Global refining industry faces twin challenges by 2030

The oil refining industry has enjoyed bumper profits in the past couple of years, buoyed by strong margins, sustained demand growth and low inventory levels. While profits have softened since the record highs of 2022, many refiners are still generating significant returns, allowing them to pay hefty dividends to shareholders.

Despite record profitability, there has not been a surge in new refinery projects. Some planned closures have been deferred as refiners capitalise on the short-term benefits of the industry boom. However, future profitability for refiners is closely linked to the global oil demand outlook. Oil demand is expected to be tempered by the global transition to clean energy.

According to the International Energy Agency (IEA), global oil demand will plateau around 106 million barrels per day (mb/d) towards the end of the decade, marking a rise of 3.2 mb/d between 2023 and 2030. This growth will be dominated by Asian economies, particularly India and China, while oil demand in advanced economies is expected to decline sharply.

The IEA published the latest edition of its annual medium-term market report, Oil 2024, in June 2024. The report provides insights into global oil markets and highlights a challenging landscape for the industry, with significant implications for refiners.

Current state of the global refining industry

Twin challenges weigh on the profitability of the refining industry to 2030: slowing oil demand growth and the rise in non-refined products, including a surge in natural gas liquids (NGL). In the IEA analysis, NGL and biofuels account for three-quarters of the projected global demand growth over the 2023-2030 period, undermining the demand for refined product supplies.

The IEA noted the role of electric vehicle market share growth in reducing transport fuel consumption. Government mandates to increase renewable and biofuel supplies further compound pressure on refineries to lower operating rates.

Oil refining is a global business. The IEA’s 2024 report delivers a more cautious outlook on the trajectory of oil refining capacity, expecting subdued growth with a 3.3 mb/d increase in capacity by 2030, down from the 4.4 mb/d forecast in its 2023 report for the 2023-2028 period.

Challenges from slowing oil demand

Nameplate capacity, the maximum amount of crude oil that a refinery is designed to process over a given period, will reach 107.4 mb/d. This is up from 104.2 mb/d, comprising 5.1 mb/d of new projects minus 1.8 mb/d of forecast closures. This capacity will easily exceed world demand for refined products in 2030, which is estimated at 85.8 mb/d. The IEA stipulates the need for refiners to progressively modify their product output in the wake of falling gasoline demand. Annual net capacity additions over the seven-year period are expected to average 470 thousand barrels per day (kb/d), a significant drop from the 780 kb/d achieved from 2010 to 2019.

The current wave of refinery capacity growth is “likely to be the last,,” says the IEA, with the Paris-based agency expecting rationalisation of capacity moving forward, particularly West of Suez. It noted that 4.4 mb/d out of the projected 5.1 mb/d of gross additions to 2023 are due to come on stream from 2024 to 2026, with sparse additions from 2027, mainly in China and India. An eastward shift of capacity growth, primarily East of Suez, will account for nearly 85% of the increase.

Falling utilisation rates in mature regions raise the risk of further capacity closures this decade. A report by energy consultancy Wood Mackenzie earlier this year stated that 21% of global refining capacity in 2023 was at some risk of closure. Analysis of 465 refining assets indicated Europe and China have the greatest number of high-risk sites. In Europe, about 30 refineries have already shut down since 2009. In China, high-risk sites are mainly small-scale independent refineries, so-called “teapot” refineries, which are facing more stringent government regulations.

In the latest U.S. Energy Information Administration (EIA) Refinery Capacity Report, operable atmospheric crude oil distillation capacity the primary unit in a refinery where the initial separation of crude oil into different fractions occurs, increased by 324 kb/d in the United States, in 2023, a 2% rise. ExxonMobil’s Beaumont refinery in Texas, which boosted capacity by 240 kb/d to a total of 609 kb/d, was responsible for much of this capacity growth.

Impact of the energy transition

However, the IEA report emphasises significant challenges for the U.S. refining industry in the near term, projecting a decline in refinery runs of 1 mb/d by 2030 alongside dropping utilisation rates and announced refinery closures of almost 400 kb/d. It noted that Phillips 66’s 128 kb/d Rodeo facility in California has been converted to a biofuel facility, and Houston’s Lyondell refinery in Texas will close its 263 kb/d operation in 2025.

