As dominance in the global refining industry diverts away from developed nations like the US while advancing towards emerging economies, companies in the gas and oil industry need to modify their approaches to refining. Diesel and gasoline prices, normally varying according to demand from developed countries, now change with developing countries’ increasing demand for crude oils and fuels. The conventional link between Gulf Coast marginal refining cost, US gasoline prices and global crude prices has been cut. The factors driving these dynamics are also leading to waning attraction towards the refining industry composition.
Environmental and hyper oil prices are creating margins which could result in more refining asset sales and restructuring or bankruptcies such as the Petroplus Holdings closure in January 2012, which was among the top refiners in Europe. In addition, demand for gasoline in the US declined due to sluggish economy, increased demand for bio fuels and entry of electric and hybrid vehicles in the market. Despite the low margins and excess current industry supply, National Oil Companies still continue to expand their refining capacity.
What does this imply to the industry and private companies out to compete? The recovery projections in developed countries are constrained. Companies are seeking reduction of capacity strategies due to drop in petroleum based refined motor fuels. However, the demand will most likely decrease faster than supply, so net excess fuel capacity will increase with decline of utilization in the foreseeable future. The global refining industry will be confronted with cyclicality caused by increasing fluctuations that are defined by overall global economy, major refinery disruptions and global crude markets.
Despite the turmoil, some regional and global factors experience a potential upside. For instance, refiners in the Midwest of US currently reap from shale oil surge. Due to poor infrastructural network, the shale oil currently sells at a significant discount in comparison with global market crude prices. At the same time, refining companies at the Gulf Coast of US could get more profits when oil companies in the North-East reduce operations because of excess oil capacity in the Atlantic market. They can also benefit from construction of Keystone pipeline, which would transport crude from oil sands of Canada.
Most of the improvements will be experienced by companies that respond to market dynamics effectively. Major restructuring of the global refining industry is going on, touching all kinds of companies. Due to this, National Oil Companies, independent companies and International Oil Companies need to revise their investing strategies. All these mentioned companies will have to adjust to changing refining trends. However, International Oil Companies face the most difficult combination of opportunities and risks.
The developing economies such as Asia will continue to dictate global demand of fuel thereby creating major changes in the refining industry. Result of surveys carried out by OPEC indicate that between 2015 to 2020, the liquid fuels demand in Asia Pacific region increase by 2% annually while demand may drop slightly in Europe and North America. Therefore, International Oil Companies can prepare themselves to benefit from the new centres of demand.