A year-and-a-half into the Covid pandemic and the outcome has been harsh for most, strenuous for many with a little good fortune for some. The reality is that refining was one of the worst hit sectors during the initial months of 2020 and the outlook remains uncertain. The World Refining Association looks at the cost of the Covid-19 pandemic on the industry.

The sector has come under increasing pressure in the past few years to change their processes and reduce the carbon impact, as they were labelled among the “worst” offenders for carbon emissions. And while there is truth to this, the public perceptions of refining are often limited to images of chimney smoke and darkened steel.

Refining has experienced its fair share of cyclical peaks and troughs, and the unexpected oil price war – but challenges that were not necessarily insurmountable. Europeans refiners have continued to face a struggle to keep afloat against growing ESG-related financial barriers. For the integrated refiners in the Middle-East the decarbonisation efforts link directly to CCUS and powering refineries with renewable energies; and the integrated Asian refiners expanding their projects en masse; while the US-market has tried to juggle the competing energy visions of Democrats and Republicans. Down under, Australia and New Zealand have taken the bold step to shut all but a handful of refineries and reforming their operations to support a new fuel import model.

The initial price war was beneficial to the IOC and NOC refiners as they could purchase feedstock at lower prices and refine their products for a lower overall cost. However, as Wood Mackenzie noted recently – the decline in oil price and the closure of refineries created “a perfect storm” that led to “global utilisation plummeting from over 80% in Q4 2019 to 66% for Q2 2020.”

The Impacts of Covid

Just 18 months ago in early 2020, the Russia-Saudi oil price war had sent global Brent prices tumbling up to 65%. By March when the realisations of the pandemic were dawning, the WTI was into the negative due to this supply glut and refiners couldn’t purchase and process oil or gas fast enough. Demand for their products had similarly declined as economies went into lockdown, and many refiners were struggling with their inability to process the glut or move their product. As a result, global production “declined by 7.6 million b/d in 2020 to 74.3 million b/d on sharply reduced demand for fuels.”

An IHS Markit report on the sector reported that 1.72MMb/d across 15 refineries was “closed or announced to be closed”, while another 584,000b/d is “currently offline or under stress, and is at stake of a potential shutdown”. This has led to a reconsideration of priorities and, in consideration of the energy transition, avenues to create more diverse portfolios.

Yet there remains the overarching question of how the globalised model of distribution can operate without the need for refined fuels for transportation and the role refiners will play in developing our future energy demands from biofuels to CCUS and hydrogen.

An IEA report released earlier this year expects 2021 to see an increase of 3.8 million b/d in refining capacity against 2.4 million in closures, and “expects refinery throughput in 2021 to increase by 3.6 million b/d to 77.8 million b/d and in 2022 a further 2.4 million b/d to 80.4 million b/d”.

Priorities and Pivots

The demand for fuels was at an historic low, and refiners had a glut of hydrocarbons that they were struggling to process, until the clarion call for PPE and vaccines drove demand for petroleum-based plastics through the roof. Chinese, US and German integrated refining complexes were enjoying a boom on the back of post-lockdown demand surges and as vaccine deployment reaches more people.

And yet still, the finance and investment restrictions grew in-line with the talk of an accelerated energy transition – at least in Europe where the refiners must adapt or die. The IHS Markit report predicts that refining will only return to pre-Covid levels towards Q4 2022 or even into 2023. Such a prolonged downturn almost ensures that the marginal refiners will close or shift their operations in-line with regional ESG pressure.

The growth and interest in the biofuels market has reached levels previously unseen and may eventually reform the need for hydrocarbons (or reduce their demand) – and can often be produced from simple food waste. It is this area where the European refiners will make their mark over others.

The Asian Pacific region (led by China) remains committed to industrial growth and the regional sector has grown to occupy the greatest share of global refining capacity at 34%, followed by the US at 20.5% and Russia at 6.6%. And while these are the usual suspects, the landscape is shifting to those who can re-purpose and re-shape their portfolios.

As the African market embraces its oil and gas sector boom, refiners will be interested in the exports coming from these new and developing markets.

Refiners are central to the emerging race for a hydrogen economy and the push for additional carbon capture, utilisation and storage projects. This is where the Middle East seeks to entrench their competitive advantages of production and refining, while maintaining a high-degree of emissions. Europe has led this market, developing a string of hydrogen clusters across the Netherlands, Germany and UK – each seeking to rapidly integrate new hydrogen production capacity. Investment in the sector continues to grow and hopes remain high that the gas will be a leading fuel of choice in the near future. 

