Where does future growth lie? (ERTC)
2022 was truly an unprecedented year for global refining. The pandemic-driven capacity rationalisation, strong subsequent demand recovery, China’s product export quota limitations, and lower Russian middle distillate exports all contributed to record refining margins.
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However, not all the record gross margins made it to the bottom line as the costs of natural gas (for hydrogen production and internal fuel use) and electricity surged, particularly in Europe.
High and volatile oil prices and an uncertain, rapidly changing geopolitical landscape will continue to support refining margins, but at more typical levels, as shown in Figure 1. Weak global economic growth as countries battle inflation and the commissioning of new refining capacity in Africa, Asia, and the Middle East will prevent a return to H1 2022 margin environment unless Russian exports are significantly curtailed. The refining industry needs to think about what to do with its newfound wealth.
Energy Transition – location, location, location?
At Wood Mackenzie, our integrated cross-commodity analysis indicates the electrification of light vehicles will lead the energy transition, with petrochemicals being the only demand growth sector for oil demand. This presents a structural challenge to gasoline-oriented refineries without petrochemical integration in OECD locations as the local demand for their key product will fall fastest. Integrated refinery/petrochemical complexes are strongly positioned to thrive during the energy transition as they divert their production from transport fuels to petrochemicals. We consider refineries of the future will incorporate a high degree of petrochemical integration.
Such sites also have a further advantage in terms of their resilience, as shown in Figure 2. Whilst the responsibility for Scope 3 emissions along the hydrocarbon value chain remains unclear, several companies are including such emissions in their net-zero aspirations. Using Wood Mackenzie’s Refinery Evaluation Model, we have benchmarked the Scope 3 emissions from over 500 refineries. This detailed asset analysis shows that unless the yield of non-combustible products is over half of the product slate, the Scope 3 emissions intensity for the entire site is largely in the range of 300 to 400 kg of CO₂ per barrel of crude processed.
The key risk associated with the cost of a refinery’s Scope 3 emissions is its location, as that will determine the carbon charge, if any, that is applied. The variation in carbon charges between two sites in different locations is likely to be far greater than the difference in their emissions intensity. Beyond our usual competitiveness metric of net cash margins, location and the applicable carbon emissions legislation will be key to a site’s longevity.
Biofuel circularity could unlock the energy transition for refiners
Municipal waste, agricultural residue, and recycling waste plastics could be game-changers and drive biofuel adoption as part of the transition to a circular economy. Virtually none of this material is used as feedstock today, but if technology delivers, it could supply an additional 20 million barrels per day (b/d) of low-carbon liquids by 2050.
The refining sector will have to adapt to unlock this potential of the circular low-carbon liquids. The economics are challenging, so policy support will be needed to make this happen. This would be in national governments’ interest: biofuels can help achieve net-zero targets by converting fossil fuel-based refineries into sustainable businesses that underpin local employment, deliver circularity, and boost security of supply.
The conversion of existing sites and building of new sites to increase petrochemical integration and produce low-carbon liquids are the future business growth opportunities for refining.
This short article originally appeared in the 2022 ERTC Newspapers, which you can view HERE
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