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Pandemic Pushes Fuel Makers in Richer Countries to the Brink

By David Winning and Rebecca Elliott 

A decade ago, Australia was home to seven refineries. Now, it has four. Soon, it could have just one.

Covid-19 is accelerating a rash of global refinery shutdowns in the world's richest economies. Companies from energy giant Royal Dutch Shell PLC to Australian fuel company Ampol Ltd. are closing facilities or considering doing so as they reckon with anemic fuel demand and growing competition from newer, more efficient fuel-making facilities in Asia and the Middle East.

Eleven refineries from the U.S. to Japan have said this year that they intended to close. Three have announced partial shutdowns, and at least another five are on the chopping block, according to analytics firm IHS Markit.

The thinning out is part of a global shift in fuel-making power away from wealthier countries, where demand is in long-term decline and there are many older, smaller refineries. Newer, larger facilities in countries such as China generally are able to produce fuels for less, benefitting from growing regional markets and shipping their products overseas.

More than 1.7 million barrels a day worth of refining capacity in countries such as the U.S. and Japan has disappeared or is poised to do so in 2020 and 2021, as China, India and the Middle East add more than 2.2 million barrels a day worth of fuel-making capability, according to the International Energy Agency.

In comparison, 2.2 million barrels a day of refining capacity closed from 2009 through 2011, in the wake of the 2007-09 recession, according to IHS Markit.

Nowhere is that shift more evident than in Australia, where a BP PLC refinery is set to close next year and two others are under review for possible shutdown, stoking concerns about energy supplies. As of 2018, domestically refined fuels met just 40% of demand in Australia, which has become increasingly dependent on imports.

Australia's once-mighty refining sector is now pushing the government for financial aid, mirroring requests from airlines and hotels in some parts of the world. Among the companies that could benefit is Ampol, whose Lytton refinery on Australia's east coast has lost $100 million since the start of the year, leading management to consider closing it for good.

"That's a clear financial burden and not sustainable," Matthew Halliday, Ampol's chief executive, said.

The pandemic has been brutal for refiners, which have seen the margins they generate turning oil into fuel fall to their lowest level in more than a decade during the third quarter, according to the IEA. The global shakeout under way reflects an expectation that the effects will be lasting.

Pre-coronavirus, IHS Markit forecast that the global appetite for refined products would peak at around 94.5 million barrels a day in the mid-2030s. Now, the firm thinks demand will top out at roughly 91 million barrels a day, as people work from home more and travel less.

In the U.S., a half-dozen refineries have said since the onset of the pandemic that they planned to close at least a portion of their facilities, according to IHS Markit. In many cases, their owners are planning to retool the sites to produce biofuels from products such as animal fat or vegetable oil, a bet that stricter government regulations will increase the market for greener fuels.

Marathon Petroleum Corp., for example, closed two refineries this spring, resulting in more than 800 job losses. The company, which said the pandemic amplified an already difficult business climate, is now considering repurposing one of them to produce a biofuel known as renewable diesel.

Others, such as Shell's Convent refinery near New Orleans, which employed some 675 people, are simply closing up shop. Shell tried to sell the facility, capable of processing 240,000 barrels a day of crude, earlier this year but failed to find a buyer. Shell said in October that it plans to trim its refining portfolio from 14 sites to six as it wrestles with weak demand and seeks to make good on emissions-reduction commitments.

"We expect to see changes in consumer behavior for some time to come, and that is likely to continue to put pressure on demand," Shell refining chief Huibert Vigeveno said.

Smaller, older facilities such as BP's Kwinana refinery on Australia's far west coast are particularly vulnerable to competition from newer, larger refineries abroad. BP plans to close the 65-year-old fuel-making facility early next year before converting it to an import terminal, citing low refining margins and an oversupply of fuel in the Asia-Pacific market. The terminal will employ around 60 people, compared with the refinery's roughly 650, BP said.

"The issue is those imports are more competitive than the locally produced supply," IHS Markit director Rob Smith said.

Meanwhile, refineries owned by Viva Energy Group Ltd., which counts oil trader Vitol Group as its major shareholder, and Ampol face reviews that could end in their closure in Australia. Exxon Mobil Corp. owns a refinery there but hasn't indicated it is under threat.

The threat of closures has angered unions and prompted the government to consider financial aid, even though it has turned down requests for help from other businesses hurt by the pandemic, including Australia's second-largest airline, which became insolvent in April.

"Australia's capacity to make its own fuel cuts to the heart of our viability as a sovereign nation," said Daniel Walton, national secretary of the Australian Workers' Union. "If we can't independently fuel our trucks, our industry, and our defense vehicles, then we leave ourselves incredibly vulnerable."

Prime Minister Scott Morrison's government says it is willing to give cash to refiners that stay open, worried that boosting imports will drive up prices for fuels such as diesel that are used by farmers and for mining trucks. It aims to introduce a package of measures that would essentially subsidize every liter of fuel refined in Australia starting early next year, and include construction of new diesel-storage tanks.

"To the extent that we can produce crude oil in Australia and refine it in Australia, that's a very secure supply chain in the very extreme scenario where we cannot import from other countries," said Angus Taylor, Australia's energy minister.

Sushant Gupta, a research director at energy consulting firm Wood Mackenzie, said Australia's government may need to "invest a huge amount to make the refineries competitive," including committing to buy a certain amount of fuel at an agreed price.

"The challenge is the supply chain to Australia will get longer and longer" if the country becomes wholly dependent on imports of fuel products, he said.

Write to David Winning at david.winning@wsj.com and Rebecca Elliott at rebecca.elliott@wsj.com

 

(END) Dow Jones Newswires

December 06, 2020 08:14 ET (13:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.