The new map of global refining

Isabella: Hello, everyone, and welcome to another episode of "Driving Discussions," where today we will discuss a very interesting subject. It has been interesting for the last few years, which is the new map of global refining. What we have been covering at Argus is the ever-changing map or refining environment in the world with few capacity in Europe than used to be the case and now new developments elsewhere which have caught everyone's attention. For that I have Benedict George with me. Benedict George is the editor of the European Oil Products Report and we have as well Sarah Raffoul, which is one of the leaders in our consulting team based in Dubai. Thank you for being here. Sarah, as a consultant I would love to start asking you this basic question. Has the map of global refining changed in recent years from what has been the standard before?

Sarah: Thank you, Isabella, and actually that's a great question and I think a perfect way to kick off this discussion. You might know that I've been working in this industry for close to 10 years, but let's be honest, it's not a ton of years, but it has been enough to see the shift from relatively stable markets to periods of real, even headline-grabbing volatility. I did get the chance to experience some pretty major shifts in the global refining industry, especially in the period after the COVID-19 pandemic. One of the biggest shifts we've seen is where growth is happening. Major refining capacity growth has moved from the west of Suez markets towards Asia, the Middle East and even Africa. In fact, China and India are spearheading this growth in refining capacity. Just to put things into context, China's refining capacity has nearly doubled between 2005 to 2025, which was initially driven by surging domestic demand, but this was more policy-led and also strategic. Similarly, India's capacity has grown from close to 3 million barrels per day in 2005 to a little over 5 million barrels per day today, and this is supported more by strong domestic consumption and obviously strategic investments in infrastructure.

Now, at the same time, we're seeing the opposite trend in more developed markets where we're seeing widespread refinery closures in Europe and North America. Now, this is fundamentally reshaping global supply patterns. Now, just to focus on Europe and North America, by the end of 2024 and 2025, refineries in both regions were under pressure from all sides. So you have costs, regulations, demand uncertainty, and there's a great metaphor that came out from the London editorial team. Oh, now that I think about it, Benedict, I think you're the one that wrote this. You described it as a feeling like passengers in a sinking hot air balloon where all are nervously watching each other wondering who's going to be the next one to jump to keep the rest afloat just a little longer. And just to quickly put things into context, sorry Isabella, between 2020 and 2025, we've seen more than 7 million barrels per day of CDU capacity shutting down globally and about 42% of those closures were concentrated in Europe and North America, which really underlines how much pressure refiners in those regions have been under.

Isabella: Yes, that's very interesting, Sarah because as you said, this has been driven by demand in Asia. And I was just curious to ask Benedict, as you were saying who has covered this in so much depth, if he believed as well if these new constructions were influencing capacity shots in Europe.

Benedict: Thanks, Isabella. Yes, I definitely do think the new capacity constructions in other parts of the world are pushing European refiners to close. We've had about 30 or so European refinery closures since 2000 against 1 new refinery opening in Europe, so that's taken away about a quarter of the refineries that were operating in Europe in 2000. The new builds in other parts of the world are best seen as an intermediate step in a chain of cause and effect because for the most part, especially in the Middle East, or in Africa, or in North America, the new builds are responding to profit opportunities, and the profit opportunity is there because those locations are more cost competitive than Europe. So I think you could say the original cause is the shifting cost competitiveness of different locations.

Europe has significantly added to the costs that refiners have to take on not only because of the green measures that European policymakers have put on refiners over the years, for example, with the emissions trading scheme where refiners have to pay a higher and higher cost for their carbon emissions and over time in the future they expect to need allowances to cover more of their carbon emissions, but also more recently because of the exclusion of Russian gas, for example, has massively increased the energy costs European refiners face. So Europe has become a higher and higher cost environment. The capacity naturally moves to the location where it can operate at the lowest cost. This is happening in parallel with other forces that are closing down European refiners. Most importantly the decline of European fossil product demand. European fossil oil product demand has substantially declined over the last 25 years or so, especially around the major economic crises 2008, 2012, and COVID, of course. After each of these crises, demand never recovered to the level that it was at before. That's a massive pressure on European refining economics naturally, so that is closing down a lot of refineries too.

Isabella: And besides from cost and demand, Benedict, as well, we see that these new builds elsewhere are... so the capacity of it is usually bigger than European refiners. We're talking about a part of the world which is dominated by 300,000 to 600,000 barrels per day integrated sites in comparison to more humble sites here in Europe. So and on top of everything that you said, I was going to ask you if that also changes the map in a sense, how competitive can smaller or older hydroskimming refineries be in comparison to these new sites?

