Global Refining Capacity: Impact on Oil Refiners' Profit Margins

Current Trends in Global Refining Capacity

Recent expansions, such as ExxonMobil's 250,000 barrels per day addition in Beaumont, Texas, and policies supporting net zero emissions, are shaping global refining capacity. These developments aim to balance supply and demand, mitigate price pressures, and enhance environmental sustainability.

"And we completed the last largest refinery expansion in the U. S. Since 2012, adding 250,000 barrels per day of refining capacity in Beaumont, Texas in early 2023. This growth in supply helps reduce rising price pressure, easing the impact on consumers and businesses." --- (XOM, event transcript, 2024/05/29)

"These policies and programs, some of which support the global net zero emissions ambitions of the Paris Agreement, can change the amount of energy consumed, the rate of energy-demand growth, the energy mix, and the relative economics of one fuel versus another." --- (CVX, sec filing, 2024/Q1)

"We also added 250,000 barrels per day of refining capacity in early 2023 at a refinery in Belmont, Texas. Additionally, we just closed on the Pioneer transaction and plan to get more barrels out of the ground more efficiently and with a lower environmental footprint than either company could achieve separately, which will help to address the greenhouse gas emissions challenge." --- (XOM, event transcript, 2024/05/29)

"Refining margins in the quarter rose to the top of the 10-year range, as demand grew while turnarounds and global disruptions weighed on supply." --- (XOM, sec filing, 2024/Q1)

"These include everything from crude exploration and production to additional refining and chemicals capacity to biofuels and advanced recycling. We expect these projects to contribute nearly $4,000,000,000 in additional potential earnings in 2027 at $60 real Brent and constant margins, demonstrating the importance of continuing our investments in the business." --- (XOM, event transcript, 2024/05/29)

Regional Differences in Refining Capacity and Demand

Global refining capacity remains tightly balanced with demand, but regional differences are evident. Utilization rates vary, with Phillips 66 reporting high global rates, while PBF Energy highlights the unique complexity of East Coast refineries. Limited new capacity and continued demand growth suggest bullish long-term margins.

"Longer term, we remain constructive on the global refining market. Global capacity, including the new additions and refined product demand remain tightly balanced. In the immediate term, demand looks okay, nothing spectacular nor terrible but importantly, we are seeing utilization across the sector come off its highs and as a result both crude differentials and cracks are now improving. With that, I'll turn it over to Karen." --- (PBF, earning call, 2024/Q2)

"And then longer term, we see very little new refining capacity additions with continued demand growth, which should be bullish margins in the long-term." --- (VLO, earning call, 2024/Q2)

"Our worldwide refining crude oil capacity utilization rate was 98% and 95% in the second quarter and six-month period of 2024, respectively, compared with 93% and 92% in the second quarter and six-month period of 2023, respectively." --- (PSX, sec filing, 2024/Q2)

"The per barrel for the refining operating costs, refining planned turnaround costs and refining depreciation and amortization for the regions, as shown in the tables below, is calculated based on the gross refinery throughput (includes inter-refinery transfer volumes)." --- (MPC, press release, 2024/04/30)

"And so our assets within the PADD, I think line up very, very well quite frankly. The only refining capacity on the East Coast that has the complexity that we do to be able to process any crudes in the world." --- (PBF, earning call, 2024/Q2)

Supply-Demand Dynamics in Oil Refining

Long-term demand for oil remains strong, with companies like ExxonMobil and Chevron focusing on increasing production while reducing emissions. Chevron's integrated value chain and logistics support growing energy demand, despite occasional production declines. Both companies aim to balance supply growth with sustainability initiatives.

"We see long-term demand for oil continuing, albeit with a much lower emissions footprint as we continue to find ways to decarbonize." --- (XOM, earning call, 2024/Q1)

"Net oil-equivalent production during the quarter was down 39,000 barrels per day from a year earlier primarily due to a planned turnaround in Nigeria and normal field declines, partly offset by stronger operational performance at Tengizchevroil." --- (CVX, press release, 2024/04/26)

"Contrary to the claims of the proponent, we can increase production of the oil and natural gas the world needs and still reduce emissions intensity." --- (XOM, event transcript, 2024/05/29)

"We aim to grow our oil and gas business, lower the carbon intensity of our operations, and grow lower carbon businesses in renewable fuels, carbon capture and offsets, hydrogen and other emerging technologies." --- (CVX, press release, 2024/04/25)

"We've got an integrated value chain that allows us to serve two competitive refineries and advantaged logistics that take us out into a market where we've got a very strong brand and where the demand for all forms of energy continues to grow, be it power, be it transportation fuels." --- (CVX, earning call, 2024/Q1)

Regulatory Impacts on Refining Capacity

Regulatory developments, including obtaining necessary permits and government mandates, significantly impact ExxonMobil's refining capacity. Government approvals, such as those for the Whiptail project, are crucial for capacity expansion, while production limits or sanctions can restrict sustainable production levels.

