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Awareness and commitments to address climate change are
advancing rapidly, and downstream companies need strategies to
address the shifting landscape. The demand for transportation fuels
will wane over the longer-term, or rapidly decline—depending on
two variables: policy and technology innovation. Downstream
investment and operating strategies must account for the
fundamental shift in regulations and demand trends, but also the
competitive pressure from emerging market supply where
overinvestment in refining capacity may continue. Still, there are
opportunities for companies able to pivot to a lower-carbon fuels
world through biofuels integration, petrochemical expansions, and
other avenues.
Refined product demand
Our research on energy transition in the oil sector is based on
an end-use sector-wise view. This is driven by policymakers',
regulators' and original equipment manufacturers' (OEMs) differing
strategies for decarbonizing. The pace of deployment - and
therefore the influence on demand -varies widely among end-use
sectors, country markets, and the scenario considered. IHS Markit
energy scenarios assumptions provide an established framework to
consider the oil markets and downstream outlook.
Rivaly scenario
Oil demand continues to grow through the early 2030s, but
increasing rivalry with other energy sources, efficiency gains,
emission standards, and urban policy slow oil demand growth in key
markets - resulting in a peak in global oil demand in the latter
half of the 2030s.
Advances in battery cost reduction and energy density help
propel electric vehicle (EV) sales in the light-duty sector -
particularly expanding mobility services (e.g., ride hailing, car
sharing) companies—and diesel truck fuel efficiency standards
reduce on-road diesel demand. However, the scale, complexity, and
inertia of the established road transportation system moderates the
pace of change.
Through the 2030s, increasing fuel economy and emission
standards are a larger force in limiting oil-demand growth in
transportation than the penetration of alternative vehicles.
Autonomy scenario
The stunning pace of adoption by consumers of driverless
electric cars (DECs)—with many owned and operated by new
mobility services companies—leads to much weaker oil
demand.
DECs operated by mobility services companies offer lower costs
for mobility to consumers who do not wish or cannot afford to buy a
car. This also fuels strong policy action by many governments to
restrict use and sale of oil-powered vehicles and increase fuel
economy standards.
Policies that support no internal combustion engines
(ICEs)—referred to as NICEs—in favor of electric
powertrains will affect both light-duty and commercial-duty
vehicles that operate in metro areas. NICE policies are also
referred to as zero-emission vehicle (ZEV) mandates.
Autonomous long-haul trucking and electrification of city-based
trucks limit diesel demand growth. Policy focus on aviation and
shipping—combined with societal pressures—also influences
demand in these growing transportation sectors.
A core belief in both scenarios is a shift from free carbon
emissions to one where carbon (or carbon intensity of fuels) and
operations bear a cost, either explicitly or indirectly through
regulatory constraints.The combined impact of these changes in the
Rivalry outlook results in refined product demand growing by 10
million barrels per day (MMb/d) from about 88 MMb/d currently to 98
MMb/d in 2040. In contrast, demand in Autonomy falls by a similar
amount to 77 MMb/d by 2040. penetration of alternative
vehicles.
Investment trends
The refining environment has remained reasonably well balanced
since recovering from the 2009-2014 oversupply period following the
global recession of 2008/09. Global utilization rates have hovered
around 81% to 82% on an annual basis since 2015.
The industry has benefited from stronger demand increases that
have outpaced net capacity additions. Over a six-year historical
period (through end-2019), demand has increased by approximately 7
MMb/d. Over this same period, investment in new refining crude
capacity was 8.5 MMb/d on a gross basis but was partially offset by
approximately 4.5 MMb/d of closures—resulting in about 4 MMb/d
of net crude unit capacity adds.
Asian (specifically Chinese) refiners have dominated investment
in refining over this historical period (chosen to mirror the
forecast six-year known project window). The Chinese refiners added
approximately 2.5 MMb/d of crude capacity, accounting for
two-thirds of global net crude capacity brought online and over
half of reforming vacuum gas oil (VGO) and vacuum bottoms
upgrading.