Benedict: Absolutely, this is really important as well. You can't turn an old 100,000-barrel-per-day refinery into a new 600,000-barrel-per-day refinery. At some point, you just have to knock down the old one and build a new one. So there's a kind of generational process of replacement in these assets and as we reach kind of the end of one generation and we build the new generation assets, they are going to be built in the location where they're most competitive, and that won't be in Europe. There are some refineries operating in Europe that have been operating since even the 1930s and '40s in some cases, but even there are a lot that have been operating since the 1950s and '60s and they were built for a world where the scale of oil demand just wasn't comparable to what it what it is today. They were built in a world where refining technology was not comparable to what it is today and naturally, as you say, these sites are not going to be able to compete with new 500,000, 600,000-barrel-per-day refineries in other parts of the world.

We see in the data... Argus has analyzed the data on refinery closures in Europe since 2000 and lack of complexity and lack of scale, so being simple and small, are both strongly correlated with refinery closures. So refineries that were simple and smaller were much more likely to close down than the average over the last 20, 25 years or so. But it's important to bear in mind there can be rare advantages that can keep a small, simpler refinery competitive. So most noticeably when you see one of these refineries that is the only one left operating, especially in a landlocked country, the import parity price for products in that country will be that much higher and that will allow that refinery, although it is smaller and simpler, to attract a higher margin for its products and that can keep a refinery like that profitable.

Isabella: This all leads me to the next question, which is open for either of you, Benedict or Sarah, to answer. Perhaps Sarah can give us a bit of an insight in this from her services in consulting, which is how has all of that which has been happening in parallel been having an impact on commercial routes? How have they reshaped with this new capacity dominating elsewhere and [inaudible 00:11:28] in Europe?

Sarah: Yeah, maybe I can go first and maybe just adding to what Benedict has already said. Because the new refineries that are being built in the Middle East and Asia, we're calling them mega refineries, and what do we mean by that term? In simple terms, these new refineries are highly complex and very efficient and, most importantly, they operate with different economics. So for example, they can run on heavy or discounted routes and even maximize high-valued products, etc. And in short, they do have the ability to turn problems into margin, which is a big structural shift for Atlantic-basin refiners, which translate into a tougher competitive backdrop. But turning back to your question, these refineries that have been built, particularly in the east of Suez markets, are increasingly export-oriented. So they aren't just supplying local demand. They're actively increasing market shares or looking for new outlets and destinations such as Europe and Africa and Latin America, which means that the Atlantic basin refiners are facing more competition in their traditional export markets.

Now, I just want to point out one thing, which is if you strip away all the day-to-day market noise, the implication is pretty clear. This puts sustained pressure on refining margins, especially during periods of weaker demand. When global demands soften, these large, efficient refineries tend to keep running while you have higher cost Atlantic basin refineries that Benedict mentioned are the ones that are susceptible to operating challenges.

Isabella: Benedict, what do you think? Do you think that this has influenced commercial routes as well? And I would also be interested to know if the type of products that are being exported, as Sarah said, have had different yields? So say, for instance, more middle distillates than before or less heavier product than before now with this rise of mega refineries?

Benedict: Yes we have definitely seen product trade routes around the world evolve as this refining capacity has shifted. It's important to bear in mind how European demand has changed. So every product market has seen a different trajectory of demand relative to the trajectory of production around the world. Refiners are choosing when to close down or open up a refinery. They have to make all the products or they have to stop making all the products, but demand for the products are each moving independently in Europe. Diesel demand has declined a lot over the last 25 years. Gasoline demand has increased somewhat. Naphtha demand has decreased a lot. Jet fuel demand has increased a lot. So they all have completely individual trajectories.

That means, for example, as Europe has closed down refineries, it has not needed to import more diesel particularly. The closure of capacity has pretty much tracked the decline of diesel demand. Germany actually has imported less diesel over time despite closing down refineries. So diesel is pretty much secure and trade routes have continued much as they were in the past with the exception, of course, of sanctions against Russia. But in terms of the interaction with production capacity, diesel has been steady. Europe has, on the other hand, needed to import a lot more jet fuel than it used to because Europe has been consuming far more jet fuel at the same time as closing down its refineries. So Europe now is heavily, heavily dependent on jet fuel imports, particularly from the Middle East, from the Middle East Gulf, from India, from in some cases East Asia as well.

Then looking at gasoline, for example, Europe has always had a surplus of gasoline, certainly in recent decades. Europe has now found that it has a much weaker international market for its gasoline because of the startup of a new mega refinery, as we call it, in West Africa. Europe used to import gasoline primarily to the U.S. and to Nigeria, but now the Nigerian market has virtually evaporated because the Dangote Refinery in Nigeria is capable when operating strongly of more or less serving Nigerian gasoline demand. So overall we see European capacity declining with European demand, but for each product, demand and capacity are not aligned and we see dramatic change in some of these trade flows as a result.

Isabella: So it's my understanding that in some of these markets for some of these products, fuel supply might be a concern, whereas for some others it's just an economic concern of it is viable for refineries here to export to the places that they used to.

