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.

Response options

Refinery managers looking to safeguard their competitiveness have a limited set of options. One of the most important may be to reduce the breakeven point at which they run the refinery. They may be more used to looking for debottlenecking opportunities, but a smart mindset now might be to ask: what options do we have to run our assets at a slightly lower utilisation level and still make money? I understand that there are some interesting technical ideas emerging in this space.

Finding ways to improve crude and feedstock flexibility could also be important, while increasing product slate flexibility could prove highly valuable in terms of a refiner’s ability to respond to the mass balance challenge that I outlined earlier.

Portfolio owners could explore additional options, from optimising their portfolios in terms of geography and investment timelines, for example, or looking for rationalisation and strategic partnering opportunities.

The key here is being able to figure out which of those options actually make sense to their specific technical and market circumstances. For example, the most appropriate responses for a state-owned national oil company are likely to be very different to those for a small independent refiner.

Strategic monitoring

There is a substantial flow of news about developments affecting the energy transition. Some will be important, some hype, and some not actually news at all; it may be difficult for refiners to identify which are important “signposts” of the future pace and direction of change. Energy executives do not traditionally monitor some of the key indicators, which may cut across industry boundaries; however, these executives would be well advised to develop mechanisms to help figure out which developments are important to their business and which are not.

A wholesale oil demand revolution will not be necessary for new threats and opportunities to emerge. And, frankly, most refinery executives are not aware of this yet. The refining industry is clearly not going to disappear overnight, or even over several decades, but the opportunities to make money could change much more quickly.

Key takeaways

  • The energy transition creates new threats and opportunities that could have a profound effect on refiners. These changes are already happening more rapidly and in more ways than most industry managers recognise.
  • Quite small changes from the business-as-usual projections for transport fuel demand could have profound impacts on refining economics and the competitive landscape.
  • The impacts will vary by region and company, although operations with scale, flexibility, complexity and close integration with petrochemicals could be better placed to withstand the changes that lie ahead.
  • Managing the risks and opportunities requires monitoring of a wider range of issues than most refining companies have traditionally considered.
  • Ensuring that investments in capacity and in performance improvements deliver profits and business resilience requires both leading-edge technical solutions and greater understanding of how the energy transition will affect the individual refinery in the coming decade.

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