Race to integrate: Energy transition fuels structural shift for refining/petchems

13:37 PM | January 18, 2021 | Mark Thomas

The drive to decarbonize as the global energy transition gathers pace is having a profound effect on the refining and petrochemicals sector, with the structural shift accelerated by the COVID-19 pandemic.

After three decades of relatively minor progress to decarbonize energy consumption, the hold of hydrocarbons on global energy demand is suddenly starting to weaken. Fossil-fuel demand jumped 63% between 1990 and 2019 to keep its share of total primary energy consumption worldwide steady at about 80%, but the next 30 years will look very different.

The unprecedented collapse in oil demand and prices in 2020 due to the pandemic, combined with the growing desire by governments worldwide to tackle climate change to satisfy the wishes of society, has sparked rapid reevaluations of strategy by the integrated oil majors as the medium- and long-term outlook for transportation fuels becomes increasingly bearish.

Some analysts now see 2019 as the possible peak in world crude oil consumption at just more than 100 million b/d, although IHS Markit’s latest forecast sees global oil demand hitting a plateau in the mid-2030s.

Strategy shifts by integrated energy companies such as Shell, ExxonMobil, Total, and BP provide mounting evidence of the major downstream restructuring underway in the refining sector, a shift that will “directly impact the petrochemical industry,” according to Mark Eramo, global vice president/oil markets, midstream, downstream, chemicals at IHS Markit.

“We’re starting to shift to a world where carbon has been free to one where carbon will bear a cost, and it’s happening today. Companies are positioning themselves, either in a defensive mode or by taking offensive strategies based on their markets, their resources, and their fuels’ potential market outcomes,” Eramo said at the Chemical Industry Financial Outlook and Sustainability Forum, held online recently by CW.

Petrochemical integration into refining over the last couple of years has “really come into play and been a big focus, especially as we watch major assets start up in Asia, especially in China. It’s been evolving over time,” he said. “This increased focus on the importance of chemicals, the degree of technologies employed to convert oil-to-chemicals, opportunities to integrate, the pressure for low carbon, and waste recycling.… It’s a very important dynamic unfolding for the petrochemical industry,” Eramo said.

Rationalization

A rationalization of the refining sector is unavoidable following 2020, a year in which close to 20 million b/d of refining capacity was taken offline temporarily. Global oil demand plunged by 22 million b/d in April year-on-year as worldwide lockdowns were imposed in response to the spread of COVID-19, according to IHS Markit’s energy advisory service. Average world oil consumption in 2020 is expected to be confirmed at about 90.8 million b/d, around 10.0 million b/d lower than in 2019.

Global refined product consumption in 2025 is now forecast to be 4.0 million b/d lower than had been predicted in the 2019 long-term outlook, and about 5.5 million b/d of new refining capacity is being built that will come onstream over the next five years, with most of this capacity “world-scale, employing the latest technology, and often integrated with petrochemicals,” IHS Markit says.

As a result, the permanent closure of at least 3.0 million b/d of refining capacity in Europe, North America, and APAC is now expected by 2025 in what IHS Markit calls The Great Shakeout. “This period of aggressive ‘planting and pruning’ will remake the global refining industry, shifting its center of gravity eastwards and its strategic focus towards greater integration with petrochemicals and low carbon-intensity biofuels,” it says. “Refiners are pivoting to futureproof assets.… IHS Markit considers investment in biofuel and/or petrochemical integration to be particularly valuable to refineries.”


HIGHLY INTEGRATED: Shell’s refinery and petchems complex
at Rheinland, Germany.

Growth-focused, fuels-only refining investments and strategies appear to be consigned to the past, and deeper integration with the growing petchems sector and adoption of lower-carbon-intensity strategies such as coprocessing of advanced biofuels seem set to become the norm, it notes.

Globally only about 13% of refineries currently have a petrochemicals integration level of up to 10% and just 5.5% have integration of up to 20%. Integration via steam cracking represents about 50% of the current total and integration via aromatics accounts for about 33%, with the rest via fluid catalytic cracker (FCC) olefins production, according to IHS Markit.

Highlighting the refining sector’s current dire economic condition, without capacity rationalization and if operating at normal utilization rates, 43 out of 272 refineries assessed would each be exposed to pretax losses of more than $500 million over the period 2020–25, it says.

Strategic shift

Faced by this downstream scenario, and having to meet the challenge of responding to intense shareholder pressure to achieve a net-zero carbon future and simultaneously produce strong dividends, integrated oil and gas companies have responded with changes that just a few years ago would have been almost unimaginable.

