T. Fitzgibbon, A. SHANKAR and L.
VUKOMANOIC, McKinsey and Co., Houston, Texas; and P. GREEN, McKinsey and Co.,
In today's rapidly changing energy landscape, refinery
transactions have become a focal point of investment discussions. Despite
uncertainties surrounding the long-term future of refineries in a transitioning
world, many refineries continue to be acquired but at lower values than in the
past. On a stage set for change, what is the rationale for investing in the
refining sector now?
For a few bold investors, refineries can still be a
strategic investment generating short-term profits while providing opportunities
for securing green assets in the longterm. With the world still relying heavily
on crude oil refining for fuel supplies, the next decade will likely see continued
profits in this sector. When the push for green fuels outweighs the need for refined
oil products, these refineries could have a second life as green manufacturing
facilities such as renewable diesel or sustainable aviation fuel (SAF) facilities.
In this article, the authors explore trends in refinery
transactions, the short- and long-term opportunities for investors and what to
keep in mind when deciding whether to invest.
volumes recover post-pandemic but at lower values. While
the number of global refinery transactions took a dip in 2020 with the onset of
the COVID-19 pandemic, there is still significant interest in these assets. In 2021
and 2022, the average transaction rate of refinery assets—as measured by both
the number of refineries and capacity—showed strong recovery, with 25
refineries changing ownership, representing 2.5 MMbpd of capacity (FIG. 1). This is in
line with the pre-pandemic trend, indicating a renewed wave of refinery
Despite revived interest in these assets, transaction
values have witnessed a global decline. While the average transaction value
between 2016 and 2019 was $12,000/bbl, the average between 2021 and 2022 was $5,000/bbl,
a decrease of more than 50% (FIG. 2).
Transaction values are declining, and they are also converging
across geographies. A transaction gap of approximately $8,000/bbl was
observed between the Middle East/Asia and Europe/North America between 2016 and
2019, yet both regions held similar values of approximately $4,000/bbl in
2021 and 2022. This suggests that a global consensus is emerging in the market
outlook for refineries.
What is driving
the global decline in transaction values? The
worldwide view on the outlook for this sector is increasingly bearish. Energy
transition trends, including higher electric vehicle adoption in many markets
and higher compliance costs from environmental regulations, are reducing growth
opportunities for the sector. The heightened long-term uncertainty in the
future of refining is creating more sellers than buyers and thus a decline in
transaction values across geographies. Although fuel demand is still expected
to grow in the short- to medium-term, global refining overcapacity has reduced
the need for investment in new refineries.1
This market is leading many refiners to reassess their
refining portfolios, and in some cases, reduce them through shutdowns and
divestitures. The global majors (e.g., bp, ExxonMobil, Shell) have been
particularly active in shedding smaller refineries, even as they continue to
invest in some of their larger hub-market assets. This is in line with a
strategy focused on consolidating downstream into a core set of very efficient
assets with high option value as a platform to integrate into chemicals,
renewable fuels or other emerging energy processing areas. Smaller, more
isolated assets do not map well to this strategy but currently remain
profitable, accounting for many of the assets that are being sold.
The fall in asset values can be attributed to this
structural shift in strategy by many players that are suddenly putting assets
on the market simultaneously. This alone helps to explain falling transaction
values. Adding to this is the generally lower long-term market outlook for the
industry shared by most industry players, despite recent high profitability.
an opportunity for some acquirers. The
market is seeing conflicting actions, with several players shedding assets
while others continue to find refining an attractive market to enter. Within
this dichotomy, current market conditions present an opportunity for buyers who
have a bold belief in the potential for value creation. The decline in transaction
values and the short-term outlook for high margins provide an opportunity for
investors to capture both short-term benefits and long-term opportunities.
Over the next few years, the refinery sector is likely to
hold sizeable profit potential. Although a significant number of refineries
ceased operations following the COVID-19 pandemic, the demand for crude oil
products is still high. For example, the U.S. Gulf Coast cracking margins are projected
to average $19/bbl between 2022 and 2025 vs. a historical average of $7/bbl from
2015–2019.1 With margins remaining inflated, refining could offer a
valuable short-term investment opportunity.
In the longer term, as the demand for refined oil products
decreases globally, some refineries could have a second life as renewable fuel
plants, such as biorefineries to produce biofuels.2 Acquiring these
assets now provides a low-cost option to participate in renewable fuel
production or other green manufacturing opportunities in the future.
Who are the likely
buyers? Some investors are not prepared to take on the long-term
risk associated with refineries and are therefore willing to sell these assets
at a relatively cheap price, even though a short-term market bump is expected.1
An investor who believes in their ability to extract value beyond normal
operations—e.g., by making strategic investments and operational improvements—could
be well suited for this type of investment.
Many different types of investors could benefit from such
transactions, including—but not limited to—refiners looking to scale up, buyers
who would like to expand internationally and private equity players. Small- to
medium-scale independent regional refiners who would like to take advantage of
niche opportunities could be potential buyers, as well, with the large profit opportunity
and ability to improve operations across assets attracting such players.
Buyers who are looking to expand internationally to
secure access to crude placement could also benefit. These experienced buyers could
potentially negotiate better rates with intermediary service providers, or even
eliminate the cost of additional pipelines, terminals and other market
participants altogether. Acquiring product short-market assets would be a bet
on product-demand growth in local markets served by these assets.
This market is also attractive to private equity players who
expect to accelerate the profit generation potential of assets and who can deploy
capital along with strong management teams. Such buyers could also partner with
existing small- or medium-sized operators to drive consolidation across similarly
Overall, buyers with a strong skillset in improving asset
performance, the ability to leverage financial market savvy behind physical
assets and expertise in converting refineries into other types of low-carbon facilities,
could continue to seek out investments at these low transaction valuations.
Factors to keep in
mind when investing. An investor who is ready to
seize this opportunity could keep the following factors in mind:
These considerations can help investors grasp the
opportunity to earn good returns in the short term and be ahead of the curve in
the green fuel transition, as low asset prices play in favor of bold buyers.
Investing in refineries now could enable buyers to
capitalize on the rising demand for refined oil products in the short term and to
convert refineries to produce renewable fuels ahead of the energy transition in
the long term. The window of opportunity is narrowing, and bold investors can
act now to reap the rewards. HP
Tim Fitzgibbon is a Senior Expert and Associate
Partner in McKinsey’s Houston office.
Anantharaman Shankar is a Senior Expert in
McKinsey’s Houston office.
Luka Vukomanovic is a Senior Analyst in
McKinsey’s Houston office.
Patrick Green is a Knowledge Expert in McKinsey’s