COVID-19 hastens demise of many oil refineries

According to a Bloomberg report in May 2020: who needs a loss-making, inflexible oil refinery in a world where demand for petroleum has been obliterated? We are about to find out.

When the consumption of transport fuels collapsed this year due to the coronavirus pandemic, much of the industry moved into survival mode, cutting processing rates and even temporarily stopping refining in some cases. While that helped prop up the industry’s margins for a while, a combination of rising crude costs and still-weak end-user demand are starting to bite.

“Many refiners will limp through the next one to two years to see what happens to demand recovery,” said Steve Sawyer, Director of Refining at FGE. It seems likely that many of the weaker plants will be permanently closed.”

In recent weeks, America’s refiners responded to the downturn by slashing rates to a minimum and idling some gasoline-making units. The devastation that COVID-19 has wrought on demand “is not over yet,” Tom Nimbley, CEO at PBF Energy, said on a 15 May earnings call, even as USA gasoline demand was showing signs of recovery. PBF is running its six refineries at minimum rates.

“2020 will be a tough year for the industry and in particular for refineries with high debt and weak liquidity,” said Dmitry Marinchenko, a Senior Director at Fitch Ratings, which has taken negative rating actions on Marathon.

The refining industries in the USA have long grappled with overcapacity as bigger, more efficient plants were built in the Middle East and Asia.

The prolonged periods of maintenance known as turnarounds that are required in the industry can easily cost $100 million (approximately £75 million).

Marathon Petroleum, the biggest USA refiner, will idle two refineries indefinitely, transforming them into a terminal and a renewable diesel facility, the company said in an update.

“On 31 July, we informed employees at our Martinez and Gallup refineries that we will indefinitely idle these facilities with no plans to restart normal operations,” a spokesperson for Marathon Petroleum said. “As part of these changes, Martinez will be converted to a terminal facility. We are also evaluating the strategic repositioning of Martinez to a renewable diesel facility, which aligns with California’s Low Carbon Fuel Standard objectives and MPC’s greenhouse gas reduction targets.”

Both refineries were idled in April amid the slump in fuel demand resulting from the national lockdowns in most of the world. Even with the transformations, the move will mean lay-offs, as “Indefinite idling unfortunately means most jobs at these refineries will no longer be necessary, and we expect to begin a phased reduction of staffing levels in October,” a spokesperson for Marathon Petroleum said.

Refiners have been under a lot of pressure, with analysts warning there is too much refining capacity in the world given the latest trends in demand for fuels. Some of this capacity will need to close or transform as the outlook for demand remains pessimistic. Many refiners could go bankrupt unless they adjust to the new reality.

Refineries in the USA have long relied on a significant amount of contract labour, including suppliers of NDT services. COVID-19 caused a significant temporary reduction in such contract services, which now appears to be permanent, thus adding to the ranks of the COVID-19 unemployment.

Excerpts from an article by Irina Slav for ‘Oilprice’ have been quoted in this article.

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