20-07-2021

McKinsey urges refiners to take action as downstream market shrinks

With light product demand set to fall by 2035, McKinsey identifies actions refiners can take to pursue profitability in shifting conditions.

Research released today by leading global consultancy, McKinsey & Company, predicts that demand for light product (gasoline, diesel/gasoil, jet/kero; includes biofuels), which largely drives refining utilisation, will plateau by the mid-2020s — even in the case of a delayed energy transition.

The report, entitled Global downstream outlook to 2035, forecasts that on current trends, demand will fall by 2.8MMb/d from 2019 levels by 2035, this rises to 11.7MMb/d if the energy transition accelerates.

The projection is more pronounced at a regional level, with light product demand in North America and Europe expected to fall most sharply, whereas a delayed transition could see demand in Africa increase by 1 MMb/d by 2030.

Underpinning this prediction are six major shifts that affect long-term global energy demand:
 - Uptake of electric vehicles
 - Efficiency gains and uptake of low-emission fuels for aviation and marine
 - Increased demand reduction and recycling of plastics
 - Cost reductions for renewables and storage
 - Electrification of residential heat
 - Electrification of EU industry low and medium temperature heat

McKinsey does not believe that the sector is in crisis. While the industry is set to contract in some regions, it is expected to remain very large in all scenarios. Indeed, even in the case of an accelerated energy transition, McKinsey anticipates a global refining sector producing 94 MMb/d of liquids in 2035.

Tim Fitzgibbon, Senior Expert at McKinsey, at McKinsey, says: “The downstream world is changing rapidly, and refiners must adapt to build in resilience. First in core refining and retail operations — by embracing digitalization, and potentially investing in decarbonization and better integrating into petrochemicals — and then within the wider portfolio.

“Many Refiners can capture pockets of growth by directing investments both into emerging markets and further down the value chain. They should also consider placing big bets on emerging value pools including new energy services, new mobility and advanced fuels. These shifts are essential to achieving every penny of potential profitability as the product and geographical market mix shifts beyond recognition.”
 
The findings are taken from three scenario outlooks, conceived by McKinsey:
 - Energy transition (reference case): the consensus view on the key drivers of oil demand, including global trade, rate of car ownership, and electrification of road transport. In this case EVs reach cost parity with ICE vehicles in next decade, while hydrogen could become competitive for long-haul trucks around 2030
 - Accelerated transition: featuring a stronger governmental push for subsidising purchases or banning ICE vehicles, combined with strong uptake of alternative fuels in aviation and maritime. Stricter regulations for minimal recycling levels and avoiding plastics in packaging
 - Delayed transition: characterized by a slower uptake of EVs due to supply delays and limited government subsidies or industry targets. Less recycling and avoidance of plastics in packaging due to long-lasting lower oil price and lack of regulation

The report details market trends around demand, crude and feedstock supply and refining capacity before going into granular detail on the outlook under each scenario. This includes a look at the implications for stakeholders across the downstream industry, including refiners, investors and regulators.

To read the outlook, HERE.