facilities.
