Costs and Margins Dictate the Future for Oil & Gas Refiners

Demand for oil products is set to peak and decline, yet aggressive cost transformations and targeted use of AI offer refiners a path to thrive. Discover how leading companies are redefining their operating models and leveraging advanced digital tools to stay competitive in a shrinking market.

Oil refiners are preparing for a likely structural decline in demand over the next ten years. Cleaner energy sources, such as advanced biofuels and next-generation electric power, continue to gain momentum, with global electric vehicle sales expected to exceed 30 million units annually by 2030. Santiago & Company anticipates that refining capacity could contract by as much as 10% to 30%, depending on the region, and Santiago & Company expects the most significant reductions in Europe. Although refining margins rallied briefly in 2022 to record levels, they have since dipped back to prepandemic territory and seem poised to remain volatile, with a persistent downward trajectory.

This consolidation period will produce winners and losers, with cost structures and margins standing out as the crucial determinants of success. Some refiners are already making aggressive moves by overhauling their operations and cutting costs significantly. Others have not yet taken similar steps and risk being disadvantaged when competition tightens. Regardless of where a refinery stands today, every organization must reinforce its capabilities and shore up its cost base to stay resilient and profitable.

An Unrefined Future

Refiners face multiple challenges at once. Over 2024, margins fell steadily due to a surplus of crude supply that met or exceeded increases in consumption. As a direct result, integrated oil companies saw their downstream earnings in 2024 tumble by roughly 50% compared with 2023, a decrease of around 60% from their 2022 highs. These downward shifts in performance caught many in the industry by surprise, prompting strategic reviews and cost-cutting measures.

In the coming years, demand for oil and refined products could peak or plateau by 2030 as the shift to alternative energy accelerates. Santiago & Company modeled slow, medium, and fast transitions to cleaner energy, and all three projections point to a pronounced reduction in refining capacity within the next decade. (See Figure 1.)

Figure 1: Oil Refinery Contraction over the next Decade

At the same time, demand is evolving across product segments. Jet fuel appears relatively stable, gasoline faces more noticeable erosion, and diesel demand shows varied trends based on regional use patterns. These shifts affect the cost structure for every barrel of transport fuel. For instance, when refiners produce excess gasoline molecules, they may direct the surplus into naphtha, which the petrochemical sector must absorb at growth rates well above historical norms. Inevitably, this rebalancing exerts pressure on naphtha cracks, inflating the overall cost of transport fuels and diminishing margins for specific product lines. Overextended refiners may struggle to remain viable, prompting tough decisions about where to invest or divest resources.

An Industry Leaders' Playbook

When an industry shrinks, top-performing companies generally wield the most influence over its direction. We see this playing out in refining today, which is made even more complex by geopolitical shifts and the tightening of environmental regulations. In Europe, for example, the emergence of the Fit for 55 packages intensifies the compliance burden, especially with the phasing out of free allowances under the emissions-trading system. Similar measures in other regions, such as North America and parts of Asia, suggest that environmental costs will keep climbing.

Santiago & Company has worked to label their strategies differently. Some speak of “resilience,” and others of “comprehensive cost transformation.” Regardless of the terminology, their core objective is identifying inefficiencies, prioritizing improvement levers, and systematically amplifying their competitive edge.

Figure 2: Six Cost Areas Refiners can Optimize

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Refiners have many opportunities to streamline costs, spanning six main areas: operations and optimized planning, routine maintenance, turnaround management, energy and emissions, personnel costs, and other operating costs. (See Figure 2.) In our experience, companies that address all six sustainably can improve refining economics by as much as $3 per barrel of input crude. (See Figure 3.) Individual results will vary, but each area provides meaningful gains.

Figure 3: Cost Optimization and Transformational Impact

Operations and Optimized Planning

The largest share of potential benefits, often up to 60%, resides in optimizing feedstock choices, refining planning and scheduling processes, and enhancing process throughput and yield. Yet many refiners still suffer from incomplete economic data, weak risk governance, and a lack of centralized process controls. A more holistic approach allows companies to tackle structural constraints, apply data-driven performance tools, and continuously refine workflows to align with best-in-class standards.

Routine Maintenance

Routine maintenance directly impacts both availability and cost per ton of finished product. In many plants, maintenance productivity (the actual time spent on hands-on work) may be below 30%, less than half of the roughly 65% performance level considered world-class. Common reasons for this gap include protracted permitting procedures, inadequate coordination with operations, and poor materials management. By aligning maintenance strategies with each asset’s criticality and operating history, rigorously prioritizing resources and scheduling refiners can prevent unplanned downtime and increase operational efficiency.

