Tight supplies of transport fuels and record profits for refining oil are likely to spur revived investment and a spate of acquisitions in the downstream sector over coming years, analysts say.
Oil companies may look to capitalise on last year's surge in refining profits by expanding plants or selling off assets that now look more attractive to independents and private investors.
Majors have so far been reluctant to put record profits into refining expansion, after suffering decades of poor margins because of overcapacity, and most spending has been for upgrades to meet stricter environmental standards.
"We might be on the cusp of a change," said David Waring, Deutsche Bank's head of European energy, adding that he expected up to 18 European refineries to change hands or restructure within the next two years. Europe's largest refiner Total said it made over a billion euros from refining in 2004, as global fuel demand surged. It said it will boost refining investment by nearly 70 per cent in the next three years.
"We are more open than before to upgrading some good refineries that produce light products, especially diesel," Jean-Jacques Mosconi, a senior vice president at Total, said on the sidelines of an industry conference last week.
Europe is fundamentally short of distillate fuels, comprising diesel, jet fuel and heating oil, as its refiners over-invested in gasoline production while motorists are increasingly switching to diesel.
Total forecasts diesel use among European motor car users to rise to 68 per cent of total consumption by 2010, compared with 55 per cent now. "The main issue in years to come will be how to find distillates," Mr Mosconi said.
Asia, which has driven world demand growth this decade, will increase refining capacity by more than 700,000 barrels per day this year. Emerging consumer giant China will just keep pace with demand growth while India boosts exports.
Big oil producers are building new plants too. Saudi Arabia's state-run oil company said this week it was in talks with prospective partners over an export refinery, while Kuwait and Algeria plan to build new plants by the start of the next decade.
The profit bonanza may only last a few years, as the extra capacity begins to soak up growth in fuel demand and ease shortages of products such as diesel that helped drive last year's 34 per cent oil price rally.
Potential investors will also be wary of hefty price tags of up to $700 million for diesel-making hydrocracker units, and the cost of cutting emissions of pollutants such as sulphur and carbon dioxide.
The world's largest oil company Exxon Mobil said it does not plan to build new plants but will expand capacity incrementally.
Others may be tempted to offload refineries, opening the door for independent companies that look to fill niche opportunities or turn around ailing plants.
Oil major BP said late last year it would include two oil refineries, Grangemouth in Scotland and Lavera in France, in a planned sale of petrochemicals units that could raise $4 billion. US independent refiner Premcor said last week it would like to get into European downstream, while Russian firms such as LukOil are looking to boost product exports and diversify their assets.
"I think we are going to see some majors coming back to refining," said Tom O'Malley, chairman of Premcor. "We shouldn't just be looking to the majors for expansion - we are trying to expand," he told the IP Week conference in London.
Mr O'Malley said he saw the next few years as being a golden age for refiners with extraordinary margins, though it would be very difficult to build any new plants in the US or northwest Europe because of planning and environmental constraints.
In Europe, upgrades are more likely than new plants, as refiners seek to produce more high value products and less excess fuel oil from cheaper heavy crude oils, which will form the bulk of new exports from producers such as Saudi Arabia.