North America to spend $27bn on refining projects

Diversification into new revenue streams such as petrochemicals and export markets as refiners seek additional profit margins is keeping the short-term outlook for refining project spending healthy, according to an analysis by Industrial Information Resources (Industrial Info).

Motiva is the latest Big Oil player to diversify further into downstream, viewing the petrochemical sector as a growth engine and a means for margin security.

The North America refining project outlook has been healthy for some time and this trend looks set to continue in the near term.

Current active capex project pipeline projects at planning and engineering stage are estimated at $35 billion in North America, Industrial Info said.

Looking ahead, there will be some softening, but growth overall continues. 

North America Refining Projects Outlook

Looking ahead, North America could have up to $27.7 billion in refining projects with a kickoff start date of 2021 to 2022, Industrial Info said in its Global Refining Project Outlook presentation.

While grassroots spending represents 46% of the total projected spend, the project probability for these types remains low, Chris Paschall, Vice President of Research, Global Oil and Gas and Petroleum Refining said.

Of these, there are eight grassroots projects totaling $12.7 billion. One of these has already started site prep but still looking to secure final funds, Paschall said.

Crude diet flexibility to reduce feedstock costs is driving plant expansion activity, he said.

While spending to meet the ultra-low sulphur mandate has slowed down, compliance with the IMO 2020 regulation is spurring investments in coker and cat project announcements. 

Some projects related to IMO 2020 continue to be in construction or are even in the planning stage.

Nearly $7.5 billion of the projected $27.7 billion total would be for unit additions. These are projects adding brand new crude and auxiliary units at existing plants.

$2.5 billion would be plant expansions. This includes projects expanding capacity at both crude and auxiliary unit, plus the balance of the plant.

Other in-plant capex projects not adding any new capacity will total $2.5 billion as well.

Maintenance and turnaround projects are expected to total around 381 projects and valued at $2.5 billion as well. The maintenance forecast increases in 2020 over one year ago levels.

Reasons for investment

North America will continue to upgrade and improve existing infrastructure as it has the highest number of refineries of any region.

Midwest refiners’ margins are the healthiest of other regions because of the light, sweet crude processed in the U.S. which is cheaper than other types of crude, as well as higher prices earned for refined products.

West Texas Intermediate (WTI) oil has continued to outpace margins in other regions. In addition, U.S. refining margins remain high supported by tight product markets as a result of extended turnaround activity and unplanned outages earlier this year.

Singapore margins have recovered as a result of outages in the region but remain the worst performing of the global hubs. European cracking margins remain firm due to lower activity in the region.

Meanwhile in the U.S., there continues to be support for additional projects because gasoline and diesel demand remains stable and the export market is strong where a lot of U.S. Gulf Coast refiners are shipping into Latin America and some into Europe, Paschall said.

Demand outlook

Looking out farther toward 2030 to 2040, Industrial Info still sees refined product growing but in different areas. Gasoline demand will continue to increase in the short term with more autos on the road globally, but it starts to slow down around 2035 much slower rate.

Diesel demand continues to rise. More diesel vehicles will be on the road making this refined product a growth engine for the next 20 years.

Residual fuel oil demand will start to reverse. This is largely attributed to power plants switching to run on natural gas instead of bunker oil because of cost.

For now, U.S. gasoline demand set a record in July 2019; at 9.928 million bbl/day, which was the highest since 1991, Paschall noted.

Meanwhile, the U.S. continues to produce a lot of oil and exports about 3 million bbl/day and about 5 million bbl/day day of refined products. Exports into Latin America are expected to remain healthy.

Global refining projects outlook

North America is ranked fourth in terms of projected refining project spending behind various areas of Asia and Africa.

Western Asia has the highest ranking spend outlook at $78.2 billion which is attributed to growth in the Middle East. South Asia has the second highest spend outlook with $76.2 billion and Africa is the third highest with $75.8 billion in projects.

Grassroots spending remains dominant in the spending outlook, but Industrial Info expects this will slow down as worldwide global growth forecast projection drops.

More efficient vehicle fleets will continue to have an impact on gasoline demand in the future but will be offset by growth in the petrochemical and diesel markets.

Globally there are currently 653 projects under construction with a total investment value of more than $100 billion. This is down from more than 700 last year as project realization declines have been seen in Asia and Russia.

Projects continue to be announced but probability of all going through is unlikely as the supply-demand situation is becoming unbalanced.

Crude oil stocks rose by 7.4 mb/day May to 1,141 mb/day, the highest level since November 2017.

Global refining rates decreased by 0.7 mb/day in the second quarter of 2019 compared with a year earlier, the largest annual decline in over 10 years.

“I think the market will have a tough time absorbing a lot of this capacity that comes onto the market so I think a lot of these announced projects may have lower probability especially as you look further into the future. Even if some get started, there may be problems securing funding for completing these multi-billion-dollar projects,” Paschall said.

“Trying to get banks or even finance themselves could be challenging in this market. At the end of the day, we don’t need it (excess supply). Demand will not be robust enough to absorb all this (announced capacity),” Paschall said.

Industrial Info estimates there are more than 3,000 active projects at the planning or engineering stage for a kickoff of 2020-2021. These projects are valued at $274 billion.

By Heather McGuire Doyle