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From uncertainty to transformation: Reflections on what 2021 may have in store for the refining and petrochemical sector

What steps should refining and petrochemical companies be taking in 2021?

By Andy Gosse, President, Shell Catalysts & Technologies on Jan 25, 2021

The business landscape shifted in an unprecedented way in 2020 and, perhaps because my organisation has a unique perspective on the energy sector, many people have been asking for my views on what 2021 holds for our industry.

Will the current uncertainty and challenging conditions remain? That seems most likely, I say. Will the world revert to what it was in 2019? Not necessarily, and there will probably be a reset in energy demand. Will decarbonisation continue to rise up the corporate agenda? Almost certainly – and this is one of the few bright spots to come out of the last 12 months.

Perhaps the most common question though, is, “What steps should refining and petrochemical companies be taking in 2021?” On this question, I am pleased to say that there are several levers that they can pull.

I believe that companies need to take a dual approach: to maintain their competitiveness in the short term, they may need to prioritise efficiency and cash conservation, but it is also vital that they simultaneously continue to execute longer-term plans for decarbonisation.

Maintaining competitiveness in the short term

I am sure we are all acutely aware of how the COVID-19 pandemic has caused a decline in demand for transportation fuels and led some businesses to close or mothball assets. In some cases, those decisions may also have been driven by longer-term views of what the energy system may look like once we emerge from this period of uncertainty, so, unfortunately, further closures and consolidations seem likely.

Optimising existing assets

On a more optimistic note, however, we have seen businesses taking some really effective steps to enhance their profitability since the shock of the pandemic.

For example, as necessity drove people to look even deeper at how they were spending their dollars and to examine their operations through a new lens – the current reality – some of them found valuable opportunities. Pushing back planned turnarounds, optimising the severity and run lengths of key process units, and reviewing process control ranges and safe operating windows have helped some businesses to get more from their existing assets.

We also saw a resurgence in energy efficiency improvement and carbon dioxide (CO2) reduction: some sites have, for example, enhanced their profitability through improved heat integration or by using high-efficiency trays and internals in distillation columns and reactors.

Investing in margin improvement projects

In addition, we have seen several progressive refiners taking proactive action by revamping, repurposing or upgrading existing assets. Although the new reality calls for a more conservative approach to capital investment, they recognised that investing in margin improvement projects is usually key to maintaining one’s competitive position and failing to invest carries the risk of competitive vulnerability.

Consequently, we saw a heightened interest in, for example, installing latest-generation reactor internals to improve a unit’s profitability and revamping hydrocrackers to capture new business opportunities in petrochemicals or lubricant base oils. Such projects are not only low capital expenditure with low investment risks, they also often have short gestation periods and can deliver high returns.

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Executing longer-term plans for decarbonisation

In parallel with the above, energy companies must simultaneously continue, or begin, to adapt or reposition their businesses. As the energy system of the future is likely to feature more solar and wind power, biofuels and electric vehicles, they may need to transform what they do and how they do it. What will their role be then? Will it require new business models or modes of collaboration? What technologies will they need?

The energy transition was already under way before the COVID-19 pandemic and, in some ways, has been accelerated by it. Some governments have gone on to launch decarbonisation-related incentives as part of their recovery programmes.1 Shell’s view is that the pandemic could be a pivotal moment in the energy transition. In 2019, global society was not on course to achieve the goals of the Paris Agreement on climate change, but COVID-19 may be a trigger to get it back on track.

Developing decarbonisation roadmaps

Consequently, many companies are taking a look at the potential decarbonisation pathways open to them and developing bespoke decarbonisation roadmaps. But it is worth highlighting that many of these pathways do not solely offer CO2 emission reduction, they are also highly effective investment opportunities. Take biofuels, for example. The companies that have invested in biofuels technologies have not only reduced their net carbon footprints, they are also capturing higher margins, as biofuels have a higher market value than conventional diesel.

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For that reason, I think biofuels will be a really interesting area for refiners to explore in 2021. Legislation is being introduced in many regions that will mandate the use of varying proportions of renewable feedstock, but I would urge businesses to view this less as a licence-to-operate issue and more as a margin improvement opportunity.

