From climate change, air quality concerns and the growth in electric vehicles through to the emergence of smart cities and autonomous vehicles, a complex mix of interrelated factors is changing conventional patterns of energy supply and demand – and at a faster rate than most industry managers recognise. What are the implications for refiners and how could they respond?
There continues to be a sharp focus on the Paris agreement on climate change, and rightly so, as this global agreement to decarbonise the economy will be a key long-term driver of the energy transition. Meanwhile, there are many other developments happening at a much faster rate that could affect refiners more quickly and more dramatically.
Take air pollution, for example. The understanding of the health impacts and costs of air pollution has changed significantly in the past 10 years. National and city governments worldwide are under enormous pressure to tackle air-quality concerns and they have autonomy to take decisions on this front. Consequently, we have recently seen cities around the world introducing various initiatives for decreasing congestion and tackling traffic pollution, including vehicle emission standards, low emission zones and public transport improvements.
In addition to regulations, there are numerous fast-moving business-, technology- and consumer-led trends such as the growth in electric vehicles, improvements in battery technology, car manufacturers’ plans to electrify their fleets and autonomous vehicles. Furthermore, vehicle efficiency is continuing on its upward trend and there is potential for even more aggressive efficiency improvements.
Collectively, the above factors could reinforce each other and increase the pace and extent of change in the energy landscape.
What does all this mean for refiners?
At Irbaris, we believe that business-as-usual projections for future market size will, in many places, miss critical aspects of the changing mix in demand and will prove an overestimate of actual demand. This is highly significant because even a small reduction in demand for transport fuels could have a profound impact on refiners’ economics.
This becomes clear when one crunches the numbers. We modelled a plausible projection of the 2030 market that would be consistent with a 2.5% per annum gain in new vehicle efficiency across the petrol and gasoline fleet, and a 25% share of new vehicle sales for electric vehicles. In such circumstances, total refinery product volume falls by 8% compared against the current business-as-usual projections. More important than the absolute volume impact is the impact on product mix. (Please note that this is not a forecast and it is also not an extreme scenario by any means.)
As shown in Figure 1, we modelled two options available to refiners. Option 1 would be to rebalance the barrel: find other options for the molecules otherwise directed to road diesel and gasoline. Some may not consider an 8% demand decline to be dramatic, but the fact that it only affects specific pieces of the product slate makes it highly significant. In fact, road diesel demand would see a 20% cut while gasoline demand would fall by 17%. The impact in some regions could be even more pronounced.
Finding other uses for those molecules would probably require reconfiguring a refinery or adjusting its operating strategy. One might consider directing the gasoline-bound naphtha to petrochemicals; however, the naphtha market would soon be long. Moreover, even if a refiner could sell its naphtha, it would take an economic hit because sales of naphtha have a lower value for refiners than gasoline.
So, rebalancing the barrel could present a major technical challenge. However, I know that Shell Global Solutions’ consultants have lots of ideas here.
Option 2 would be to cut output. Although this might be more straightforward technically, operating at lower utilisation rates would likely change the profitability of some refineries.
Of course, not all refineries would be affected equally. There will be regional variations and those with a strong connection to a petrochemical business would probably be relatively robust, as would those with intrinsically low costs or strong feed and product flexibility.
Likewise, the scale, global footprint and diversified interests of the bigger players should provide some protection for their businesses. The impact may be more marked for individual refineries and smaller companies. Paradoxically, the impacts could be most significant in markets expecting the fastest growth and where there are plans for substantial refinery capacity expansion.