"Actual future results, including project plans, schedules, capacities, production rates, and resource recoveries could differ materially due to: changes in market conditions affecting the oil and gas industry or long-term oil and gas price levels; political or regulatory developments including obtaining necessary regulatory permits; reservoir performance; the outcome of future exploration efforts; timely completion of development and construction projects; technical or operating factors; and other factors cited under the caption 'Factors Affecting Future Results' on the Investors page of our website at exxonmobil.com and under Item 1A." --- (XOM, press release, 2024/05/07)

"Actual future results, including project plans, schedules, initial capacities, production rates, and resource recoveries could differ materially due to: changes in market conditions affecting the oil and gas industry or long-term oil and gas price levels; political or regulatory developments including obtaining necessary regulatory permits; reservoir performance; the outcome of future exploration efforts; timely completion of development and construction projects; technical or operating factors; and other factors cited under the caption 'Factors Affecting Future Results' on the Investors page of our website at exxonmobil.com and under Item 1A." --- (XOM, press release, 2024/04/12)

"Whiptail project receives government approvals; production targeted to begin in 2027. Sixth Stabroek block development will add capacity of 250,000 barrels of oil per day. $12.7 billion of additional investment in Guyana's growing economy. ExxonMobil has made a final investment decision for the Whiptail development offshore Guyana, after receiving the required government and regulatory approvals." --- (XOM, press release, 2024/04/12)

"Government Mandates are changes to ExxonMobil's sustainable production levels as a result of production limits or sanctions imposed by governments." --- (XOM, sec filing, 2024/Q1)

Technological Advancements in Refining Processes

Technological advancements in refining processes are crucial for oil refiners like ExxonMobil and Chevron. These advancements, including cost-effective abatement and continuous high grading, drive project success and long-term strategies, ultimately enhancing profit margins. Conferences and sessions focused on emerging technologies further underscore the industry's commitment to innovation.

"Individual projects or opportunities may advance based on a number of factors, including availability of supportive policy, permitting, technological advancement for cost-effective abatement, insights from the company planning process, and alignment with our partners and other stakeholders." --- (XOM, sec filing, 2024/Q1)

"EnerCom Denver - The Energy Investment Conference will once again include The Energy Transition and Emerging Technology Session featuring quick-pitch investment presentations from promising start-up energy and technology companies focused on innovation and operations in alternative energy, advanced oil and gas technology, environmental sustainability and carbon solutions." --- (CVX, press release, 2024/07/17)

"But it is this continuing high grade. We were doing it all the way back when I was President of the refining company, so it's been a long-term strategy." --- (XOM, earning call, 2024/Q1)

"If we can get the technology, if we can develop the technology to a point that we're successful there, that gets us on this path and demonstrates the value of the concepts that we are developing to keep on going and drive further down." --- (XOM, earning call, 2024/Q1)

Competitive Landscape in Oil Refining

Growing competition for waste oils, integrated marketing and refining operations, diversification into renewable fuels, cost reduction efforts, and regional market challenges are shaping the competitive landscape in oil refining.

"Eric Fisher : Yes. We have noticed that there is growing competition for waste oils, we're still the largest importer of foreign waste oils." --- (VLO, earning call, 2024/Q2)

"The U.K., that marketing business is very integrated with our refining in the U.K., so it's much more akin to the U.S. model where the marketing business serves to help ensure product placement coming out of the Humber refinery." --- (PSX, earning call, 2024/Q1)

"And we in addition to renewable diesel, we'll be producing 50 1,000 barrels of renewable fuels, but we've got the ability to produce sustainable or actually renewable jet." --- (PSX, conference, 2024/06/18)

"We are committed to returning over 50% of our operating cash flows to shareholders.In refining, we're enhancing performance and reducing our cost structure." --- (PSX, earning call, 2024/Q1)

"The Los Angeles and the Ferndale facilities will continue to operate and they've been good contributors to the West Coast, but I'll say in general the West Coast is a challenging market to make money on the refining side of the business." --- (PSX, earning call, 2024/Q1)

Environmental Concerns and Their Impact on Refining

Environmental concerns are driving ExxonMobil to evolve standards, reduce emissions, and adopt cleaner technologies, impacting refining practices and potentially profit margins.

"In addition, historical, current, and forward-looking environmental and other sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future, including future rule-making." --- (XOM, sec filing, 2024/Q1)

"I think as we look at going into some of the countries that are on a growth path, on a developing path, we look for opportunities of how our footprint and presence in those countries and markets can help the people in the community and this is a great example of that, of getting the gas that's produced offshore, onshore, so they can replace what is a relatively inefficient, high-emissions power generation system that's fairly unreliable with something that's cleaner, lower emissions, and much more reliable and should be much more cost-effective." --- (XOM, earning call, 2024/Q1)

"You have our commitment that we'll keep working to deliver energy and products safely and with fewer emissions in the years ahead." --- (XOM, event transcript, 2024/05/29)

Future Outlook for Refining Capacity and Profit Margins

Chevron and ExxonMobil are adapting to fluctuating margins and refining capacities by adjusting capital spending, focusing on strategic growth, and managing operational costs. Despite current challenges, both companies aim to enhance earnings potential and maintain financial flexibility, indicating a cautiously optimistic future outlook for refining capacity and profit margins.

"During extended periods of low prices for crude oil and natural gas and narrow margins for refined products and commodity chemicals, the company has the flexibility to modify capital spending plans, discontinue or curtail the stock repurchase program, sell assets, and increase borrowings to continue paying the common stock dividend. The company remains committed to retaining high-quality debt ratings." --- (CVX, sec filing, 2024/Q1)

"By executing with excellence on our strategy, we expect to grow our earnings potential by an additional $12 billion from 2023 to 2027 at constant prices and margins, a growth rate of more than 10% per year." --- (XOM, earning call, 2024/Q1)

"Three Month Periods Ended March 31, 2024 and 2023 U.S. downstream earnings decreased by $524 million primarily due to lower margins on refined product sales of $380 million and higher operating expenses of $210 million mainly from planned shutdowns." --- (CVX, sec filing, 2024/Q1)

"Energy Products First Quarter Earnings Factor Analysis (millions of dollars) Margin – Margins decreased earnings by $2,000 million driven by weaker industry refining margins." --- (XOM, sec filing, 2024/Q1)

"And I'm just wondering how you think about margins, even though it's still early for some, how the margins of these compare to your higher-return traditional margin business." --- (CVX, earning call, 2024/Q1)