At Shell Catalysts & Technologies, we recently commercialised two technologies for processing up to 100% biofeeds: the Shell Renewable Refining Process, a hydroprocessing technology for producing renewable fuels from a wide range of vegetable oils, fats and greases, and Shell Fibre Conversion Technology, a bolt-on technology enabling first-generation ethanol producers to generate higher-value products, including distillers’ corn oil (DCO), which can be used as low-carbon renewable feed to the Shell Renewable Refining Process, second-generation ethanol and high-value animal feed from corn waste.

Of course, some companies will be inclined to delay major investments right now but that is OK; they can make their first moves in this space for little or no capital expenditure through co-processing: adding up to 10% renewable feedstock to an existing hydroprocessing unit. We have seen a lot of interest in this lately.

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Accelerating momentum for carbon capture and storage

Carbon capture and storage (CCS) provides another example of how the energy transition has continued to gather momentum despite the coronavirus crisis. CCS capacity saw a 33% year-on-year increase in 2020, and, at Shell Catalysts & Technologies, we saw unprecedented interest from companies, governments and consortiums keen to discuss potential projects. I expect that to continue through 2021.2

Gasification also seems set to play an increasingly prominent role, as it enables refiners and petrochemical companies to convert unwanted streams such as steam cracker residues into synthesis gas (syngas), a high-value product that can be used for producing chemicals, hydrogen and power.

Another exciting technology, which combines gasification and CCS, is blue hydrogen. It is exciting for the short term because momentum is building; last year, we commercialised the Shell Blue Hydrogen Process, which has generated huge interest. And, it is hugely significant for the long term because it provides an important stepping stone between grey and green hydrogen.

Right now, most of the hydrogen that industry produces is grey: it is derived from natural gas, often in a steam methane reformer, or a gasification unit from residue. The large volumes of CO2 generated are neither captured nor reused. Blue hydrogen is cleaner because the CO2 emissions are captured and either stored or reused.

The aspiration is to move to green hydrogen, which is generated using renewable energy sources that do not produce CO2 emissions in the first place, but analysts suggest that cost parity is some way off. In the meantime, the use of blue hydrogen will encourage infrastructure and demand growth. Then, by the time green hydrogen projects become commercially viable, they will have a ready-made market to sell into.

Exploiting cross-sector opportunities

Another interesting trend that began to emerge last year is industrial clustering. In north-western Europe we helped to co-ordinate and set up a carbon capture cluster comprising oil, gas and petrochemical companies, along with companies from hard-to-abate sectors such as power, steel, cement, paper and pulp.

The common denominator between these companies is that they share the common goal of reducing their carbon intensity while making margin; the cluster provides the opportunity for one company’s waste streams to be repurposed as others’ value streams. For example, a steel producer that generates CO2 and carbon monoxide could route these to other companies’ synthetic fuel projects.

There are cost savings too, as the companies can share carbon capture, utilisation and storage infrastructure, which might otherwise be uneconomic for smaller facilities, and even utilities such as hydrogen, steam, water and electricity.

I think this is a really interesting space because we are seeing progressive companies looking beyond their own sector and considering how they can play a role in the energy system of the future. This was not even on our radar this time last year, so it is fascinating to think about where we could be 12 months from now.

The takeaway

It is probably going to remain pretty tough out there in 2021 and beyond, but we should not be despondent. Vaccines are providing a ray of hope and we will emerge from this period of uncertainty at some point. But, right now, there is a wide variety of opportunities for you to evaluate. And it is important that you do, because they could have a major impact on your short-term competitiveness and also help to reposition your business so that it has a role in the energy system of the future.

1 Karl Nietvelt, et al., “The energy transition and COVID-19: A pivotal moment for climate policies and energy companies,” S&G Global Ratings, Sep. 24, 2020, https://www.spglobal.com/ratings/en/research/articles/200924-the-energy-transition-and-covid-19-a-pivotal-moment-for-climate-policies-and-energy-companies-11651888.

2 Sarah George, “Report: Global CCS capacity surged in 2020, despite Covid-19,” edie newsroom, Dec. 2, 2020, https://www.edie.net/news/8/Report--Global-CCS-capacity-surged-in-2020--despite-Covid-19/.

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