US refiners well placed to maintain top spot

The US refining industry, and particularly its Gulf coast heartland, looks well placed to retain its pre-eminent position in the global downstream sector, despite a wave of looming global start-ups that will ease market tightness and pressure margins.

That was the consensus view at the recent American Fuel and Petrochemical Manufacturers conference in San Antonio, Texas. The conference took place against a backdrop of dislocated global markets as Ukraine war-related sanctions force the rewiring of crude and products trade flows.

While US gasoline demand is unlikely to return to pre-Covid levels, a rebound in jet fuel demand from pandemic-era lows and sanctions-constrained middle distillate supplies have tightened the global markets. But with approximately 2mn b/d of new capacity coming on line this year, largely in non-OECD countries, "the broad theme is that tightness is easing", the vice-president of refining at consultancy Wood Mackenzie, Alan Gelder, told the conference.

Some projects, such as the new 650,000 b/d Dangote refinery in Nigeria, should help alleviate US-specific supply issues, particularly the Atlantic coast's historically low distillate stocks. While milder-than-expected winter weather averted a crisis in the key US northeast heating oil market and average US diesel pump prices have recently fallen to an 11-month low, attention has turned to the peak summer driving season and how well domestic refineries cope with an increase in transport fuel demand.

Bank of America (BofA) 10 years ago forecast a global golden age of refining. It published a new thesis last year suggesting a "regional" golden age, expecting the US to become the high-margin leader despite competition from elsewhere.

"If you think about refining as standing on a cost curve, we view the US sitting on the low end," BofA oil and gas equity research vice-president Kalei Akamine told the conference, noting that European facilities are the marginal refiner and face a higher chance of profit compression and overall closure than US plants.

Gulf coast refiners continue to expand capacity, with major projects at Marathon's Galveston Bay, Valero's Port Arthur and ExxonMobil's Beaumont refineries up and running or in the process of starting up in the first half of this year.

Rational outlook

But changes in domestic demand will probably lead to rationalisation. "There are a few US refiners that we categorise as at high risk of closure" by 2030, Gelder said, especially non-strategic refineries with large emissions footprints. By the late 2020s, refiners could have a costly turnaround approaching and choose to close their asset instead, he said. This would echo LyondellBasell's decision to close its 265,000 b/d Houston refinery after failing to find a buyer for it.

Most global shutdowns will be in Europe and China, Gelder said. "We don't see China wanting to be a refined products export centre from the mid-2020s when demand is going down," he said. This, combined with Beijing's focus on reducing its emissions intensity, could drive capacity closures, he said.

Even BofA, which forecasts a positive outlook for US refining margins this year, driven by relatively cheap indigenous natural gas, does not think that the domestic industry's future involves major capacity expansions — a view shared by refiners such as Phillips 66 and CVR Energy.

The Marathon, Valero and ExxonMobil expansions this year "are some of the last big projects that have been green-lit", Akamine said, as companies look to prioritise investment for energy transition projects such as carbon capture or developing renewable diesel. Future expansions will be small or focused on debottlenecking infrastructure as opposed to large capacity upgrades, he said.

By Nathan Risser