Refinery Additions and Subtractions Complicate Outlook for 2023

Much of the oil industry’s attention in 2022 was appropriately focused on a shortfall in global refining capacity that was borne out by some of the largest refining profits in modern history.

But with the start of the new year, some new refinery capacity is much closer to entering service. That makes it more likely that facilities far from the continental U.S. will have a sizable impact on global markets, particularly if consuming countries flirt with or slip into recession.

Many refinery projects originally expected to come online in 2021 or 2022 were delayed into 2023 and a few of the more ambitious projects may have to wait for 2024 or 2025. In short, products’ and crude traders need to keep close track of the upcoming changes to world crude runs and downstream conversion capacity that may significantly impact returns for both new and existing refineries.

OPIS, together with the refinery consultants at Turner Mason, took a look at expected global refining additions and subtractions. Some of the names may be familiar and others may soon move into the lexicon of trader vocabulary, replacing facilities such as St. Croix that no longer appear relevant.

Turner Mason’s John Mayes pointed to a new sense of urgency for some of the expansion projects, saying the huge margins created by Russia’s invasion of Ukraine have hastened the need for more barrels.

In less than a month, the European Union will begin to enforce an embargo on Russian refined products. Many of the managers of new refinery equipment are motivated to take advantage of record returns before that happens.

The U.S. is home to only one real 2023 “mega-project,” but it may impact gasoline, diesel and jet fuel later in the first quarter of 2023.

ExxonMobil Corp. will expand the capacity of its Beaumont, Texas, refinery by 250,000 from its current nameplate of 384,000 b/d.

The project is part of the company’s “Growing the Gulf” plan and is designed to find a home for Permian Basin crude produced by the major. When completed, the refinery will be the largest single refining complex in the country.

The Beaumont facility weathered a cold snap on Christmas weekend and reports indicate that it is currently running at around 235,000 b/d, during the expansion work, which is expected to be finished by April. At some point in the second quarter, it will be processing about 534,000 b/d of crude and feedstock.

In addition to that project, the first quarter is expected to see the restart of the rebuilt 50,000 b/d Superior, Wis., refinery that has been offline since an early 2018 explosion and fire. Most industry sources expect the plant will resume production sometime in March.

Some smaller tweaks are also in the works for other U.S. refiners. Valero Energy Corp. is adding 102,000 b/d of crude processing capacity at its Port Arthur, Texas, refinery and the work will include a 55,000 b/d increase in coking capacity.

In the minus column, the largest subtraction will come when Lyondell’s Houston Refinery complex closes at the end of 2023. The 268,000 b/d plant is destined for repurposing and sources believe efforts to its production will have little chance of success, given that a new owner would need to make more than $1.5 billion in required upgrades.

Phillips 66 Co.’s twin facilities in the East Bay region of California will be taken out of the mix soon this year. The company is well underway with its “Rodeo Renewed” project to convert the San Francisco area complex into a renewable fuels’ facility.

The company will stop running crude and instead use waste oils, fats, greases and vegetable oils to make more than 50,000 b/d of renewable diesel, renewable gasoline and sustainable aviation fuel.

And the company’s Santa Maria facility in San Luis Obispo County, which now processes crude and makes intermediates for Rodeo, will be decommissioned.

Foreign Expansions Highlight a Busy 2023

A typical refinery project that is properly planned, funded, and constructed takes about five years from start to finish, according to Turner Mason. A number of projects originally slated for 2022 start-ups were pushed into 2023.

That means that what was once expected to be a quiet year of new processing will be much busier.

Beyond the U.S. projects, not much work is planned for the Western Hemisphere. Latin America looks to remain compromised by a very poor utilization rate, thanks mostly to the decline of PDVSA-affiliated complexes.

Turner Mason late last year assessed a utilization rate of just 53% for Latin America, thanks in great part to the miserable 9.5% operation rate for PDVSA plants. But even if PDVSA’s performance is removed, Latin America refineries still ran at a subpar 65%.