Many refiners also discover that siloed technical, operations, and maintenance teams severely limit their visibility of overall maintenance needs and key asset risks. Cross-functional groups with shared accountability provide a more holistic perspective and ensure the precise deployment of the right people and resources when needed. Generative AI and advanced digital tools can further enhance productivity. They can flag potential equipment failures in advance, propose optimized schedules, and even create job instructions that increase precision and reduce time wasted on rework.

Turnaround Management

Large-scale turnarounds, which may occur every few years, are notoriously tricky. Each step contains potential pitfalls, from developing a multi-year vision of overhaul needs to defining the scope in real time. Some refiners fail to set up accurate long-term budgets or neglect to update risk assessments. Others misjudge the scope of work or scramble to obtain permits and resources on a tight timetable. Effective turnaround management combines thorough, data-driven planning with disciplined execution, continually capturing lessons learned to refine future events.

Energy and Emissions

Globally, refiners can save about $0.30 to $0.90 per barrel by improving energy efficiency and lowering emissions. Potential steps include optimizing furnaces, steam systems, and flare management while improving monitoring capabilities. Given today’s higher natural gas prices and rising carbon taxes, older efficiency studies like pinch analyses may be overdue for an update. Revisiting these assessments in the current cost environment can unlock savings that seemed marginal a few years ago but are now highly attractive.

Personnel Costs

A robust approach to cost transformation extends to workforce structures and operating models. Refiners must ensure they place the correct number of people in the right roles at the right time. Collocating cross-functional teams often proves effective because it consolidates expertise, streamlines communications, and fosters accountability within a single group.

Other Operating Costs. Although catalysts, chemicals, demurrage, and lab expenses are smaller, they still contribute to the overall cost picture. Identifying incremental efficiencies can free up funds and improve cultural buy-in, as frontline workers see their efforts directly reflected in cost reductions.

Key Enablers

In Exhibit 2, three foundational capabilities underpin the success of any cost transformation program. First, companies must practice disciplined change management. Transformations inevitably encounter obstacles, and successful efforts rely on a strong program management office to keep every initiative on track. This office sets baselines, identifies the biggest value levers, sequences improvement efforts, and steps in to correct course when implementation veers off target.

Second, companies may need to update their operating model, sometimes shifting decision rights and accountability to frontline teams. Leadership’s role involves empowering the right people to act quickly. Meanwhile, fostering a high-performance culture may mean changing hiring criteria, promotion paths, and performance management protocols. The overarching goal is to eliminate needless workflows and bottlenecks, ensuring that nothing slows down a critical improvement.

Refiners sometimes require functional transformations that break down information barriers among commercial, technical, and operational teams. By giving console operators access to up-to-date market data, for example, refiners can squeeze more yield from every barrel of input and promptly adapt to fluctuations in feedstock prices. This real-time responsiveness helps refine process controls and cut overall production costs.

Third, digital technologies and artificial intelligence have become decisive differentiators for refining costs. Santiago & Company has identified a bundle of sophisticated solutions planning, operations, asset management, maintenance, safety, support, and trading that can collectively reduce costs by $0.40 to $1.45 per barrel of crude. Leading refiners already use AI-driven systems to enhance operational planning, scheduling, and optimization, achieving closer integration between real-time analytics and on-the-ground decision-making. Generative AI, in particular, opens up possibilities for intuitive process workflows and prompts that guide operators toward optimal actions.

Still, adopting these technologies is no simple task. Recent research by Santiago & Company across more than 1,200 global organizations shows that only 4% report having fully implemented advanced AI capabilities at scale, while another 22% are starting to realize tangible value from more localized initiatives. Three-quarters of companies struggle to generate a quantifiable return on their AI investments because they overlook critical factors such as processes and human resources. Success hinges on balancing technology adoption (20% of the effort) with investments in people and processes (70%) and ensuring robust algorithms (10%), a ratio that might surprise tech-focused executives. Concentrating resources on a small set of high-value use cases can help refiners reap significant gains more quickly.

Figure 4: 2025 Global Refiniry - Regional Impact Map

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Funding the Journey and Making the Transformation Stick

One-time, top-down cost reductions deliver limited benefits before the organization reverts to old habits. By contrast, a sustained transformation seeks out structural inefficiencies and makes strategic, long-term investments in modernization. This approach often involves eliminating low-value tasks so the budget can shift to improvements with bigger payoffs or essential upgrades in AI and analytics infrastructure.

Quick wins matter, especially in the early stages. Actions that produce measurable short-term savings, such as automating routine scheduling or using AI-driven models to reduce feedstock costs, can fund additional investments. As necessary, those successes help build credibility and momentum, convincing leadership and frontline employees alike that more significant changes can and should happen. Although early adopters gain the advantage by moving first, every refiner eventually will need to reassess its operating model and culture. Those who embrace ongoing improvement will find themselves better positioned in an era of declining demand, while others may struggle to keep pace. Refiners can carve out a competitive edge that endures long after the market reshuffles by methodically reducing costs and staying nimble.