Decarbonisation Technology - February 2023

Refining – what is the path of future growth?

A look at the key risks and uncertainties for the oil and refining industry in 2023, and what it should invest in to become more resilient to the energy transition

Alan Gelder Wood Mackenzie

Refiners now have cash in the bank In hindsight, 2022 was a truly unprecedented year. Oil demand growth was forecast to be strong as the economy continued its recovery from the global pandemic. Russia’s invasion of Ukraine introduced huge geopolitical uncertainties, as Russia weaponised its energy exports in response to EU and G7 sanctions, causing energy prices to soar. The shadow of Covid-19 loomed large over China, with sizable parts of its petrochemical and manufacturing sector locked down for many months in the first half of the year. Central banks abruptly switched tack as rocketing energy prices stoked inflation. Recession fears started to loom large in the second half of the year. The EU’s crude import ban and G7 price caps on Russian crude oil came into force on 5 December 2022, with the refined product import ban scheduled for 5 February 2023. Looking back, global oil demand in 2022 was 99.0 million b/d, growing over 2 million b/d from 2021 but remaining just under 2 million b/d below pre-pandemic levels. Russian crude oil exports largely continued to flow but were diverted away from Europe to India, China, and Turkey. As we had been forecasting, global oil supply growth outpaced demand growth by almost 2.5 million b/d on a year-on-year basis, so oil prices weakened towards year end. Pandemic-driven refinery closures, self- sanctioning by many European companies, and low product export quotas from China tightened the refined product markets, with refining margins hitting record highs during the summer months. Consumers suddenly appreciated that

refining is another step in the value chain which links crude oil to retail fuels. The global refining system is still running in max distillate mode, with cracks for light distillates, such as naphtha and gasoline, very weak, particularly as over- supply and poor profitability now haunt the petrochemical sector. In our latest economic outlook, Wood Mackenzie expects some key economies to enter recession and the global economy to slump in 2023 before recovering in 2024. Global GDP growth is downgraded to 2.1% for 2023 – the weakest global expansion, outside of the Covid and global financial crisis contractions, since 2001. Europe is likely already in recession or will enter a downturn over the winter. In the US, we expect the Federal Reserve to continue the tightening cycle, with interest rates reaching a peak of 5-6% in Q1 2023. However, this is not a synchronised global recession. China’s economic growth will improve in 2023, although the growth path is likely to be bumpy and dependent upon the handling of the new Covid cases. The cessation of its zero-Covid policy will kickstart the domestic economy – we expect this will happen towards Q2 2023. Despite this economic uncertainty, 2023 oil demand is to grow by just over 2 million b/d, reaching over 101 million b/d and exceeding 2019 levels in the second half of 2023. Refining sector tightness should ease during 2023 as new sources of supply become available to the global market. Over 1.4 million b/d of additional refining capacity is scheduled to become fully operational over the course of 2023, enabling crude runs to increase to satisfy