Shell, which owned 55 refineries worldwide in 2004, will by 2025 operate just 6. The company’s announced restructuring of its worldwide chemicals and refining operations will see its current portfolio of 14 refining sites reduced to 6, with the remaining sites all large-scale integrated energy and chemical parks that will maximize economies of scale and integration opportunities. It will also retain six established chemicals-only production sites.

The streamlining of Shell’s refining segment is to “high-grade our footprint and maximize the integration with chemicals. For us, the strategic value of refining is in its integration,” says CEO Ben van Beurden. “It will be smaller but smarter. We will keep only what is strategically essential to us and integrate those refineries with our chemicals business, which we plan to grow. We will keep sites in key locations which have the flexibility to adapt.”

Shell’s overall climate goal is net-zero emissions by 2050 or sooner, and the company is underway with multiple projects at its six chosen refinery/petrochemical complexes as it bids to achieve the target. At its Rheinland refinery complex in Germany, the company is working with partners to build the world’s largest polymer electrolyte membrane (PEM)-electrolyzer to produce green hydrogen using renewable energy. This is a “significant step in testing the feasibility of a hydrogen network on a large, industrial scale,” according to Huibert Vigeveno, Shell’s downstream director. “The hydrogen would be used not only in the chemical processing at the site ... but in future, it could also supply cars and lorries at retail sites,” he says. The complex, consisting of the integrated Godorf and Wesseling refineries, processes more than 15 million metric tons/year (MMt/y) of crude, as well as 6 MMt/y of products for the chemical and other industries.

Van Beurden sees “significant growth opportunities” for biofuels, hydrogen, and synthetic fuels, with Shell already ranking among the largest blenders and distributors of biofuels. If Shell wants to be “a large player in biofuels, a lot of the biofuel capability will be built within our refining infrastructure,” he notes. The company is investing in new ways to produce biofuels from sustainable feedstocks such as waste products or cellulosic biomass, he says. “We will have some oil and gas in the mix of energy we sell by 2050, but it will be predominantly low-carbon electricity, low-carbon biofuels, it will be hydrogen, and it will be all sorts of other solutions too,” he adds.

Decarbonizing chemicals

Shell is collaborating with Dow to develop technology that will potentially electrify steam crackers. It says that using renewable power to heat cracker furnaces “could become one of the routes to decarbonize the chemicals industry.” It has also partnered with Linde on the development and commercialization of ethane-oxidative dehydrogenation catalytic technology for the production of ethylene as an alternative route to the cracking of ethane, again with the potential to lower carbon dioxide (CO2) emissions significantly through the electrification of power input.

Refineries in Europe are taking the leap toward biofuels production to meet climate goals amid the wave of rationalization and closures, according to IHS Markit’s energy advisory service. Repsol is upgrading to biofuel as a near-term opportunity and moving toward synthetic fuels, investing in its Bilbao and Cartagena, Spain, refineries, and Total is converting its Grandpuits, France, refinery into a “zero-crude” platform.

Repsol announced in late November that it would invest €18.3 billion ($22.3 billion) between 2021 and 2025 to accelerate the company’s energy transition to achieving net-zero CO2 emissions by 2050, with €5.5 billion of the investment by 2025 to be spent on low-carbon and renewable-energy businesses. The company’s current organization will evolve into four business areas: upstream, customer, low-carbon generation, and industrial including its chemicals, refining, and biofuels activities. Repsol is aiming to cut its CO2 emissions by 12% in 2025, 25% in 2030, and 50% in 2040.

Total’s industrial repurposing of Grandpuits will see it invest more than €500 million converting the refinery into a facility for the production of bioplastics and biofuels, and for the chemical recycling of plastics. The revamp is a “demonstration of Total’s commitment to the energy transition” and the reaffirmation of its ambition to achieve carbon neutrality in Europe by 2050, says Bernard Pinatel, president/refining and chemicals at Total.

Oil refining at the site will stop in the first quarter of this year, with the storage of petroleum products to cease in 2023. The conversion will be complete by 2024, Total says. A 100,000-metric tons/year polylactic acid (PLA) bioplastics plant will be built by Total Corbion PLA (Gorinchem, Netherlands), a 50/50 joint venture (JV) between Total and Corbion, and start operations in 2024. It will be Europe’s first PLA manufacturing plant, according to Total. PLA is produced entirely from sugar, is biodegradable and recyclable, with a market growing at up to 15%/year, it says. “Demand is rising fast, particularly in the markets for film wrap and rigid packaging, and in numerous industrial applications,” the company says.

