We saw an improvement in global refining utilization and margins in 2017 that was a welcome turnaround from much lower levels in 2016. An unexpected uptick in global product demand was the biggest contributor to this, but a slowdown in new refinery additions also helped bring the market into balance.
Moving forward, demand growth is generally expected to remain strong, averaging around 1.2 million barrels per day (b/d) each year, for the next few years. However, the expected growth in new refinery additions may create headwinds for the industry.
In 2017, global refinery additions totaled just over 800,000 b/d (exhibit), which was about 33 percent lower than the increase in global oil product demand. In 2018, we expect a much higher level of addition: over 1.6 million b/d of new capacity, or 33 percent higher than the expected growth in demand. This likely will push the market into an over-supplied mode, thinning margins going into 2019.
Farther out, in 2020 and 2021, we expect another surge of new refining capacity totaling about 3.6 million b/d to come online.[[exhibit 1]]
Capacity itself is only half of the story. The new capacity being added will mostly be very complex greenfield additions—more complex than the average installed capacity, and very much more complex than the marginal operating capacity it will displace when it begins to operate. This will effectively allow the industry to generate twice the amount of light product per barrel of input from this new capacity compared to the marginal capacity being displaced.
Fortunately for the industry, however, 2020 will see the impact from changing global bunker fuel specifications due to marine pollution – MARPOL regulations – that should be more than enough to balance the market by absorbing some portion of this new refinery capacity. We anticipate that MARPOL will result in a shift in bunker fuel demand from resid to marine gasoil sufficient to push refining utilization back to levels above 2017 and keep them high for at least a few years. In fact, the surplus that develops between now and 2020 may prove critical to meeting this market shift.
Tim Fitzgibbon is a senior industry expert based in Houston.