Over the last four decades, refiners have had to adjust to a relentless stream of changes in product demand patterns and ever-more-stringent environmental regulations. Making the adjustment takes time and requires a good assessment of the potential future scenarios.

We had the unleaded gasoline mandate, followed by the introduction of oxygenates to gasoline. Next, came the trend for ultra-low levels of sulphur in diesel. Then, over the last 10 years or so, the momentum in dieselisation, changing crude slate and the need for tighter integration with petrochemicals have given refiners even more new things to think about.

Each time, refiners have displayed remarkable flexibility in reconfiguring their facilities and operating strategies. And now, further challenges lie ahead. Two in particular will have a profound impact on refiners.

First, we have the International Maritime Organization’s (IMO) MARPOL 73/78 Annex VI (IMO 2020) on the horizon, which will cut the allowable sulphur content of marine bunker fuel from 3.5 to 0.5%. Achieving full residue conversion is likely to be extraordinarily capital intensive and might not be necessary anyway, but cost-effectively reducing fuel oil exposure is almost certainly a good idea, as it has a clear link with competitiveness.

Secondly, a global energy transition is under way. One element of this is that we are starting to see battery electric vehicles gaining consumer acceptance. Worldwide, about 50% of refinery output is directed towards road transportation fuels, so any substantial moves towards electrification have significant potential to reduce demand for diesel and gasoline.

Disruption #1: IMO 2020

Although clean air concerns have driven the IMO 2020 legislation, it is not necessarily a compliance issue for refiners.

After 2020, ships that are not fitted with scrubbers will not be able to use high-sulphur fuel oil. However, that does not mean that refiners will not be able find outlets for it, especially as about 50% of the current high-sulphur fuel oil market is not marine fuel so will not be affected by the IMO regulations. In addition, there will be a limited number of ships fitted with scrubbers that can process it. Alternatively, other refiners that have spare residue conversion capacity may take it – but at a price.

That is why, at Shell Global Solutions, we believe it is better to consider IMO 2020 as a margin opportunity rather than as a compliance issue. Discover more in the following articles:

Disruption #2: The energy transition and changes in the mobility sector

The energy system of the future is going to look very different; there is no doubt about that. And of course, we need it to.

We know the world needs more energy, but we must emit much less carbon dioxide. So, renewable energy and diversified supplies are key, and that includes solar power, wind farms and biofuels. We also now see politicians under increasing pressure to improve air quality, particularly in urban areas. Some analysts argue that this factor now has a greater influence on transport policy decisions than the wider concerns about climate change.

But when could the arrival of new mobility options such as battery electric vehicles, which are an important and growing part of the transport mix, cause a significant disruption for the refining industry?

The timeline is highly uncertain and there is a wide range of predictions. Shell’s view is that the internal combustion engine will continue to power most vehicles over the next couple of decades. The lack of sufficient charging infrastructure and electric engine and battery manufacturing capacity provide some reasons to anticipate a relatively slow pace of change globally, as does the current perceived high cost of the vehicles. The existing world fleet of passenger cars is also unlikely to be replaced through consumer choice alone unless there are incentives or penalties to encourage a switch.

And we are not alone in this view. The International Energy Agency believes that, even by 2040, only 7.5% of the two billion cars that will be on the road will be electric. And then there are trucks, ships and jet planes. It appears unlikely that any of these will be running on batteries any time soon.

So, it seems that the world is going to continue to need gasoline, diesel and jet fuel for some time. Furthermore, demand for petrochemicals remains robust and, of course, petrochemical facilities need refineries.

Alternative points of view

There are other points of view, however. Some, for example, suggest that as ride-hailing fleets adopt increasingly affordable electric car technology and self-driving technology becomes more common, global demand for oil will start dropping in as little as three or four years from now. In this extreme scenario, it is predicted that some 95% of people will not own a private car by 2030.

Although Shell expects a relatively orderly transition, which would give refineries a couple of decades of relatively slow-changing demand patterns, it does not have all the answers. There are other possible, credible futures to which refiners should remain open.

Consequently, we have invited David Hampton, an independent strategy consultant with particular experience in energy, to provide an external view on how the energy transition could affect the refining and petrochemical sectors over the next 10–15 years, and beyond.

Response options

In our experience, nearly all refineries have untapped potential. Naturally, those with older technologies generating suboptimal yields or that have poor reliability often have improvement potential. But, we also often find that pacesetting refineries can still achieve higher margins with smart investments.

We believe, therefore, that many refiners will be able to adjust their operations to meet the dynamics of the future markets better without major capital expenditure. Latest generation catalysts will be key and many promising opportunities centre around revamps, so this issue also explores some of the latest thinking, and technology developments, for revamping some of the principal technology blocks.

We hope the following articles will provide insights to help you to do that:

IMO 2020 and the energy transition could both have a major impact on an ill-equipped refiner’s profitability. As with the changes that the industry has overcome over the years, from unleaded gasoline to dieselisation, businesses will need to rise to the challenge again.

Key takeaways

  • IMO 2020 is on the horizon, the global energy transition is under way, renewables are on the rise and electric cars are an important and growing part of the transport mix.
  • Refiners that develop the best responses can optimise the opportunity to enjoy a sustainable and profitable future.
  • There are many bottom-of-the-barrel upgrading options to choose from, but there is no one-size-fits all solution.
  • Revamps, applying state-of-the-art catalysts and thermal conversion technologies are likely to provide compelling responses, especially as they can require less capital expenditure than other options.

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