The planned recycling plant will be France’s first chemical recycling facility, with the unit to be majority owned by Total with a 60% share and with UK-based partner Plastic Energy holding 40%. The facility will convert plastic waste using pyrolysis into a liquid known as Tacoil, which will be used as feedstock for the production of polymers. The new unit will help Total meet its objective of producing 30% of its polymers from recycled materials by 2030, it says.

The planned biorefinery will be commissioned in 2024 and feature a renewable diesel unit, primarily producing sustainable aviation fuel, but also up to 50,000 metric tons/year of renewable naphtha for bioplastics manufacturing, using primarily animal fats and used cooking and vegetable oils as feedstock. Total had previously converted its La Mede oil refinery into a biorefinery, where it has now announced it will also build a green hydrogen production plant to meet the needs of La Mede’s biofuel production process.

Integration an overlying factor for ExxonMobil

Any remaining refineries with medium- or low-complexity not integrated with chemicals in OECD countries “are going to be a challenge, going forward, and that certainly plays into our thinking,” according to Jack Williams, ExxonMobil’s senior vice president/downstream. ExxonMobil has long subscribed to an integrated approach to refining, with more than 90% of its chemicals capacity integrated with the company’s highly complex refineries and natural gas processing plants, which enables it to shift production between chemicals and fuels, based on demand. “We are fortunate that we had some highly complex refineries that very importantly are integrated with chemicals. That chemicals integration is probably the overlying factor that we look at, in terms of assets, that we think long term are going to be very competitive,” said Williams at a recent briefing with investment analysts.

He highlighted investments the company has made or plans to make in its refineries at Antwerp, Belgium; Rotterdam, Netherlands; Beaumont, Texas; and Singapore, because those complexes “belong” in ExxonMobil’s long-term refining/chemicals portfolio. “The ones that are already there are highly integrated refineries on the [US] Gulf Coast—Baytown, Baton Rouge, and increasingly, Beaumont—and then there’s those that we’re pushing in that direction with some good strategic investments to shore up some of the conversion capacity gaps we’ve had.”

Margins at lowest for past 20 years

Refining is a “highly cyclical industry with significant ups and downs, but today’s net refining margins are below any low experienced in the prior 20 years,” he said. The industry is responding by shutting down capacity in refining and pushing new investments into chemicals, Williams said. “This is a typical response we’ve seen historically, as producers struggled to maintain operations in very challenging financial conditions. We expect this will continue until supply and demand come into balance and margins recover,” he said.

The industry has already seen closures and “I expect there will likely be more,” Williams said. “The deeper, the longer we stay in this sort of environment, the more announcements will come out.… We’re oversupplied right now, and the market will take care of that through these closures.”

The market uncertainty in 2020 saw ExxonMobil, which has also committed to net-zero emissions by 2050, take actions “quickly and decisively” to underpin its plans for 2021 and retain flexibility for the expected recovery, according to Williams. This included taking advantage of the more favorable cost environment to continue progressing the company’s chemical project at Corpus Christi, Texas, to deliver the plan ahead of schedule and under budget, he said. The project, a JV of ExxonMobil and Sabic, is approximately 80% complete with start-up activities expected to commence in the fourth quarter of 2021, ahead of the previously announced 2022 timeline. The JV includes a 1.8-MMt/y ethane cracker as well as polyethylene and ethylene glycol units.

Other chemical and downstream investments are being “paused, but certainly not canceled,” said Williams. “Importantly, we’re not canceling any projects that are in execution or in the funding process. These remain attractive investments and while the value of these projects may be deferred, it will not be diminished,” he said.

The existing high level of integration of ExxonMobil’s chemicals business with its refining assets benefited the two segments in 2020 “as we’ve been able to really nimbly optimize the feedstocks that we’ve been moving into our crackers, sometimes cracking some distressed refining streams, then moving between chemicals and gas as those feedstock prices have moved around,” said Williams.

More competitive

As the industry brings new, large, integrated refineries onstream, mainly in Asia, existing facilities will need to become more competitive to avoid being marginalized, according to Stephen Jew, director at IHS Markit.

Traditional refiners that used to cater to the gasoline market can upgrade their FCCs to increase olefins yield by building ethylene- and propylene-recovery units in the backend, but to support investments in upgrades and derivatives, those refiners will need to look at factors including population growth and resulting chemical demand growth. This is also in emerging markets mainly in Asia, said Jew at IHS Markit’s Asia Chemical Conference, held as an online event in November.

