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Ten downstream issues to watch in 2020

11 February 2020 Rob Smith

The current year began much as did the previous one, with both cautious optimism and significant uncertainty. Refined product demand is growing, and crude supply is relatively ample. But trade disputes and geopolitical volatility continue to lurk, and it seems increasingly likely that the 2020s will represent an inflection point for the oil industry.

1. What if marine gasoil demand is a dud?
After years of anticipation (or dread), a new era has commenced for shipping, with the maximum allowable sulfur content for bunker fuel now set at 0.5% rather than 3.5%. As expected, the price of high sulfur fuel oil has suffered while very-low sulfur fuel oil (VLSFO), has emerged as the star of the oil barrel. However, marine gasoil has so far not enjoyed much of a post-IMO bounce; what if the global demand uptick turns out to be marginal or even non-existent?

2. Will the recent spate of regulatory backtracking continue?
Environmental policy has often found itself at odds (both legitimate and imagined) with economic growth. However, the urgency among those on both sides of the debate has certainly increased. In countries ranging from the United States, Mexico, and even France, efforts to roll back environmental regulation are bumping up against economic considerations.

3. How will tightening specifications impact the global gasoline pool?
Countries accounting for around half of global gasoline demand have recently - or will soon - enacted tighter gasoline specifications. Several other countries are expected to follow suit by 2022. How will this impact the global trade flow of gasoline and its blending components? Moreover, given that these changes inevitably put a financial burden on refineries, how will this affect industry rationalization?

4. What will "Oil-to-Chemicals" mean for "traditional" refineries?
Due to their large scale, high degree of sophistication, and flexibility— do crude-oil-to-chemical (COTC) plants have the potential to be an imminent threat to traditional refiners by squeezing costs and dictating margins? Will refiners invest further downstream in the retail sector to secure offtake, or will they embrace alternative opportunities such as biofuels?

5. Are US refineries actually out of the woods?
In June 2019, the 330,000 b/d Philadelphia refinery experienced a catastrophic explosion, leading to its permanent closure. This, in turn, reduced chances for additional rationalization in the US East Coast any time soon, and the rest of the US refining industry is pretty well positioned. The biggest - or perhaps only - threat to the industry may be enactment of burdensome carbon/GHG regulations.

6. Renaissance or retreat for African refining?
Sub-Saharan Africa's import dependence has increased dramatically in the last two decades, due to both fast-growing demand and local refinery rationalization. Six new refineries have been proposed, but very few have been completed. If none of these refineries come onstream, the region's net product deficit will reach 2.4 million b/d by 2030. However, it they all are developed, this would put substantial pressure on refineries in Europe, India, the US, and the Middle East that currently depend on exports to Sub-Saharan Africa.

7. What will Brazil and Mexico's divergent downstream tracks mean for Atlantic Basin trade?

  • Brazil: Brazil's NOC Petrobras has privatized its fuel distribution and retail subsidiary and forged ahead with plans to divest half of its refining capacity, while cancelling the scandal-marred 165,000 b/d Compere refinery project outright.
  • Mexico: In Mexico, the government is delaying or diluting various aspects of the previous administration's ambitious Energy Reform market opening, thereby tilting the scales back in favor NOC Pemex.

    Both countries still have a long way to go to execute their respective downstream visions, but product exporters in Europe, the US, and elsewhere will be watching closely.

8. How will refiners compete against c-store giants in fuel retail?
The value of a strong non-fuel offering is greater now that fuel demand is at or nearing decline in so many markets. So it is unsurprising that traditional refiner-retailers are developing, expanding, or (re)investing in the non-fuel space more aggressively than in years past. However, c-store giants like Alimentation Couche-Tard and EG Group are also expanding aggressively.

9. How long will biofuels' second revival last?
After an initial surge in popularity in the early 2000s, the biofuels sector has progressively faded off the policy radar - or at least settled into autopilot. Yet we are now witnessing a worldwide resurgence in interest abetted by a new wave of government mandates and technological developments. Will biofuels continue to play an important role in the increasingly decarbonized future of transport? Or will markets focus more on efficiency gains and electrification?

10. Where are the next refining "pinch points"?
What will the aforementioned issues mean for the future of industry rationalization? Structural trends certainly favor the US, Asian, and Middle Eastern refining industries, while disadvantaging Europe, Latin America, and Russia. However, government policy could end up moving the needle, with the result having a major impact on refinery supply and regional trade flows.

The top 10 downstream issues to watch in 2020 full report is part of the IHS Markit Refining and Marketing service.
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Posted 11 February 2020 by Rob Smith, Director, Global Fuel Retail, S&P Global Commodity Insights

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