Can't You Hear Me Knocking - Global Refinery Capacity Additions and Their Effect on U.S. Refiners

Worldwide, refiners expect to add significant capacity over the next five years, mostly in the Middle East and the Asia Pacific region. While only a small amount of crude processing capacity additions are expected in the U.S. and Canada, the capacity additions elsewhere could have major product-trade and utilization effects on U.S. refiners — especially in PADD 1 (East Coast). Today we analyze expected near-term refinery capacity additions, global demand projections, and potential effects in the U.S.

Until a few years ago, the U.S. stood as a major net importer of refined products; but thanks to the recent boom in domestic crude supply and an abundance of low-cost natural gas (cheap thermal energy, power and hydrogen), U.S. refiners now rank among the lowest-cost producers of transportation fuels worldwide. Despite lackluster demand growth within the U.S., low-cost American refiners have maintained record-setting outputs, boosting refined product exports to new highs. However, with new refining capacity under development in major international markets, is the high domestic capacity utilization sustainable? Well, it depends.

First, let’s look at where crude oil processing capacity is being added. Baker & O’Brien reviewed announced crude processing expansion projects globally and handicapped the likelihood of each project going forward — examining timeline, financing/engineering/construction status and parent company history. Figure 1 summarizes the results. The colored blocks in the columns represent the major regions. The black-dashed bars represent all announced projects included in the data set; the white space atop each of the columns indicates the capacity of announced projects we think is unlikely to be built.  FYI, the dashed bar in 2020 extends off the chart up to nearly 8 million barrels/day (8,000 Mb/d). All in all, about 5,600 Mb/d of refinery capacity is expected to be added over the 2017-20 period, or about 1,400 Mb/d per year (assuming no major project delays), with another 1,400 Mb/d to come online in 2021-22.