Navigating Legal and Operational Risks in Energy Trading: The Supply Chain Challenge for Refineries and Investors

A refinery complex with disrupted supply chains, showing delayed shipments, geopolitical tensions, and digital tools like AI simulations being used to mitigate risks. The image highlights the interplay between physical infrastructure and digital resilience strategies.

The energy trading sector is facing a perfect storm of legal and operational risks, driven by supply chain vulnerabilities that are reshaping refinery operations and investor returns. From tariffs to cybersecurity breaches, the challenges are as complex as they are costly. Let's break it down.

Supply Chain Vulnerabilities and Refinery Operations

Refineries are under siege from a trifecta of pressures: geopolitical tariffs, environmental regulations, and shifting global trade dynamics. The U.S.-China tariff war, with rates as high as 145% on imports, has forced refiners to rethink sourcing strategies, according to a BCG analysis. Companies are now prioritizing nearshoring and friendshoring, with Mexico overtaking China as the U.S.'s top trading partner, based on a Dastoor Legal analysis. But this shift isn't without pain. The normalization of supply chains post-pandemic has pushed firms to balance resilience with cost efficiency, a tightrope walk that's easier said than done, as that Dastoor Legal analysis also notes.

Environmental and regulatory pressures add another layer of complexity. The Uyghur Forced Labor Prevention Act (UFLPA) demands unprecedented supply chain transparency, while EU emissions reforms phase out free allowances, squeezing refining margins, as covered in a Supply Chain Digital piece. Meanwhile, climate-related disruptions-think hurricanes and rising sea levels-are driving up costs for raw material sourcing and production, which the same Supply Chain Digital piece highlights.

Investor Returns: The Cost of Chaos

The financial toll on investors is staggering. Refining margins in 2024 dropped 50% compared to 2023, with U.S. downstream earnings for integrated oil companies falling 60% year-over-year, according to a ScienceDirect study. Structural demand declines, driven by the rise of electric vehicles and biofuels, are expected to shrink refining capacity by 10%–30% over the next decade, as the earlier BCG analysis indicates. For investors, this means shrinking profit pools and a wave of refinery closures. Wood Mackenzie warns that 101 global refineries-18.4 million barrels per day of capacity-are at risk of closure by 2035 in its analysis.

Compounding these issues are compliance costs. EU refineries face carbon prices projected to triple by 2035, threatening the viability of standalone refineries without petrochemical integration, as the Wood Mackenzie analysis explains. And let's not forget the geopolitical wildcard: proposed U.S. tariffs on Canadian and Mexican crude imports could erase hard-won refining gains, per an Oil & Gas 360 article.

Legal Risks: From Tariffs to Cyberattacks

The legal landscape is just as treacherous. Regulatory bodies are cracking down on supply chain overreliance, with the U.S. Department of Commerce launching a Section 232 investigation into polysilicon imports for solar and semiconductor production, discussed in a Morgan Lewis briefing. Meanwhile, energy firms are grappling with sanctions enforcement, as seen in the Treasury's crackdown on illicit oil shipments, also covered in that Morgan Lewis briefing. Non-compliance? Expect hefty fines. A major energy firm was hit with a $12 million penalty for market manipulation in 2020, according to the earlier Dastoor Legal analysis.

Cybersecurity breaches are another ticking time bomb. The energy sector's 45% third-party breach rate-far above the global average-exposes critical infrastructure to operational and reputational damage, as the BCG analysis reports. The 2023 MOVEit software vulnerability exploited by the Clop gang accounted for 39% of third-party breaches in the sector, a statistic the BCG analysis also highlights. Colonial Pipeline's ransomware attack, which disrupted regional fuel supplies, is a stark reminder of the stakes, noted in the Supply Chain Digital coverage.

Mitigation Strategies: Can Tech Save the Day?

Refiners aren't standing idly by. Cost transformation programs-focusing on AI-driven simulations, digital twins, and advanced planning systems-are yielding savings of up to $3 per barrel of input crude, according to the BCG analysis. For example, optimizing crude mix and process throughputs has helped some firms boost efficiency, as the Dastoor Legal analysis outlines. Yet progress is uneven. Talent shortages in digital capabilities and struggles to quantify ROI on tech investments remain hurdles, as the ScienceDirect study discusses.

On the legal front, companies are beefing up compliance frameworks. This includes rigorous due diligence on suppliers, robust AML/KYC protocols, and continuous monitoring of vendor systems, measures recommended in the Morgan Lewis briefing. For cybersecurity, network segmentation and DevSecOps practices are becoming table stakes, as Supply Chain Digital observes.

The Bottom Line for Investors

The energy trading sector is at a crossroads. Supply chain vulnerabilities are not just operational headaches-they're existential threats to profitability and compliance. For investors, the key is to identify firms that are doubling down on resilience: those investing in digital tools, diversifying suppliers, and proactively managing carbon costs.

But tread carefully. The road ahead is littered with geopolitical landmines, regulatory whiplash, and cyber risks that could derail even the most well-intentioned strategies. As the old adage goes, "He who ignores the past is doomed to repeat it." In this case, ignoring supply chain risks could mean a one-way trip to the exits.

A line chart showing the decline in refining margins from 2022 to 2025, with annotations on key events (e.g., Russia-Ukraine war, U.S. tariff proposals). Data points should include EIA and BCG reports.

A bar graph comparing third-party breach rates across industries, highlighting the energy sector's 45% rate. Source: SecurityScorecard and IBM.