An Array of Factors Complicates U.S. Petroleum Refining Strategy

Maintaining profitability amid considerable uncertainty in global trade, environmental policy and product demand is a daunting prospect for the U.S. refinery fleet

A complex and somewhat unprecedented interplay of factors has been complicating investment and production strategies for U.S. petroleum refiners for the past few months. After several years of growing momentum toward an eventual transition to low-carbon energy, including carbon-capture-and-storage technologies and higher hydrogen production, policies pursued by the Trump Administration in the U.S. has have prompted energy companies to rethink investment strategies for renewable fuels and sustainability. Ongoing supply-and-demand effects for various refined products, including for sustainable aviation fuel (SAF), continue to evolve across the global economy, creating challenges and opportunities for fuel producers. And meanwhile, petroleum refiners are identifying applications for a host of technologies related to the digital transformation in pursuit of greater reliability, safety and profitability.

Tailwinds with uncertainty in D.C.

Since the beginning of the Trump Administration in January, the President and cabinet officials have signaled friendliness to the petroleum and natural gas industries, by issuing a series of executive orders in support of U.S. oil and gas production.

“The [Trump] administration has promoted the idea of ‘american energy dominance,’ and we need a strong refining sector for that,” says Geoff Moody, senior vice president for government relations at the American Fuel and Petrochemicals Manufacturers (AFPM; Washington, D.C.; www.afpm.org). “I would say there’s quite a bit of optimism in the industry, right now, and an awareness of both challenges and opportunities.”

But the Administration has also taken actions that challenge the U.S. oil and gas industry. In early April, the Trump Administration upended global trade with a series of tariff announcements, only to announce, a week later, a 90-day pause on most of the tariffs (except for those aimed at China). Although crude oil and refined products were generally exempted from tariffs on imports to the U.S., limiting feedstock and product impacts for refiners, the “on-again, off-again” approach to tariffs could offset the effects of the pro-oil-and-gas executive orders.

“The U.S. oil and gas industry should be happy about the change in administration policy stances, especially with regard to deregulation efforts and permitting, but the potential benefits of the reduced regulatory burden may be offset by the effects of the tariff policies,” says Clayton Seigle, senior fellow at the Center for Strategic and International Studies (CSIS; Washington, D.C.; www.csis.org). For example, “steel tariffs would be a cost escalator for both upstream and downstream segments,” he says.

“At the macro level, the major effect [of the tariffs] of course is bearish,” Seigle says. “An economic slowdown will decrease oil demand and prices.” And on top of the tariffs, a subgroup of the Organization of Petroleum Exporting Countries, plus (OPEC+) announced in April that they were easing previous crude oil production cuts from late 2023. These developments, leading to higher-than-expected supply from OPEC+, “were not on my ‘bingo’ card,” Seigle joked.

Global stock markets sank strongly in response to the rollout of the tariffs, and as of press time for this article, remain significantly lower than recent highs, even after partially recovering following the announced tariff pause on April 9. Several recent forecasts for economic growth globally, including from the Organization for Economic Co-operation and Development (OECD; Paris, France; www.oecd.org), suggest a slowdown in 2025 and 2026 compared to previous years. Indicators of consumer activity, such as the University of Michigan’s (Ann Arbor; www.umich.edu) Consumer Sentiment Index in the U.S., were down significantly in April.

Among the many reasons for the dip in consumer sentiment and for the forecasts of slowing growth is uncertainty surrounding the rationale for the U.S. tariffs. Administration officials have offered contradictory information about the motivation for, and desired outcomes of, the tariffs. At times, it has been indicated that the purpose of the tariffs is to force trade negotiations with other countries, suggesting that they may be reduced or eliminated as trade agreements are established. In other instances, it has been suggested the tariffs are intended to entice manufacturers to move operations into the U.S., for which they would have to become permanent in order to prompt action on the part of manufacturing companies (Figure 1).

“One of the big pieces of feedback we’ve heard is: ‘some clarity would be nice,’” says Austin Lin, principal analyst for refining and oil products at Wood Mackenzie (Edinburgh, U.K.; www.woodmac.com). “Refiners, and really most industrial companies, can adapt to given sets of conditions, but to act, they need certainty as to what those conditions will be. For fuel producers and other operating companies, volatility will be harmful, and makes it more challenging to plan for the future, particularly when it comes to the large capital projects that are expected to be a cornerstone of the energy transition.”

Another consideration for negative consequences of the tariffs would be retaliation by other countries (Figure 2). “We should consider the prospect of retaliatory energy sanctions [on the U.S.], for example by India, U.K. or the European Union,” CSIS’ Seigle says, but Trump could also react by rescinding the [tariff] exemptions, giving him deterrent leverage.”

Transition slowdown

Among the main outcomes of the 2024 election results in the U.S. is a shift in focus away from climate issues and renewable energy, and toward an embrace of traditional fossil fuels. For example, references to climate change and greenhouse gases have been removed from a host of federal websites, and on March 12, U.S. Environmental Protection Agency (EPA; www.epa.gov) Administrator Lee Zeldin announced a raft of deregulatory actions that include reconsideration of regulations on 40 CFR 60 Subparts OOOO a, b and c on emissions, as well as the federal Risk Management Program rule, the Greenhouse Gas Reporting Program and other Biden-era initiatives for determining the social cost of carbon.