Looking forward, global crude distillation capacity is set to
pass 100 MMb/d, not counting an additional 4 MMb/d of condensate
splitter capacity. Based on our current project list, and a
conservative estimate of capacity rationalization, it appears that
refining utilization should remain reasonably firm over the coming
six-year period—even when accounting for weaker demand of about
0.5 MMb/d this year due to the estimated COVIDS-19 impact.
Decisions, decisions
Refining companies are facing a complex set of choices. On one
hand, new long-horizon investments are faced with the prospect of
declining fuels demand and pressure to decarbonize remaining liquid
fuels. In this view, can investments in traditional fuels capacity
be justified?
On the other hand, substantial demand for liquid fuels—and
therefore a refining industry—is probable for the foreseeable
future. However, the structure of the refinery, its feedstock
sources, and its success factors could be quite different as
successful companies pivot to a low-carbon supply business.
Refining companies can take a defensive or proactive stance when
it comes to addressing these pressures. A defensive stance might
include focusing on plant reliability, lowering costs, buying
emissions credits (as opposed to generating credits), and shifting
product placement into lower regulated (export) markets. This
strategy returns cash to shareholders in the near-term but might
threaten viability longer-term.
Companies that opt for a proactive stance will invest in
low-carbon strategies including biofuels, bio-integration, lower
carbon intensity crude oils, and perhaps hydrogen. Carbon reduction
will be a central goal toward profitable long-term returns. Much of
the return on these investments depends on the value of carbon
emissions credits, which are not without risk. For example, will
regulatory programs capture Scope 2 emissions such that investments
or contracts for renewable offsite power help lower the fuel
life-cycle emissions?
Petrochemicals and petrochemical feedstocks
Our analysis indicates that increasing demand, slowing NGL
supply growth, and peaking fuels demand will lead to a greater need
for naphtha and other feedstocks from refining.
There will simply not be enough "by-product" naphtha and NGLs
produced over the coming decades to meet petrochemical growth. The
multitude of streams and options - including offgases, LPG, and
other low value streams - are still not enough without shifting the
fundamental yield of fuels towards petrochemicals directly or
petrochemicals feedstocks. Measured on a yield of naphtha-to-crude
run, global naphtha yields will need to increase from about 12%
today to 19% by 2040.
Refining and petrochemicals plant integration is a
well-established strategy by some downstream companies. More will
be needed and the most interesting questions center around which
technologies and segments of the refining market will make the
investments.
In China today, there are large, highly-integrated refining and
petrochemical plants that are online or starting up. These large
plants produce around 40% petrochemicals but use no novel
technology. Instead, they employ a series of naphtha-producing
hydrocrackers to produce large volumes of hydrocrackate that is fed
to reformers for paraxylene production (and some light
naphtha-to-steam cracking.) Given the capital required and
"downgrade" of diesel to naphtha, does this configuration make
sense anywhere outside of China?
New crude-to-chemicals technology and configuration schemes are
being researched with one such plant online in Singapore. These
plants promise even higher petrochemicals yields of 50% to 75% in a
world-scale refining size (400+ kb/d). These plants are most likely
to be built as greenfield sites in the Middle East, India, or
Eastern Asia and they require a substantial commitment.
Finally, new technologies are coming to the market that promise
to increase the yield of petrochemicals from existing fuels
refineries. Many of these are based on fluid catalytic cracking
technology, a long-time workhorse of the modern refinery. There are
a multitude of intermediate or semi-finished streams used to
produce fuels today that could, with the right reconfiguration, be
converted to petrochemicals - typically light olefins or BTX
aromatics. A potential advantage of these more modest process unit
investments is they may be suitable for large existing Western
refiners as well as Asian and Middle Eastern refineries. Western
refiners as well as Asian and Middle Eastern refineries.
Kurt Barrowis the Vice President for
Oil Markets, Midstream & Downstream at IHS Markit.
