Refining Capacity Outlook to 2020: 2015 Developments
November 2015 | Patrick Green, Alan Martin
Refining capacity additions continue at historically high rates
The latest results from the McKinsey refinery capacity additions survey indicate that net refinery capacity additions continue to be high in comparison to history.
Total net additions of distillation capacity out to 2020 are forecast at 9.4 million bpd globally (see Exhibit 1). This is equivalent to a 1.6% annual growth rate in global capacity, versus a 10 year historical rate of 1.2%. New greenfield refineries, particularly in Asia and the Middle East, continue to provide the largest part of this growth.
Conversion capacity additions continue to be proportionally greater than those of distillation capacity, driving a trend toward increasing average complexity for the industry. This results partly from the higher complexity of most of the new greenfield refineries, relative to the installed capacity base, but there is also significant continued investment in conversion projects at existing refineries, unaccompanied by expansion of distillation capacity. This trend suggests a growing capability, and desire, of the refining industry collectively to run heavier crude and generate less fuel oil.
Several large changes underlie a fairly stable net outlook
Net distillation capacity forecast to come onstream by 2020 has declined by 4% compared to our August 2014 survey. However, within this high level picture, there are several major underlying developments in project cancellations, new project announcement, and newly announced closures (see Exhibit 2).
These underlying drivers, thus far, have been largely offsetting. Project cancellations have occurred, but are balanced by new and firmed up projects, plus upward revisions to project capacities. The net decline in capacity additions in this period is driven by newly announced plant closures; without these closures, forecast additions to 2020 would have increased over the past year. Finally, there have also been many delays within our forecast period, which change the annual forecast, but not the total.
There have been several project cancellations, both explicit announcements and projects put ‘on hold’, and projects delayed beyond 2020. Collectively these have reduced the expected additions through 2020 by 1 million bpd.
These cancellations have primarily been in Latin America, most notably two large projects in Brazil: the Premium I refinery project was cancelled in January 2015; and the Comperj project has seen construction work halted and uncertainty develop around its completion date. In Colombia, the Barrancabermeja refinery upgrade project was placed on indefinite hold, though not formally cancelled, in May 2015.
Outside Latin America, there are fewer major cancellations. In China, the Hainan refinery and petrochemicals project has been significantly delayed, with its potential onstream date now beyond 2020.
New and firmed up projects
New project announcement and firming up of previously uncertain projects have added 1 million bpd of new capacity to the 2020 forecast, essentially offsetting the effect of project cancellations. The impact from new projects is largest in Africa. In Egypt, an expansion project at the MIDOR refinery was announced in July 2015. In Uganda, the long planned greenfield refinery at Kaabale saw progress with an international consortium awarded a majority stake in the plant in February 2015. Distillation capacity was revised upwards by 250 thousand bpd at the planned new Lekki refinery in Nigeria.
There have also been new and firmed up projects in Asia. The largest single change has been the RAPID greenfield refinery in Malaysia, for which EPC contracts were signed in August 2014. Additional, smaller projects include: an expansion at the Ta-Lin refinery in Taiwan, designed to partially mitigate the closure of the Kaohsiung refinery; and the firming up of the first phase of an expansion of the Bina refinery in India.
Newly announced closures
The net capacity change has also been affected by 900 thousand bpd of new refinery closure announcements, mostly in Europe and Japan.
In Europe, these include the confirmed closures of the Gela refinery in Italy and the Milford Haven refinery in UK, and the plans to close La Mede in France and halve capacity at the Killingholme refinery in the UK by the end of 2016.
In Japan, refiners have continued to announce capacity rationalization to comply with the second phase of the METI Refinery Ordinance. Distillation towers at the Chiba and Yokkaichi refineries will close, and operation has been suspended at the Okinawa refinery.
Delays within the forecast period
There are also notable delays that have been observed in some projects that will still commence operations within our forecast period. Specifically, although the total capacity to be added over the entire forecast period does not change much, capacity due onstream in 2016 and 2017 has declined substantially while that due onstream in 2019 and 2020 has increased (see Exhibit 3).
Delays are most apparent in China and Russia. There is increasing uncertainty around some of the greenfield projects in China, given expectations of lower demand growth. Projects have been delayed, but as of now, most still fall within our forecast period. In Russia, the planned widespread conversion expansion has seen significant delays, but our view is that most projects including most of the new hydrocrackers will continue to move ahead.
Implications across the downstream value chain
- For refiners - high capacity additions continue to indicate a need for high oil product demand growth to reduce the risk of over-supply and consequent pressure on utilization and margins in the future. However, the project delays being seen reduce the near term risk of excess capacity especially in the 2016-2017 period and, depending on the level of demand growth, might prolong the current period of relatively high margins. Pushing peak refining capacity growth further towards 2020 increases uncertainty around refining market conditions in the period beyond 2020.
- For traders and the shipping sector - the impact of this capacity outlook for trade flows varies by region. Latin America is currently significantly short light product; fewer new refining projects will prolong reliance on product imports and continue to support the US Gulf Coast as a product export hub. Delays seen in Russian conversion projects might slightly reduce pressure on European refiners, but continued growth in the Middle East and continued US product exports imply that the growth of imports into Europe will persist and drive additional import logistics-related opportunities.
- For suppliers and the EPC industry - there might be short term relief that lower oil prices have not resulted in declines in refining construction activity, but project delays increase uncertainty and downside risk. Continued high additions to 2020 also increase the risk of a period of low capacity growth beyond 2020, unless demand growth reverts to a level strong enough to support continued expansion.
About the authors
Patrick Green is a knowledge expert and Alan Martin is a senior expert for the Oil & Gas Practice, both located in McKinsey's London office.