In Europe, capacity closures have occurred at an annual average rate of 220 kb/d since 2010. The IEA expects a decline in refinery runs of 1.5 mb/d from 2023 to 2030. 480 kb/d of capacity to be shuttered between 2024 and 2025 follows the rationalisation of 650 kb/d of capacity during the 2020 and 2021 drop in demand due to the Covid-19 pandemic.

The Grangemouth refinery (130 kb/d) in the UK will be converted to a biofuel facility in 2025. bp plans to close its 80 kb/d Gelsenkirchen refinery in 2025, and Shell’s Rhineland refinery capacity will decrease by 150 kb/d. The Oil 2024 report also noted the potential impact of the new Dangote oil refinery (650 kb/d) in Nigeria, which could disrupt a USD17 billion gasoline trade between Europe and Africa. The IEA suggests that by the end of the decade, Europe and North America could each have between 1-1.5 mb/d of at-risk capacity.

Regional variations in refinery closures and expansions

Despite projected closures in China’s smaller independent refineries, China’s refining capacity is expected to increase by 900 kb/d to 19 mb/d during the forecast period as 1.6 mb/d of new refinery capacity overshadows announced closures. Nevertheless, growth in China is slowing, with annual average net additions expected at 130 kb/d, less than half the average observed in the past decade (300 kb/d). The IEA noted no major projects within the forecast period from 2027.

By mid-2024, the large-scale Yulong refinery will become operational with a capacity of up to 430 kb/d. In Panjin city, central Liaoning province, Saudi Aramco and Norinco’s integrated petrochemical facility will add 320 kb/d of crude distillation capacity by 2026. Several expansion projects are outlined in the report, including Sinopec’s Zhenhai refinery and CNOOC’s Daxie petrochemical refinery. Despite this, spare capacity is expected to remain close to current levels by 2030, with limited room for additional projects.

India is the fourth-largest refiner in the world following extraordinary growth in refining capacity from 2006 to 2023 (3 mb/d). With 23 operating refineries and a total capacity of 5.8 mb/d, the IEA expects continued growth including several large-scale capacity expansions, adding 1 mb/d of distillation capacity by 2030.

Indian Oil Corp. Ltd (IOCL) has announced an increase in capacity of 400 kb/d by 2030, with projects underway at the Panipat, Barauni, Koyali and Digboi refineries. Bharat Petroleum Corp. Ltd (BPCL) will add 130 kb/d, and Hindustan Petroleum Corp. Ltd’s (HPCL) Visakh refinery will increase capacity by 70 kb/d, alongside a greenfield project in Rajasthan’s Barmer (180 kb/d). Expansion projects at Chennai Petroleum Corp. Ltd (CPCL) and Numaligarh Refinery Limited (NRL) will contribute 300 kb/d.

The Middle East, a leader in crude oil and refined products, has already added 1.5 mb/d of new capacity since 2022, which the IEA indicates is nearing full utilisation. During the forecast period, capacity of 630 kb/d will be added, which equates to 23% of East of Suez capacity growth.

Latin America’s refining capacity will rise by 130 kb/d, driven solely by Brazil. Declines in capacity in OECD Asia Oceania (Australia, Japan, South Korea and New Zealand) are expected, with a drop of 120 kb/d to 6.9 mb/d by 2030 and no new projects announced.

Future outlook: Capacity growth and rationalisation

Japan has experienced several refinery closures in recent years due to declining domestic demand and an inability to compete internationally. The closure of the 120 kb/d Yamaguchi refinery in the first quarter of 2024 by Idemitsu Kosan Co. Ltd, which will be transformed into a hub for carbon-free energy, brings the cumulative loss of capacity to 1.7 mb/d since 2006. The IEA report predicts a decline in demand for refined products in Japan of nearly 270 kb/d by 2030.

South Korea has a relatively stable refining capacity of approximately 3.5 mb/d, which has increased from 2.8 mb/d in 2013 alongside ongoing investment. This growth is supported by strong integration with the domestic petrochemicals industry. South Korea is the only net exporter of petroleum products in the region.

The IEA also reported that Indonesia’s Balikpapan refinery is set to increase its crude distillation capacity by 100 kb/d during 2025. This expansion is part of Indonesia’s broader strategy to modernise its refining sector and reduce its dependence on imported fuels​. Additionally, Thailand is on track to complete its 125 kb/d Sriracha refinery, by 2026. Operated by Thai Oil Public Company Limited (Thaioil), the Clean Fuel Project (CFP) will boost the Sriracha refinery’s capacity from 275,000 bpd to 400,000 bpd.