Benedict: That's absolutely right. Yeah exactly. For some fuels, I would point to jet fuel particularly, security of supply could be a real concern and you see that when, for example, there is discussion of the risk of the Strait of Hormuz at the bottom of the Mid-East Gulf being disrupted or closed, and that moves European jet fuel prices very significantly because if that strait was closed, a very large proportion of European jet fuel imports would be blocked. But for gasoline, for example, there's no security of supply issue at all, rather European refiners are worried about where they might be able to sell their surplus gasoline, so it's quite the opposite situation.

Isabella: I see, seems like it's a very challenging moment for the market. And I wanted to ask you, Sarah, what is Argus doing as a market intelligence provider to help illuminate this market in this ever-changing fundamentals?

Sarah: So actually, one of the new service offerings the consulting subscription team is launching is the Argus Refined Products Outlook, which helps cancel out this noise, the grabbing headline that's creating volatility, to give out clear messages to what the driving factors are in the in the market. One of the things we do track are obviously refinery capacity closures and additions, which we now will provide through the Argus Refined Products Outlook. And another service is the Argus Refinery Gate Values, which they call RGVs, which I think helps refiners identify the most profitable market for a specific crude, which is becoming much more important, right, in this landscape, in this market, particularly as we have high-complex assets, whether they are older ones or whether we have new ones coming up. And this RGV represent the optimal calculated value of a specific crude grade at the refinery gate determined by the market prices of its refined products minus processing costs. Obviously, whoever is interested can reach out to the team.

Isabella: Fantastic. To add to the to-do list after listening to the podcast. Just to grab up and to ask this final question, whoever, or both if you want to answer it, what are we expecting in terms of news events in the refining world for this year, 2026, or in the next 5 to 10 years?

Benedict: I can go first. I actually think slightly to change tone from most of what we've talked about in the podcast, I think it will be interesting if we do not see any refineries close down in Europe in 2026. I think there's a real possibility there won't be any more closures in 2026, and then there may be more in 2027. The reason I think there may be none in 2026 is because there were a lot in 2025. So between 2024 and 2025, Europe lost about 400,000 barrels a day of refining capacity and one of those refineries closed quite unexpectedly because of the bankruptcy of its operator. So Europe lost a lot of capacity suddenly and at certain points in 2025, we saw European product margins against crude go through the roof. So particularly in June and July, and then in October and November we saw huge volatility particularly for middle distillate margins against crude, and then a very counter-seasonal spike in gasoline margins towards the end of the year. This could promise the remaining refiners in Europe enough hope, could promise them enough potential profit in 2026 if there are similar bottlenecks in supply that they may keep going. I wouldn't be surprised if they all pushed through 2026 to eke out any potential profit.

Once we've got through 2026, if that's the case and none of them have closed down, I think we would expect the structural decline of European fossil product demand to have continued. We know that the EU governments are implementing new green measures under the Renewable Energy Directive. Germany, for example, is changing the rules around biofuel blending, which is expected to heavily diminish fossil road fuel demand, especially diesel. So by the end of the year, we may see demand decline further without any more closures, at which point product margins against crude will probably be lower and less volatile, and then you may see more closures in 2027. That's all hypothetical, of course. It will be interesting if it does play out like that.

Sarah: I think one thing to note in the medium term is that we are seeing new capacity. We are seeing close to 4 million barrels per day of capacity coming online between now and 2030. Obviously, 80% of which is coming from Asia Pacific. But one thing that's quite important to note is that not all of these projects have firm timelines. Some are still vulnerable to delays and even others may never fully materialize, which is something we did see in the past. Some of the notable projects maybe that are worth mentioning is the new Panjin Integrated Refinery petrochemical complex in China, which is a joint venture between the Chinese state-controlled Huajin Petrochemical and Saudi Arabia state-owned Saudi Aramco. This refinery is expected to come online in the second half of the year. The reason why I am giving you this example is because this is quite an important project. It reflects the new model of refining growth, which is highly integrated, petrochemical-focused, and designed for long-term resilience beyond, for example, transportation fuels.

If we look beyond 2030, it is very important for me to flag that there are currently very limited firm refining capacity additions announced and almost none have reached the final investment decision. So most post-2030 capacity remains quite indicative rather than committed. And you know, I was going through the latest World Oil Outlook 2050 that was published last year by OPEC. Now, they expect refining capacity set to increase by over 7 million barrels per day between 2030 and 2035, which they claim is supported by rising demand in most of the developing region. But at Argus Consulting, we are taking a more conservative view because we do expect demand growth to significantly slow down compared to where OPEC has it. But one country we expect to remain the most likely source of post-2030 additions is actually India.

Isabella: That's very interesting, and I stick with what you said of not a lot of things being announced after 2030 so far. Because obviously I am going to encourage our listeners to have a long-standing relationship with us and keep on looping Argus for any new developments besides from the things that now we are able to discuss because there are the things that now we know. So please, everyone listening, just follow through Argus Direct, be aware of the new refining outlook that the consulting services are providing. And I want to thank you, Benedict and Sarah, for joining me today. Follow other "Driving Discussions" episodes, and we'll hear each other next time.