By Chinedu OkaforI
n a recent analysis, energy consultancy Wood Mackenzie says he found that more than a fifth of the global oil-refining capacity is at risk of closure, as gasoline margins weaken and the pressure to reduce carbon emissions mounts. Of 465 refining assets analysed, the consultancy ranked about 21% of 2023 global refining capacity at some risk of closure.
Wood Mac found out that Europe and China housed the greatest number of high-risk sites, putting about 3.9 million barrels per day (bpd) of refining capacity in jeopardy, based on its estimate of net cash margins, cost of carbon emissions, ownership, environmental investment and strategic value of refineries. There are 11 European sites that account for 45% of all high-risk plants, the report found. About 30 European refineries have already shut down since 2009, data from industry body Concawe also shows, with nearly 90 still in operation. This spate of closures has been brought on by competition from newer and more complex plants in West Asia and Asia as well as the impact of the COVID-19 pandemic.
The Wood Mac analysis showed that gasoline margins were expected to weaken by the end of this decade as demand dips and sanctions on Russia ease while expected carbon tax should also start to bite. Operating costs could go up so much that “closure may be the only option,” said Wood Mac senior oils and chemicals analyst Emma Fox. The seven high-risk sites in China are small-scale independent refineries.
It is speculated that the recently built Dangote refinery could significantly dent the European oil market. The refinery threatens to heighten the competition for European refineries in a market that already seems over-saturated. According to economists, the Dangote refinery might halt the decades-long gasoline trade from Europe to Africa worth $17 billion each year. In other words, Africa’s richest man, Dangote, stands between Europe and $17 billion in revenue.
According to Kpler Statistics, West Africa received over one-third of Europe’s 1.33 million BPD average gasoline exports in 2023, more than any other area, with Nigeria receiving the lion share of that total. However, this is bound to change once the Dangote refinery which is touted to be able to refine up to 650,000 barrels per day (bpd) commences full production.
The refinery, once it reaches its fullest capacity would be the largest in Europe and Africa. The refinery’s inauguration has been considered the tipping moment in Nigeria’s drive for energy independence. Despite being the largest country by population and the top oil producer on the continent, Nigeria’s oil market has been plagued by an inability to refine its own oil, leaving it at the mercy of foreign markets.
The establishment of the Dangote refinery alongside the rehabilitation of dilapidated refineries in the country is expected to reverse its dependence.
“The loss of the West African market will be problematic for a small set of refineries that do not have the kit to upgrade their gasoline to European and U.S. specification,” consultancy FGE’s head of refined products Eugene Lindell said. According to Kpler analyst, Andon Pavlov, 300-400,000 bpd of European refining capacity is at risk of ceasing as global gasoline output rises.
A European refinery executive who declined to be identified stated that coastal refineries oriented for exports will be more susceptible, but interior refineries are less vulnerable since they rely on local demand. “The changes won’t happen overnight, but they could ultimately lead to closures of refineries and their conversion to storage terminals,” he explained.
The $20.5 billion Dangote refinery, Africa’s largest., built over 2 decades, has a processing capacity of 650,000 barrels per day. It aims to produce 250,000 barrels per day of gasoline and 100,000 barrels per day of gasoline and diesel. The refinery would produce oil for both local consumption and international trade. And already, 150,000 fuel stations run by the Independent Petroleum Marketers Association of Nigeria (IPMAN) have been approved to receive fuel supplies from the newly built private Dangote refinery.
The 650,000 barrel-per-day capacity refinery is set to influence the global oil and fuel flows, as the trading community watches to see how significant this influence would be. So far, the refinery has processed around 8 million barrels of oil between January and February, according to reports, and will take months to reach full capacity.