Closer to the U.S., lots of rhetoric and plenty of skepticism surrounds the Pemex Dos Bocas refinery. Mexican President Andres Manuel Lopez Obrador last summer announced the “inauguration” of the 340,000 b/d complex, with talk of a start-up in mid-2023. But Turner Mason doesn’t expect a startup until 2024 and believes full capacity won’t be reached until 2025.

Very little activity is noted through South America, so that continent looks as though it will remain very dependent on U.S. Gulf Coast output, although some countries could choose to import products from Russia, China, or Europe.

A small project that increased Petroperu S.A.’s capacity by 33,000 b/d is believed to have been completed.

Across the Atlantic, there will be plenty of focus on a refining complex heralded as a major game changer for Africa. Nigeria, which has often relied on U.S. and European refiners for gasoline, diesel, and jet fuel is slated to see output begin at the new 650,000 b/d Dangote refinery.

The plant, named for the richest man in Africa, saw construction completed in 2022 with ongoing work tying in equipment at the complex. Turner Mason believes a March startup is likely but projects relatively low operating rates in the first year.  If the plant meets its promise of supplying West African countries with transportation fuels, it could have a negative impact on European refineries and perhaps even orphan a merchant plant.

What makes the Dangote refinery unique is also an attribute that provokes some criticism. Other refineries of this scale tend to have multiple “trains” (crude oil distillation towers) but Dangote will be a single-train behemoth.

Further, some substantial capacity should come onstream in the Middle East within the year and, as is the case with operators along the U.S. Gulf Coast, those facilities will have a built-in advantage of low-priced natural gas.

First up is the Kuwaiti Al-Zour refinery, which is believed to be essentially completed, albeit on a slower timeline than originally planned. There is an ongoing tender for buyers of low-sulfur fuel oil from the 615,000 b/d facility and sales of jet fuel were authorized from the complex late last year. The final work on diesel hydrotreaters was completed in December and that should lead to progressive ramp-ups of finished light products through the first half of 2023.

Global refined product traders see this $16 billion plant as a huge factor in diesel and jet fuel markets, thanks to high yields of both. Also in the relatively tardy classification is the new 400,000 b/d Saudi Aramco refinery at Jizan. The original completion date was 2019 and 2021 brought the commissioning of about half of the nameplate capacity. The facility is still in the ramp-up phase, but full rates are likely before the end of the first quarter.

To the southeast of the Saudi complex, work is continuing at a 320,000 b/d refinery owned by Oman Oil and Kuwait Petroleum Corp. The full was described as 95% complete in November, but commercial operations may not commence until close to the end of 2023.

In Asia, China started its 320,000 b/d Shenghong Lianyungang refinery in mid-2022 and the 400,000 b/d Jieyang refinery commissioned a 200,000 b/d crude unit in mid-autumn. Various other pieces of equipment, including hydrotreating, are being prepared and the greenfield facility should have barrels for export or domestic consumption.

Another ambitious project for a refining and petrochemical facility in Yantai City has been slowed due to financing issues, with start-up pushed into 2024.

Impacts Will be Measured over Twelve Months

The impact of all the additions and subtractions will be measured over the next twelve months and beyond.

While refinery experts don’t believe contemporary $40-$60/bbl cracks for diesel or jet fuel represent a “new normal,” they are hesitant to put numbers on how much margin attrition could occur as new facilities are commissioned.

Turner Mason observes that total refinery completions in 2022 were above historical levels but the additions need to be weighed against the multiple shutdowns caused by Covid-19. From 2018 through the pandemic period, the U.S. saw a total of 1.9 million b/d of capacity reductions and the rest of the world lost about 2.1 million b/d. Some of those idled facilities have restarted but quite a bit of output was lost.

Turner Mason warns that a slump in refinery capacity additions could still occur, with peak demand still years away.

Unless more projects are announced, “we could see another refining squeeze around 2025/2026,” according to Mayes.

There will of course be an impact on crude markets. Turner Mason’s analysis sees new facilities as mostly dependent on medium blends of crude.

The new output also appears to be distillate-rich, in contrast to the 20th century when gasoline represented the most magical molecules.

The expected 5.791 million b/d of new refining capacity breaks down to about 2.5 million b/d of distillate and 1.827 million b/d of gasoline.

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Tags: Crude, Crude oil, Gas & Diesel