Covid-19 provides a warning to refiners that adaption is key to thrive in the energy transition (ERTC)
The energy transition is all about supplying the world’s growing needs for energy and mobility in a more sustainable way.
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This takes many forms, but for the oil value chain, it is largely about the penetration of cleaner energy from renewables. The main carrier mechanisms are electricity, delivered by either battery in electric vehicles or green/blue hydrogen via fuel cells in heavy-duty commercial trucking. Liquid renewables — biofuels — are viable alternatives, particularly given the reduced need for investment in a distribution infrastructure.
need TO ADAPT
The sheer scale of global oil demand, its associated ecosystem, and the typical long life of vehicles and industrial equipment result in a slow rate of change. The energy transition could potentially take decades to achieve. For refining in Europe, the consequence of the energy transition is that the industry needs to adapt. As local demand for refined products is set to fall, the global market for exports remains highly competitive, making refiners relatively sanguine given the long timescales involved.
Covid-19 was a glimpse into the potential future, given the recent collapse in demand for transport fuels, as national, state, and local governments restricted mobility to slow the spread of the pandemic. These restrictions have returned to some degree to slow the spread of the pandemic. European refinery utilisation fell below 70% in Q2 2020 and has recovered slowly due to the overhang of product stocks. By year end, we expect refinery utilisation to still be 10 percentage points down on the five-year average.
Earlier this year, TOTAL’s chief executive Patrick Pouyanne said refining margins at such low utilisation levels are “utterly catastrophic”. Our preliminary analysis indicates that over two-thirds of European refineries will be loss making this year. For those refiners, this is a stark message that if they fail to adapt, the energy transition will likely deliver the same results.
What marks the winners over the coming year? Any new refineries will need to be large coastal sites that are heavily integrated with petrochemicals to ensure they are highly competitive. We can evidence this already, as our preliminary analysis of the existing European refining landscape highlights the competitive strength of integrated refinery/petrochemical sites for 2019.
Europe’s 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 also reduce carbon intensity in both operations and their supply of liquid fuels. The core competences of operating integrated refinery /petrochemical sites can be leveraged to become a central hub in a ‘low-emissions energy complex’ that brings together carbon capture and storage, chemical recycling, LNG, and renewables to the production of liquid fuels and petrochemicals.
In a world aspiring to restrict the global temperature rise to less than 2°C, the disruption to the global refining industry could be even more severe. Wood Mackenzie’s accelerated energy transition suggests far greater penetration of battery technology and hydrogen into the vehicle fleet. In such a scenario, localisation becomes 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. The basis of the road map is the decision tree opposite.
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.
This short article originally appeared in the 2020 ERTC Newspaper, produced by PTQ / DigitalRefining.
You can view the digital issue here - https://online.flippingbook.com/view/1029582
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