Figure 1 Global composite gross refining margin – historical and forecast, US$/bbl
diesel/gas oil demand, so easing the pressure the sector is facing. Our forecast is for refining margins to remain elevated during the first half of 2023 and then decline back to the top of the historical five-year range, as shown in Figure 1 . There are, however, several uncertainties, beyond the typical challenges of project completion and commissioning, that could disrupt this outlook: • China’s product export policies. This is a relatively new risk to the global refining market as China’s export quotas did not previously constrain the operations of its domestic refining sector. In 2022, China restricted exports, initially to both drive the rationalisation of the independent teapot sector and reduce its overall carbon emissions, as refining is considered a low value-added sector. In 2023, we are expecting exports to grow as China attempts to stimulate economic growth, particularly in the first half of the year. • The EU refined product import ban from Russia and price cap, to be implemented on 5 February. Given that very little of current Russian diesel/gas oil exports go much beyond Europe, the diversion of these flows could be disruptive. We expect Russian distillate exports to fall in Q1 2023 and this loss to then decline over time as global distillate flows re-establish themselves. The refining system returns to being heavily distorted if significant volumes of Russian exports are lost to the global market. • Russian exports of natural gas to Europe fell dramatically during 2022. Despite currently high gas inventories, the risk of high
European natural gas prices remains during 2023. This has a direct impact on European refinery operating costs and the cost of diesel production. Higher European operating costs are reflected in its regional product crack spreads, which provides a potential upside to refiners elsewhere. The current refining investment wave, focused on Asia and the Middle East, will be largely operational by 2025. There are limited capacity additions considered firm thereafter. The growth in refined product demand and additional refining capacity and other non-refinery sources of supply is well balanced. The margin environment for the refining sector looks healthy for the rest of this decade. Given that the risk of closure is low, refiners will hence have funds to invest. What do they invest in to become more resilient to the energy transition? What are the investment options to deliver resilience? There are many attributes of resilience, but we have simplified them to two key parameters: site profitability, measured as net cash margin (NCM), as positive cash flow is critical to sustain future investment requirements, and site emissions intensity, as relatively low carbon emissions can be a source of competitive advantage. Figure 2 categorises European refiners into four quadrants (based on their position relative to the regional volume- weighted averages for 2021), along with proposed investment strategies.
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