The Downstream dilemma - keep investing, or cash in now on what might be refining’s last golden age

In India, several new refineries, petrochemical projects, as well as expansion projects for existing refineries are projected to double India’s refining capacity from the current 5 million barrels per day to 10 million barrels per day by 2030. In the Gulf, four new mega-facilities totaling almost 1.4 million barrels per day are already operational or shortly going live in Jazan, in south-western Saudi Arabia, Al Zour in Kuwait, Karbala in Iraq, Duqm in Oman. Abu Dhabi’s Adnoc Ruwais refinery and Dubai’s Enoc Jebel Ali refinery have raised refining capacity in 2020. Fujairah, Egypt, Iran, Iraq, and Bahrain have also implemented various other refining expansions and upgrades. In Nigeria, a giant new refinery is expected to begin processing in the third quarter of 2022. Saudi Aramco is making new refining investments in Poland and China.



This endless demand for refining capacity with economies of scale, maximizing the output of high-value products may be close to a peak due to increasing fuel efficiency, competition from biofuels, rise of electric vehicles and pressures from climate action groups. Current fuel shortages caused by Russia’s invasion of Ukraine may ease but with a projected global economic slump in the last two quarters of 2022 the Great 2022 Downstream boom is bound to come to an end.

These new refineries may be harbingers of refining’s last golden age as among global refining mainstays, oil demand in Europe has been in decline since 2006; in Japan, since 1996. Refineries need constant investment to meet tightening safety and environmental standards, a changing demand mix for fuel, the capital cost of the facility, a host of other expenses and liabilities from unionized workforces, pensions, pollution legacies from less stringent eras as well as carbon prices. Oil majors Shell, BP and TotalEnergies have been selling or closing refineries or converting them to biofuels processing or storage terminals to cash in now on refining’s last golden age.

The Great 2022 Downstream boom

Refiners are enjoying the best of times as of mid-2022: Saudi Aramco’s 1Q22 upstream profit improved 75 per cent on higher crude prices and production but downstream, including refining, gained 130 per cent. In the downstream business, margins in the spread between the input cost of crude oil and the prices of outputs typically hover between $2 and $5 a barrel and frequently go negative.



As of mid-2022, refining margins have soared above $30 a barrel on a global basis and $50 in some locations as China cut its refineries’ export quotas by more than half while diesel stocks in Europe, US and Singapore have drained to multi-year lows. Even though crude prices are, historically speaking, not that high, the squeeze on refined products due to Opec+ production restrictions, sanctions on Russia, Iran and Venezuela, crimp the availability of diesel-rich, medium-gravity crude oils driving end-user prices to records ($176 a barrel for diesel in the UAE in mid-2022).