A new complimentary online report from Wood Mackenzie has said the coronavirus has provided the ultimate stress test for refiners. “Who will thrive? Who will merely survive? And what does this tell us about refiners’ resilience and readiness to take on the energy transition?”

It said that with populations locked down to slow the global coronavirus pandemic, demand for oil products is collapsing and, with it, the market for oil. Refiners have started to reduce runs, margins are coming under severe pressure and some refineries will close, albeit temporarily. 

Refining has always been a challenging business, but global capacity has continued to grow despite periodic bouts of rationalisation in OECD countries. The energy transition introduces the threat of oil demand peaking before 2040, which makes refinery investment decisions even more difficult.

The coronavirus crisis could be a grim foretaste of what the longer-term future looks like for the refining industry when oil demand starts to decline, the report said. It explores how existing refiners can adapt to low demand in a low carbon future, whilst staying true to their roots as a conversion industry.

It said as demand growth stalls, refineries get ever larger and “sustained investment in additional refining capacity will be required during this period”, according to Wood Mackenzie’s energy transition outlook.

More capacity will be needed in the Middle East and Asia to satisfy regional demand growth. The attributes of new refineries to be built in regions of demand growth, such as the Middle East and Asia are well known – large, highly petrochemical integration and strongly competitive. In OECD countries, competitively weak assets will be closing, as local demand falls due to fuel efficiency improvements and electrification of the vehicle fleet.

World-scale refineries are getting bigger while the energy transition is weakening the global growth in oil demand. Within the next five years, the risk of cannibalisation within the sector – when each new refinery project prompts the closure of assets elsewhere – will grow.

But who will thrive and who will merely survive?

Wood Mackenzie was predictingf a significant surplus of refining capacity over the next five years, even before the emergence of the coronavirus and its near-term downward impact on oil demand. “Our broad expectation is that demand is not destroyed but delayed.”

Any new refineries will need to be large coastal sites that are heavily integrated with petrochemicals to ensure they are highly competitive. OECD refiners need to adapt to declining local demand and a shifting social and political landscape. Business responses must extend beyond the traditional levers of selective investment and cost control to reduce carbon intensity in both operations and their supply of liquid fuels. The core competences of operating integrated refinery petrochemical sites can be leveraged to become a central hub in a “low-emissions energy complex” that brings together carbon capture and storage, chemical recycling, LNG and renewables.

“No one-size-fits-all strategy for refiners”: In a world aspiring to restrict the global temperature rise to less than 2 degrees Celsius, the disruption to the global refining industry could be even more severe. 

Wood Mackenzie’s accelerated energy transition would require much greater penetration of battery technology and hydrogen into the vehicle fleet. In such a scenario, localisation is a key theme – refiners working closely with the local community and their government to retain a social licence to adapt their business.

Cost reduction, competitive position improvement and understanding the refinery’s carbon life cycle are obvious “no regret” moves. Beyond that, no one size fits all, so strategic reviews will be essential to establish a road map for the future.

Refining is, after all, a conversion industry – one that must transition away from carbon-intensive feedstocks such as crude oil and into products and services that the consumer still values.

For more information visit www.woodmac.com

14th April 2020