Regarding the deregulatory approach being pursued by the administration, AFPM’s Moody says, “We welcome a revisiting of regulatory initiatives that would achieve a better balance between regulation and environmental stewardship.”

Several major oil companies have announced strategy shifts away from low-carbon energy. Among them are bp plc (London, U.K.; www.bp.com), which in February reportedly announced cuts to expenditures on renewable fuels, and a shift of investment toward conventional oil and gas. Chevron Corp. (Houston; www.chevron.com) also has reportedly trimmed spending on emissions-reductions efforts by 25%.

But while the short-term prospects for low-carbon energy transition in the U.S. have dimmed significantly, the vision of energy companies moving toward lower-emissions technologies seems to remain in play for the longer term. Regarding the energy transition to low- or no-carbon energy, “I think the 30- to 50-year view is the same — transition is coming. Even without U.S. participation, the rest of the world — including Europe, China and elsewhere — is looking at transitioning,” says Wood MacKenzie’s Lin. “But for now, new [U.S.] government support for decarbonization is likely to be limited, so momentum for investment will stall out temporarily.”

“Right now, the vast majority of capital investments that would be considered ‘green’ or sustainable that a refinery could make to reduce its climate impact — including for manufacturing renewable diesel or for carbon capture — do not make economic sense [at this time] without government help,” Lin says.

So while companies that have already begun renewables projects will likely push for continued government support, Lin says, other companies “seem content to sit on the fence when it comes to new renewable investments, especially as weakening credit prices over the last two years have dramatically impacted project economics. This drove several companies to stop projects or even shutdown units last year.”

And while refiners earned record profits in 2022 and 2023, margins returned to historical norms in the second half of 2024, and 2025 is looking to be a weak year for margins, Lin says. “This brings back the mindset of financial discipline for refiners, which is usually going to limit the degree of higher-risk capital investment.”

Closures and expansions

U.S. refining capacity has shifted in recent months due to two plant closures, but the lost capacity is offset somewhat by some announced capacity expansions. Late last year, Phillips 66 (Houston, Tex.; www.phillips66.com) announced its intention to close its 147,000 bbl/d Los Angeles-area refinery by the end of 2025.

Also, the Houston refinery owned by LyondellBassell (Houston, Tex.; www.lyondellbasell.com) recently completed its closing processes. LyondellBassell had first announced its intention to close the Houston refinery in 2023, but then subsequently delayed the closure until Q1 2025.

The U.S. Energy Information Administration (EIA; Washington, D.C.; www.eia.gov) says that the two refinery closures will reduce production of refined petroleum products and contribute to the decreasing inventories of the three largest transportation fuels (motor gasoline, distillate fuel oil and jet fuel) in the U.S. next year. EIA forecasts that in 2026, inventories of the three fuel types will fall to their lowest levels since 2000 (Figure 3).

“Inventory withdrawals tend to increase wholesale and retail fuel prices because market participants must meet demand by competing for a smaller pool of refinery production. As a result, we also forecast wholesale refinery margins for the three fuels will increase. In our forecast, however, these wider margins are partially offset by falling crude oil prices, leading to relatively smaller increases in retail fuel prices or even a decline in retail gasoline prices,” EIA said in a March analysis at eia.gov.

Offsetting the production lost due to the closures, however, are three recent refinery capacity expansions: ExxonMobil (Houston; www.exxonmobil.com) announced it is increasing capacity at its Beaumont, Tex. refinery by 250,000 bbl/d; Valero (San Antonio, Tex.; www.valero.com) announced an expansion of its Port Arthur Refinery by 25,000 bbl/d; and Marathon Petroleum Corp. (Findlay, Ohio; www.marathonpetroleum.com) announced an expansion of its Galveston Bay refinery.

Refined products demand

Many refiners are parsing out probable demand for different refinery products. For gasoline, forecasts, such as that from EIA, suggest lower demand for gasoline in 2026 compared to 2025. Diesel fuel demand generally tracks with measures of overall economic activity, so if the U.S. moves into recession territory, demand for diesel would be expected to decrease.

“Less motor-gasoline refinery production and smaller inventories correspond with falling gasoline consumption in the U.S.,” says EIA. “Because of both increased automobile efficiency and less employment growth, we forecast U.S. motor-gasoline consumption will decline about 1% in 2026, following no year-over-year change in 2025.”

The story is different for jet fuel, however, with EIA predicting an all-time-high consumption of jet fuel this year. Commercial aviation is considered to be a difficult-to-decarbonize industry, so a long-term need for liquid jet fuel is likely. Because of this, coupled with continued pursuit of renewable fuels for aviation, prospects for manufacturing both conventional jet fuel and sustainable aviation fuel (SAF) appear strong (Figure 4). Below are some examples of recent announcements related to SAF, and for more on SAF, see p. 9 of this issue.

