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Over the past two weeks, government and business leaders from
around the world gathered in Scotland to discuss their collective
efforts towards fighting climate change. And while one can easily
find cause for alarm over the pace of that campaign, progress is
undeniably being made. More importantly, it is clear that a global
inflection point has been passed on the subject of climate change.
From the European Union's proposed "Fit for 55" legislative package
to the Biden Administration's "Build Back Better" proposal and even
China's non-binding plan to achieve carbon neutrality by 2060,
momentum is building towards a future in which our civilization's
carbon intensity is accurately reckoned. "Net zero" is no longer
seen as an aspirational goal, but rather a necessary destination
for the world.
This reckoning for greenhouse gas emissions is occurring
alongside an inflection point for global refined product
consumption. Because while the world has changed dramatically since
the first oil refineries were constructed in the 1850s and 1860s,
throughout it all, refined product demand has continued inexorably
upward. But this assumption is no longer valid. IHS Markit now
expects that global refined product demand has little to no
incremental growth "runway" beyond its pre-pandemic level.
An unavoidable outcome of these two trends will be refinery
rationalization. Nearly 3 million b/d of refinery capacity has
closed or been slated for closure since the pandemic began, with at
least another 1.5 million b/d expected to shutter by 2025. But the
industry is by no means doomed to obsolescence. There are ways for
a refinery to survive amidst declining gasoline and diesel
consumption; to thrive even in a world that levies a price on every
ton of carbon being emitted. But such reinvention unsurprisingly
requires capital investment. In fact, IHS Markit estimates that the
global refining industry will spend at least $150 billion on
decarbonization efforts over the next three decades.
It is important to note that this figure represents just three
non-mutually exclusive pathways to refinery decarbonization: 1)
efficiency improvements, 2) hydrogen electrolysis, and 3) carbon
capture of FCC and hydrogen production units. These are the most
likely pathways for a refinery, but others certainly exist—and,
in fact, are necessary if a refinery ever wishes to achieve true
"net zero" status. This forecast also does not take into
consideration projects associated with decarbonization that take
place "outside the refinery gate". Such projects include
development of renewable grid power and the construction of
external CO2 distribution and storage facilities, both of which
will likely be at least partially funded by the refiners
themselves. All this is to say that refiners will almost certainly
spend more in the coming decades on decarbonization projects than
$150 billion. For example, IHS Markit estimates that another $50
billion will be spent at refineries to increase their biofuel
production over the next three decades.
At the moment, spending on biofuel and decarbonization projects
is still dwarfed by investment in more "traditional" refinery
units. But by the 2030s, biofuel projects and the decarbonization
pathways considered here are expected to account for nearly 70% of
total spend. This includes virtually 100% of refinery spending in
Europe and North America. Perhaps unsurprisingly, effectively all
of the traditional refinery investment going forward (particularly
after 2026) will occur in Asia, with China and India accounting for
the bulk of that. And effectively all of that traditional spend
will be on projects to improve conversion capacity or product
quality, rather than gross distillation capacity expansion.
Unavoidably, structural fuel demand decline and a heightened
global sensitivity towards the carbon intensity of energy will mean
a reduction in refining capacity. Dozens of refineries will close
in the coming decades. But many will not. After all, IHS Markit's
base case outlook still predicts the world will consume more than
75 million b/d of refined products in 2050. But what will the
refinery of that future look like?
As this outlook has made clear, lowering the carbon intensity of
operations is a veritable pre-requisite for refinery survival going
forward. And the best positioned refineries will be those that can
leverage the low-carbon ecosystem that is expected to arise
alongside them. This includes access to renewable grid electricity
as well as CO2 transportation and sequestration infrastructure. But
it also includes integration with other nearby industrial,
commercial, and residential actors. Indeed, IHS Markit envisions
the rise of numerous low-carbon "hubs", with refineries as the
pivot point of that energy-industrial supply chain. Put another
way, rationalization is not the only path forward for the refining
industry; as ever, reinvention is possible.
In two separate reports, Climate Bond Initiative and International Energy Agency both conclude Southeast Asian coun… https://t.co/U3NTnx0gdS
May 19
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