About the refining market
Oil refiners in Asia, Europe and the United States are facing a drop in profitability after the so-called “refining supercycle”.
The 3-2-1 crack spread, a key measure of overall profitability, slipped below $15 a barrel in late August for the first time since early 2021.
(The 3-2-1 spread approximates U.S. refiners typical yield of two barrels of gasoline and one of diesel from every three barrels of oil they process).
Gulf Coast gasoline margins (excluding renewable fuel blending obligations) averaged $4.65 a barrel on the 13rd of September 2024, down from $15.78 a year ago.
In 2022 and 2023, refinery companies recorded record profits due to supply shortages caused by Russia’s invasion of Ukraine, disruptions to Red Sea navigation by Houthi militants, and a big recovery in demand following the COVID-19 pandemic.
Recently, refining margins have collapsed due to structural changes on the demand and supply sides.
The Demand
- The demand of oil products from China has reduced due to the slowing economic growth and rising penetration of electric vehicles.
- The demand of oil products from the European industry has slowed down with negative impact on European refineries.
The Supply
- In 2022 and 2023, when margins were positive, some companies that planned to restructure their refineries, stopped the process. This situation has increased the supply more than it was expected.
- Some Chinese old refineries called the “teapots”, which should be shut down, are still cooking,
- New refineries coming on stream in Africa, the Middle East and Asia have increased the supply of refineries products.
Analysts agree that actual refining capacity is too high compared to the demand level, with new capacity that will make the situation worst for the refineries.
The market expects global refining margins to continue their slump, with new refining capacity which should rise 1.5 million bpd year-on-year.
This pressure on margins is expected to impact the old refineries and those that have high breakeven.
About Totalenergies
TotalEnergies is a global multi-energy company that produces and markets: oil and biofuels, natural gas and green gases, renewables, and electricity.
The Company is one of the largest integrated energy firm in the World with a presence in more than 130 countries.
The Regions detailed below are the long-standing cornerstones of TotalEnergies:
- Europe (Company’s decision-making centre).
- The Middle East (where the company has established many partnerships with producing countries and national companies).
- Africa (where TotalEnergies has substantial oil and gas production activities and Company-branded service stations).
TotalEnergies organises its activity through five main business segments:
- Integrated LNG
- Integrated Power
- Exploration & Production
- Refining & Chemicals
- Marketing & Services
The refining & chemicals segment
TotalEnergies holds stakes in 16 refineries located in Europe, the United States, the Middle East, Asia and Africa, 8 of which are operated by TotalEnergies companies including two biorefineries in France (La Mède, and Grandpuits, which is in the process of being converted).
At the end of 2023, TotalEnergies’ refining capacity was 1,792 kb/d, unchanged from 2022 (1,793 kb/d at the end of 2021). The refining capacity of the Refining & Chemicals segment amounted to 1,785 kb/d.
In the first nine months of 2024, the Refining & Chemicals business segment recorded adjusted net operating income for an amount of $1,842 billion, -54% compared to the same period of 2023 ($4,021 billion).
This negative result is mainly due to Company’s European refining marker that fell to $15 per ton in Q3/2024 (-66% compared to Q2/2024).
For the fourth quarter ‘24, the Company anticipates refining utilization rate will remain above 85% with a turnaround plan at Leuna refinery in October.
How the Company plans to manage the downside of the refining cycle
During the earning call at the end of October 2024, Patrick Pouyanné, Chairman & CEO of TotalEnergies, explained that lower refining margins will push refineries with high breakeven to close or re-convert their activities.
TotalEnergies has stake in 16 refineries that have good assets with low breakeven.
Also if margins are slowing down, TotalEnergies does not expect to reduce its refineries activities; the plan related to the transformation from normal refineries to biorefineries will also not change for the moment.
The Company intends to keep the refineries running at normal as long as they have the margins better than the variable costs, in order to cover part of its fixed costs.