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Global refining capacity is going to keep growing

Fast-growing markets are adding more plants and eking out gains at older ones. What's coming on, where, and when?

Global refinery capacity looks set to expand steadily through the early 2020s, and industry utilisation rates are expected to remain high. Capacity expansion is expected to lag most analyst expectations of world oil demand growth of 1.3m barrels a day per year by about 300,000 b/d per year through the early 2020s. Most new capacity is being developed in the Asia-Pacific and the Middle East regions.

New refinery construction is underway as oil markets face significant shifts in product output and demand. Rising US light tight oil (LTO) output suggests increased light distillate production, while an expected increase in middle distillate demand will stem from new IMO regulations mandating the use of lower-sulphur marine fuels beginning in 2020. Some oil refiners believe the former will lead to a gasoline surplus and a progressive deterioration in light distillate values relative to crude which will largely be counterbalanced by the latter. Others think growing petrochemical demand will mop up much of any naphtha surplus.

Through 2023, the largest national contribution to additional refinery capacity is expected to be in China, where seven new refineries totalling 2.5m b/d of capacity are planned, according to research and consulting firm Globaldata. At least a third of this capacity is expected to be brought online by China's independent refiners as they further emerge from under the shadow of their larger state-controlled competitors. Over the longer term, fast-growing India is expected to increase its refining capacity by 3.8m b/d by 2030. Other Asia-Pacific countries are also increasing their refining ability: Vietnam expects to bring 200,000 b/d of new capacity on stream at its Nghi Son plant this spring.

Middle East oil exporters are continuing their long-standing strategy of adding value to their production by exporting increased products volumes rather than crude oil. Iran, Iraq, Kuwait, Oman, Saudi Arabia, and the UAE collectively have announced 2.7m b/d of new refining capacity, most of which is expected to be on stream by 2022. In smaller non-OECD markets, Nigeria's Dangote refinery is cautiously expected to add 650,000 b/d to African processing capacity by 2020, while Algeria's Sonatrach is developing additional capacity to supply its growing domestic market. Egypt's EGPC is expected to bring 95,000 b/d of additional capacity in the second half of 2018.

Intriguingly, while China and Middle Eastern countries are adding the most refining capacity, their current utilisation rates are low relative to other areas. Alan Gelder, head of Wood Mackenzie's refining, chemicals and oil markets division estimates that capacity use at Middle East refineries is about 80%, while China's is about 70%, compared with 90% in the US market. Capacity slack also exists in Latin America. The International Energy Agency notes that the Mexican, Venezuelan, and Brazilian systems are all running well below nameplate capacity.

OECD markets are expected to see overall gains in refinery processing capacity as Turkey adds about 200,000 b/d to Socar's Star refinery at Aliaga this year, while the US adds capacity to handle increased LTO availabilities.

Many in the market see Europe as the region most likely to lose refining capacity, as many older European refineries lack the cracking or coking capacity needed to make the best of the shift from high-sulphur fuel oil to middle distillates in maritime fuels. Oil industry officials say several Italian and UK refineries may be at risk of closure because their configurations won't allow them to defend their market, and margins, against imports from new, more sophisticated, Middle East and Indian installations. Inland Central European refineries are expected to earn relatively high margins because they dominate their hinterlands, and likely will be supported by local governments concerned about national security of supply.

This article is part of an Report series on Refining. Next article: Refiners and finance: who's winning and where?

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