Based on IHS Markit estimates, base chemicals demand will grow about 15 MMt/y, or about 500,000 b/d, annually, with total demand by 2050 forecast to be about 800 MMt/y–1 billion metric tons/year. With total demand growth for refined products including gasoline, diesel, jet fuel, and naphtha expected to peak in the mid-2030s, base chemicals are growing at twice the rate of refined products. However, the scale of these two markets is disproportionate, with refined products still forecast to amount to a significantly larger total of 5 billion metric tons/year in 2050, according to Jew.

Despite the strong growth in base chemicals, it is still a “small market” relative to total refined products, he said. A decade ago, petchems were about 10% of the total market for base chemicals and refined products, and this share will grow to 15–20% by 2050. There is potential to monetize this growth from refining assets, but refiners will need to redirect capital to novel configurations to balance declining fuel-market requirements with increased petchems demand, Jew noted.

The acceleration of refinery closures due to the pandemic “does lead to a risk of feedstock availability issues for some [aromatics] producers, although most integrated refineries/petchem units tend to be doing better than the standalone refineries,” says Duncan Clark, vice president/aromatics and fibers at IHS Markit.

“Our concern is that there will be some reduction in capacity going forwards on the refining side, but petrochemical and naphtha demand will continue to grow,” he said at IHS Markit’s base chemicals forum in December. “It will be supported by some recycled streams, but as we investigate our views of the future, some of this additional naphtha is going to be increasingly met by reconfiguration of refining yields and by some of the new crude-oil-to-chemicals complexes, which inherently can create more naphtha yield than conventional refineries. A mixture of different approaches will be needed,” he said.

Unfolding fuels demand

The decline in fuels demand and reduced refinery operating rates naturally impacted the production of propylene in 2020, says Steve Lewandowski, vice president/global olefins at IHS Markit. The refining sector is being watched closely in 2021 as a result, “because FCCs make a lot of propylene, and the question [for refiners] is ‘How do I manage my refinery? Do I run an FCC, do I underrun an FCC, but raise severity? Do I spend some capex [capital expenditure] and add to my capability to produce propylene?’ These are some of the questions we’re looking at in the new world of unfolding fuels demand,” he said at the base chemicals forum.

Despite uncertainty over long-term fuels demand and its predicted plateau in the mid-2030s, about 400 million metric tons, or 8.0 million b/d, of cumulative demand growth in transportation fuels is still forecast, Lewandowski said. “If you’re going to build a refinery, this is still in the back of your mind. If you’re a refiner and you still have fuels growth, does that make more sense? There is growth in chemicals, so how does a refiner mesh these two story lines together? Do you design up front, manage up to this peak, and then make some quick adjustments and start converting more and more of the oil barrel into petchems? This is a key message. We still have fuels growth, and refiners are refiners. They’re going to continue to look to that market as offtake versus putting any more capex into chemicals,” he said.

Chemicals a small part of refining puzzle

Chemicals, including ethylene, propylene, and aromatics, made up 8.5% of the total refining cut for crude and natural gas liquids (NGLs) in 2010. That figure rose to 11% in 2020, and is forecast to grow to 12.3% in 2030 and 14.3% in 2040, according to Lewandowski. “To put chemicals into perspective against oil and NGLs, we’re increasing … we’re a growing piece of that puzzle, but we’re a small piece of that puzzle,” he said.

On the broader perspective of energy transition, producers of oil, gas, coal, and other fossil-based energy sources may well be displaced by cleaner technologies as industry and society move toward net-zero CO2 emissions, and they will increasingly be looking for other outlets.

This race toward petrochemical integration “may be good for chemicals because we have technologies to convert a variety of different feeds to our end products, but oil, natural gas, coal and NGLs are all looking to chemicals as one of the key solutions, and we can overwhelm our markets pretty quickly. When you add sustainability to the mix, this creates an additional challenge,” Lewandowski said. “We are a solution in some regards—but we can’t solve all the offtake of displaced carbons coming out of the ground.”

The World Petrochemical Conference will take place virtually 8-12 March 2021 and address the theme Chemical Renaissance: Building Resilience, Agility and Innovation in an Enhanced Global Role. IHS Markit and other industry experts will provide hundreds of attendees with the opportunity to get the most in-depth and comprehensive insights on all areas of interest to the chemical and petrochemical industry to help you best position yourself for success in this new world. Learn more