Asian Oil Refiners Cut Run Rates, Mull Closures as Costs Soar

Asian oil refiners are grappling with a perfect storm of challenges, leading to significant cuts in run rates and even closures. Weak refining margins, demand destruction due to the COVID-19 pandemic, geopolitical risks, and competition from new supply streams are pushing refiners to the brink. This article explores the primary factors driving these decisions and the strategic moves Asian refiners are making to mitigate risks and adapt to the changing market landscape.

Weak Refining Margins and Demand Destruction

Refining margins across Asia have plummeted, reaching their lowest levels in years. In Singapore, margins fell by 68% in the first week of September 2024 compared to the first week of August, according to data from LSEG cited by Reuters. This decline, coupled with rising fuel supply and weakening demand, has led analysts to expect further cuts in refining utilization. Amrita Sen, founder and director of research at Energy Aspects, estimates that Asia has cut runs by 400,000-500,000 barrels per day (bpd) since May, with another 100,000 bpd of cuts possible if low margins persist.

In China, underwhelming demand has led to a reduction in oil refining output, as independent refiners, particularly sensitive to low margins, have reduced throughput. Sinopec, the largest refiner in Asia by capacity, reported deteriorating refining metrics in the first half of 2024, reflecting weak Chinese demand, especially for diesel.

Geopolitical Risks and Competition from New Supply Streams

Geopolitical tensions in the Middle East, such as the Iran-Israel conflict, can increase freight and maritime insurance costs, eating into Asian refiners' margins. Additionally, the wave of new supply streams, especially of gasoil, entering the market from greenfield refineries and start-ups in the Persian Gulf is putting further pressure on Asian refiners.

Strategic Decisions by Asian Refiners

Faced with these challenges, Asian refiners are making strategic decisions to mitigate risks and adapt to the changing market landscape. Some examples include:

1. New Zealand's Refining NZ: Converting its Marsden Point refinery into an import terminal by the first half of 2022.
2. Australia's BP Australia: Undertaking a feasibility study to produce green hydrogen at the site of its Kwinana refinery, aiming to repurpose the site as a clean energy hub.
3. Australia's Viva Energy: Deciding to avoid the closure of its Geelong refinery by taking up a payment lifeline extended by the Australian federal government.
4. Australia's Ampol (formerly Caltex Australia): Conducting a comprehensive review of its Lytton refinery in Brisbane, considering all options for the facility's operations, including closure and transition to an import model.
5. Philippines' Pilipinas Shell Petroleum Corp.: Shutting down its Tabangao refinery and transforming the facility into an import terminal.
6. India's refineries: Running their plants at full or near-full capacity since early November 2020 to meet domestic demand and maintain operations in the face of weak refining margins.
7. South Korea's SK Energy: Shutting down two crude distillation units (CDUs) at its Ulsan refinery but planning to restart them in January 2021.
8. Indonesia's Pertamina: Keeping the run rate at its Balikpapan refinery in East Kalimantan steady at around 80% with no plans to raise it back to 100%.

These strategic decisions demonstrate Asian refiners' efforts to adapt to the changing market landscape, mitigate risks, and ensure the survival of their operations in the face of weak refining margins and other challenges.

Asian oil refiners face a daunting task in navigating the current market conditions. With weak refining margins, demand destruction, geopolitical risks, and competition from new supply streams, refiners must make tough decisions to stay afloat. By understanding the primary factors driving these challenges and the strategic moves refiners are making, investors can better assess the risks and opportunities in the Asian refining sector.