Refiners have borne the brunt of the decline in fuel demand from COVID-19, and declining automotive sales and air travel have reduced demand for major petrochemical and refined products. This upheaval brought to the fore the industry’s long-term risks and now is the time for companies to rethink their strategies become more resilient, prepare for the future, and identify new opportunities.
Building resilience in petrochemicals (Link to Report)
The pandemic brought a sharp drop in utilization – 2020 revenues are expected to fall 20 percent – and in the near term, production and capital investments will be cut while the construction of new plants are deferred.
More broadly, U.S. petrochemicals are at a crossroads, experiencing both cyclical and structural shifts across five major areas:
- Shifting end markets: demand from automotive and construction is changing as disruption intensifies, providing an opportunity to diversify into higher value-added products
- Changing feedstock dynamics: the US feedstock advantage may persist through the 2020s
- Overcapacity and trade barriers: the industry has entered a period of overcapacity relative to demand, while import demand in Canada, Mexico, and Europe remains weak
- Sustainability/circular economy: heightened support for reducing emissions and preferences toward sustainable consumption will spur the development of new products/business models; the energy transition could create opportunities for chemical producers by raising demand for lightweight plastics and advanced materials needed in electric vehicles (EV).
Levers to help petrochemical companies navigate disruption and prepare for new opportunities include:
- Deliberate market strategy: Focus on the long-term to build a robust product portfolio
- M&A driven growth: double down on M&A to make smart moves that increase long-term value
- Digital acceleration: invest/deploy digital technologies to increase agility and lower costs
- Innovation: commercialize new products or tech that taps into long-term growth markets
- Talent strategy: develop a future-ready workforce with digital skillsets
Building resilience in refining (Link to Report)
Refiners are also grappling with both near-term cyclical and longer-term structural shifts.
- Sudden decline in travel from COVID-19 translated into lower fuel demand and higher inventories, leading to historically low prices.
- Globally, refined products consumption fell by almost 30 percent in the first quarter of 2020 and is projected to be 91.9 million bpd in 2020, down 8 percent YoY
- Lower prices have led to lower refinery throughput and shifting yields, translating into lower downstream revenues and margins.
- 2020 revenues are expected to fall 40%
- Estimated US-wide refinery income turned negative in 2020 for the first time since 2013
- Margins are projected to remain compressed relative to pre-2020 levels Longer term, companies could face lower consumer demand, declining refiner utilization, and slower revenue unless they reposition their business.
- The energy transition may reduce long-term refined product demand with the growing focus on emissions reduction and the energy transition.
- U.S. fuel regulations (CAFE standards) and growing Electric Vehicle (EV) sales could reduce gasoline consumption over the next 10 years
- Lower throughput and higher fixed operating costs could lead to 20% lower refining earnings by 2030.
Levers to help refiners navigate disruption and prepare for new opportunities include:
- Deliberate retail strategy: improve customer experience with better retail service offerings
- Capital discipline: pivot from major capital projects towards investments in agility/flexibility
- Supply chain management: optimize through better inventory and vendor management
- Digital: connect data/operating models to reduce cost, improve customer & market sensing
- Talent strategy: streamlining people and process to improve decision making and reducing risks
