16:07 PM | March 1, 2021 | Giacomo Boati, Karine Boccara, and Spencer Welch, IHS Markit*
2020 was a harsh year for oil markets in general and refiners in particular. Even during the 2015–19 period, referred to by some as the “mini golden age of oil refining,” IHS Markit was already forecasting storm clouds for refiners. Oil demand peaked in the US and Europe in 2005 and 2006, respectively, and with declining demand in both regions, another significant round of refinery rationalization was forecast.
The COVID-19 pandemic and associated oil demand crash, despite most of it expected to be temporary, have in fact brought forward this rationalization and accelerated the energy transition. Oil refiners around the world are facing tough decisions as a result: whether to reduce capacity, repurpose refineries, or reinvent themselves.
The future will be challenging for the refining sector. While refined product demand and prices are expected to recover gradually over the next two years, ongoing refinery capacity additions east of Suez and modest product demand growth beyond 2021–22 will depress margins and put further pressure on refineries, particularly those located in regions where oil demand is already well past its peak.
The so-called Great Shakeout of the sector has started, with more than 2 million barrels/day (b/d) of refinery capacity closures announced in 2020. Around 3.7 million b/d of total closures are expected in 2020–25, while 5.5 million b/d of new refining capacity is simultaneously being added in other regions, according to IHS Markit.
Against a background of difficult market conditions for traditional oil-derived fuel markets, refiners are increasingly focusing on energy transition, with the dual goals of improving the profitability of their assets and securing long-term operations, including looking for opportunities in new sectors and environmental imperatives. This challenge is combined and aligned with trying to reduce greenhouse gas emissions and moving toward carbon neutrality.
Traditional refinery investments are typically aimed at enhancing current refinery operations, increasing biofuel processing and production, and improving chemical integration.
Reviewing refinery configurations to adapt to the main drivers of the energy transition encourages the screening of opportunities to develop chemical production, as chemical demand continues to grow. Depending on the configuration and size of the refinery, propylene, C4 streams, aromatic streams, and feedstocks such as liquefied petroleum gas (LPG) and naphtha may be available in sufficient quantities to develop downstream chemical production.
A review of feedstock availability, its current placement and value, as well as product positioning and pricing, provides the basis for an options-screening evaluation. Fitting into local value chains by substituting imports or finding alternative uses for relatively low-value refining streams can lead to attractive propositions.
Not all refinery-integrated chemical opportunities are large, and some do push refiners to venture for the first time into a chemical industry they feel ill at ease with. Higher returns on investment may be needed as incentives, or collaboration with partners more familiar with the industry—such as traders to secure product offtake, or local chemical producers—who could help refiners mitigate the perceived risk of integrating into chemical production.
In addition, in light of the increasing pressure from energy-transition imperatives and requirements, refiners are looking at broader options for utilizing their general technical and industrial skills, as well as their land, utilities, and infrastructure. These include energy-transition projects including carbon capture, utilization, and storage (CCUS), hydrogen, and desalination; gas import and supply; plastics recycling; traditional power projects; and renewable power including waste-to-energy.
Questions such as ‘What is the best way for my refinery and assets to navigate the energy transition?’ ‘How can we increase the petrochemical integration of our refinery?’ and ‘Do we still want to be in the oil refining business, or do we want to broaden our horizon?’ were asked of IHS Markit by a client in 2020.
These questions were addressed by first assembling a team of IHS Markit experts from refinery markets and optimization to petrochemical markets, to power, gas,
Baseline, identified options were created for future development and screening of options. The first involved working closely with the client to produce a detailed review of the client’s industrial assets and business operations, capacities, and design to create a base case for future performance, assuming the business remained as it was, and identifying the constraints to future alternative investments. Brainstorming potential options then took place, including various sessions with IHS Markit experts in renewables, power and gas, natural gas liquids (NGLs), refining, biofuels, petrochemicals, clean energies, and other energy-transition areas such as CO2 sequestration and hydrogen, also incorporating the client’s own input.
This was followed by a screening process with the objective of analyzing a smaller number of options in more detail. The screening criteria were agreed on with the client, as were the conclusions. The screening included alternative petrochemical integration to the traditional route of naphtha cracking into olefins, such as isopropanol, methanol, ammonia, urea, hexane, benzene, phenol, acetone, and styrene.
An integrated techno-economic, energy-transition model included various potential investments in all the main relevant energy sectors, with a standard set of cost and pricing assumptions. This was tailored to the client’s local conditions to build a base case. The model was then adapted for an immediate review of potential improvements in business operations, margins, cash flows, and return on investment.
The result was a satisfied client with clarity on the options available, ranging from investment to exit and the likely financial implications of each.
*Giacomo Boati, executive director/downstream consulting; Karine Boccara, executive director/chemicals consulting; Spencer Welch, vice president/downstream consulting.