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Last week, Marathon Petroleum began idling its 157,700 b/d
Martinez (California) refinery in response to the demand
destruction wrought by COVID-19. This is hardly the first refinery
to be shuttered due to the pandemic and it will almost certainly
not be the last. However, the shutdown is notable because Martinez
is well-positioned within the California and the San Francisco
markets, specifically, and one of the highest margin refineries in
Marathon's portfolio. Moreover, Martinez typically produces little
to no jet fuel, the refined product whose demand has been most
affected by the pandemic.
Figure 1: Refinery closures attributable to COVID-19
<span/>So, in many ways,
Martinez appears a surprising victim (albeit a temporary one) of
COVID-19. To be sure, <span/>the refineries that have so far been
shuttered due to COVID-19 are - for the most part - small with
relatively low conversion capabilities, whereas Martinez is larger
with a very high conversion ratio. But there are a lot of other,
less tangible, factors at play such as the nature of the refinery's
marketing supply chain, the volume of available product storage
capacity, and/or how it fits into the company's broader downstream
portfolio. For example, some of the refineries that are currently
closed had previously planned maintenance turnarounds, making it
"easier" for the owner to simply extend (or begin early) the
shutdown.
<span/>Ultimately, the
decision to close Martinez - and most of the other refineries -
boils down to this maxim of the industry: if you cannot sell it or
store it, you cannot produce it. <span/>Product demand throughout the world has
collapsed in the face of government mandated lockdowns and
voluntary social distancing<span/>. IHS Markit estimates April's combined
gasoline, diesel, jet, and residual fuel demand will be down by
more than 21 million b/d versus the year before - a nearly 33%
decrease. Double digit year on year percent demand declines are
expected for May and June. Meanwhile, available product storage
capacity prior to the pandemic was only around 300 million barrels.
By now, many refineries are simply running out of room. In fact,
Portuguese refiner Galp explicitly cited a lack of available
storage capacity when it announced that it will close the larger of
its two refineries (Sines) starting next week. This announcement
was particularly notable since Galp had already closed the smaller
Porto refinery earlier this month, meaning that both of Portugal's
refineries will soon be offline. But if you cannot sell it or store
it, then you cannot produce it.
Ostensibly, all of the refinery closures underway or announced
so far are temporary. However, IHS Markit believes that it is
increasingly likely that the market conditions wrought by COVID-19
will hasten a more permanent reckoning for the world's weakest
refineries.
IHS Markit experts are available for consultation on the
industries and subjects they specialize in. Meetings are virtual
and can be tailored to focus on your areas of inquiry. Book in a
consultation with Rob Smith.
Rob Smith is a Director for the Global Fuel Retail team
at IHSMarkit.