OMV Petrom S.A. (Bucharest, Romania; www.omv.com) announced the start of construction for a SAF and renewable diesel (HVO) production unit at the Petrobrazi refinery. The new facility positions OMV Petrom as the first major producer of sustainable fuels in southeast Europe, with an annual capacity of 250,000 tons.

The project entails a total investment of €750 million, of which €560 million is allocated for the construction of the SAF/HVO unit, and €190 million for two green-hydrogen production facilities.

ARAMCO. In December of last year, Aramco (Dharan, Saudi Arabia; www.aramco.com), TotalEnergies (Corbevoie, France; www.totalenergies.com) and Saudi Investment Recycling Company (SIRC; Riyadh, Saudi Arabia; www.sirc.sa) announced the signing of a joint development and cost-sharing agreement to assess the potential development of a SAF plant in the Kingdom of Saudi Arabia.

The assessment will focus on technology solutions that seek to recycle and process local waste or residues from the circular economy (used cooking oils and animal fats) to produce SAF.

bp. In December, Corteva Inc. (Indianapolis, Ind.; www.corteva.com) announced a collaboration with bp on the companies’ shared intent to form a crop-based biofuel feedstock joint venture (JV). The JV envisaged by Corteva and bp would produce and deliver crop-based biofuel feedstocks to help meet the anticipated growth in demand for SAF.

ADNOC. Through a comprehensive lifecycle assessment, the Wood Group plc (Aberdeen, Scotland; www.woodgroup.com) Carbon Advisory Team analyzed the GHG emissions associated with jet fuel production at ADNOC (Abu Dhabi, United Arab Emirates; www.adnoc.ae) refineries. After completing the lifecycle assessment of lower-carbon aviation fuel (LCAF) produced by ADNOC at its Ruwais Refinery, confirmed the company’s capability to produce LCAF, which could be a shorter-term target for modest greenhouse gas (GHG) emissions reductions compared to SAF. LCAF can cut emissions by 10%, providing a short-term solution in the face of increasing aviation activity and efforts to enhance the economic viability of longer-term solutions.

This paves the way for future alignment with International Civil Aviation Organization’s (ICAO) Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). LCAF may be certified as a CORSIA-eligible fuel if it meets the CORSIA Sustainability Criteria, including a 10% reduction in lifecycle emissions compared to the conventional aviation fuel baseline of 89 g CO₂/MJ.

Digital transformation and R&D

Pressures on profitability keep refiners looking for efficiency gains in their operations. Supporting research and development, and investing in digital tools offer two avenues to pursue these gains. Digital transformation efforts have been dominated by the application of artificial intelligence (AI) technologies to refinery operations.

An example comes from ADNOC, which has been focused on AI-enabled process optimization for both upstream and downstream operations. ADNOC Refining announced a collaboration with AIQ (Abu Dhabi, UAE; www.aiqintelligence.ae) to deliver AI-enabled corrosion- and safety-monitoring systems across ADNOC Refining’s operations.

The cooperation involves the deployment of AIQ’s SMARTi Intelligent Monitoring System, AI-enabled corrosion management, autonomous operations, digital twin technologies and other AI-driven technologies. AIQ’s SMARTi uses AI-enabled computer vision of the existing closed-circuit television (CCTV) feeds for intelligent monitoring, detection and reporting of safety incidents. The solution can process a billion images daily with greater than 90% accuracy.

Honeywell International Inc. (Charlotte, N.C.; www.honeywell.com) has also been involved with applying AI to refining operations. A collaboration with Chevron aims to develop AI-assisted systems to help operators make decisions on refining processes and to enhance efficicency and improve safety.

Honeywell has also partnered with ExxonMobil on an AI-supported initiative known as the Digital Reality Ecosystem (DRE). The DRE aims to capture three-dimensional images for digital models of assets with the goal of seamlessly integrating visual technologies, data analytics and real-time information to enhance operations across assets, the company says. At an industry event in February, ExxonMobil digital manager Michael Hotaling explained that DRE makes 3-D models easily accessible to operators and engineers at plant sites to reduce the cognitive load on employees.

And ExxonMobil is among the companies that have explored R&D partnerships as a way of positioning for the future. In April, for example, the company entered into a master research agreement with Rice University (Houston; www.rice.edu) for supporting research initiatives with a focus on sustainable energy for growing energy demands.

The collaboration builds on Rice’s interdisciplinary approach to innovation, drawing on the university’s strengths in materials science, polymers and catalysts, high-performance computing and applied mathematics, the university says.

The first research project under this agreement is already underway. Led by Rice civil and environmental engineering professor Qilin Li, the project focuses on developing advanced technologies to treat desalinated produced water from oil-and-gas operations for beneficial reuse.

Li’s approach uses advanced electrochemical oxidation processes to remove persistent volatile and semi-volatile organic compounds and ammonia-nitrogen from wastewater, enabling reuse for agriculture and industrial processes. The project also explores ammonia recovery and hydrogen production.

More projects under this agreement are set to launch in the coming months and years, ExxonMobil says.

Scott Jenkins