The profound challenges facing the refining sector have never been more evident than during the present crisis. As countries go into lock down to slow the global coronavirus pandemic, demand for oil products is collapsing and with it, the market for oil.
As we enter the second quarter of 2020, global oil demand could fall by almost 9 million barrels per day (b/d) from last year’s second quarter.
Alan Gelder, vice president, refining and chemicals, at global natural resources consultancy Wood Mackenzie, said: “Refinery utilisation - and profitability - is falling sharply in response. Refiners have started to reduce runs, margins are coming under severe pressure and some refineries will close, albeit temporarily.”
Could this be a foretaste of the future, as the energy transition and the prospect of peak oil demand combine to squeeze the sector?
Gelder said: “Since 1980, global refining has increased by 25%, but that growth has varied markedly by region. Investment has flowed where oil demand growth or imports of refined products have been strong; elsewhere, capacity has been either rationalised or closed.”
That same story will continue to play out over the next two decades. But sustained investment in additional refining capacity will be required during this period, according to Wood Mackenzie’s energy transition outlook.
He added: “Continued population growth and rising incomes in developing economies outweigh vehicle fuel efficiency improvements and the electrification of the transport fleet. These two factors displace over 10 million b/d of demand, but the outlook for overall growth suggests that, at present, the sector’s long-term viability is assured.”
More capacity will be needed in the Middle East and Asia to satisfy regional demand growth. In OECD countries, weak assets will close, as local demand falls due to fuel efficiency improvements and electrification of the vehicle fleet.
Gelder said: “Within the next five years, the risk of cannibalisation – when each new refinery project prompts the closure of assets elsewhere – within the sector will grow. World-scale refineries are getting bigger while the energy transition is weakening the global growth in oil demand.
“Any new refineries will need to be large coastal sites that are heavily integrated with petrochemicals to ensure they are highly competitive.”
OECD refiners need to adapt to declining local demand and a shifting social and political landscape. Business responses must extend beyond the traditional levers of selective investment and cost control to reduce carbon intensity in both operations and their supply of liquid fuels.
Gelder said: “The core competencies of operating integrated refinery petrochemical sites can be built on to create a central hub in a ‘low-emissions energy complex’ that brings together carbon capture and storage, chemical recycling, LNG and renewables.”
In a world aspiring to restrict the global temperature rise to less than 2o C, the disruption to the global refining industry could be even more severe. Wood Mackenzie’s accelerated energy transition sees much greater penetration of battery technology and hydrogen into the vehicle fleet.
Gelder said: “In such a scenario, localisation is a key theme – refiners working closely with the local community and their government to retain a social licence to adapt their business.
“Cost reduction, competitive position improvement and understanding the refinery’s carbon life cycle are obvious “no regret” moves. Beyond that, no one size fits all, so strategic reviews will be essential to establish a road map for the future.”
He added: “Refining is, after all, a conversion industry – one that must transition away from carbon-intensive feedstocks such as crude oil and into products and services that the consumer still values.”