Hydrogen is hailed as a game changer for the energy sector, if the right pieces fall into place. Large issues around generation, storage and transmission still need to be solved at scale. While the trends seek to enlarge the role of green hydrogen, it is blue hydrogen (produced as a by-product of the refining process) that dominates the market. Any development of this market will need cooperation and integration with major refiners until the supply of green hydrogen takes over – which may still take several decades.

In the End

The past two years have undeniably been a sore point for the global refining sector, and while not all have been hurt equally, it has forced most to reconsider their position and seek to broaden their product offerings. Certainly many refiners in the West are struggling with the increase of ESG policy restrictions on finance and investment, however equally these actors are acclimatised to adaptation as a matter of course. ESG pressures have provided the impetus to consider alternative processes, and a timely pivot could place these refiners ahead of the crowd. Their ESG ‘story’ must be convincing and credible.

The industry has been dealt a blow but it is not down and certainly not out, rather it is an opportunity for reflection and diversification. And as production capacity increases towards 2025, the sector will be central to processing that increase in oil and gas volumes.

 

Such perceptions overlook the real and tangible efforts refiners are engaging with in order to reduce their impact on the planet.

The mission of many ESG impact investors is to reduce the climate impact in sectors who need to be moved by shareholder interest, more so than outside activist influence. After all, as energy demand grows, emissions reductions are more important than investing in net-zero sectors – as oil and gas products continue to be central to societies’ wants and needs. Notably, three areas will see a major decline in fossil fuel usage; the transport sector, power generation and heating – providing space for the refining industry to make their emissions cuts and assist other hard-to-abate sectors.

Finding the Balance Between East and West

Naturally, when considering ESG efforts and the energy transition, we should look to the example of Europeans and North America. They reflect two-sides of the same coin. On the one hand, refineries exist unapologetically to facilitate the vast array of required oil and gas byproducts. On the other, these are the regions which experience the greatest ESG pressures.

This divergence of priorities is far more difficult to reconcile than most other sectors, obviously refining requires processing petrochemical products using a significant amount of energy – all driven by consumer demand. Therefore, how does a company create a balance that acknowledges consumer emissions concerns and fulfills their desires to maintain consumption habits.

Restricting supply inorganically can create a myriad of problems and unseen disruptions to which most states are similarly unprepared. The industry-led reduction of GHG emissions is far more beneficial to the growing societal demand for refined goods.

In the West: Marathon has shut down their most inefficient refineries, while Valero has committed 40% of their growth capital to new renewables projects. The trend across the US and Europe is that while some refiners are seeking to mitigate emissions through CCUS and other technological advances, these are only in addition to investing in a more diverse portfolio or repurposing existing infrastructures for biofuels, hydrogen or hybrid fuels.

There remains the concern that China and Russia will maintain their geopolitical position of maximizing their use of conventional energy sources. China has stated their intention to grow both oil and gas consumption over the coming decades, but like they have done with renewable technologies, China could prove crucial in scaling crucial new technologies.

Russia on the other hand remains deeply committed to natural gas production and their competitive advantage of using the gas for their refining purposes. And while Russia hasn’t engaged deeply with the transition, the emerging carbon markets could prove an avenue too attractive to ignore.

Pushing Technical Excellence in the Transition

There are three major technological initiatives being used to defer refining emissions; electrification, biofuels, carbon capture and hydrogen. And while these are the frontrunners, it should be noted that refiners have long excelled in integrating modern advances in order to maximize efficiency. While mitigation technologies will make the difference, ensuring the greatest efficiency of processes is core to ensuring a sustainable and lasting impact.

Biofuels and the replacement of high-emissions feedstock with greener and cleaner alternatives has proven the most cost-effective and carbon-effective route to emissions mitigation. Refiners can excel in this space through their innate knowledge of the chemical processes that create fuels. By substituting oil or gas for vegetable or animal fats, refiners can create a biodiesel fuel that is both nontoxic and potentially biodegradable.

Carbon Capture Utilisation & Storage (CCUS) has often been presented as a frontrunner in the solutions gambit for refiners, however it is a costly and underdeveloped technology that requires incredible scale to make an impact on global emissions.

Each climate scenario set-out by the International Energy Agency expects CCUS to play a defining role in the mitigation of GHG emissions. Without pervasive uptake of CCUS, the IEA believes the costs of the ‘transition’ will increase 40-fold. The benefit of CCUS is that it is not just necessary to curtail new emissions at the source where they are most concentrated, but the technology can be expanded to continually reduce our historic emissions too.

An added benefit of CCUS is the creation of ‘Blue’ Hydrogen as a by-product of the process. Hydrogen is anticipated to takeover sections of industrial gas supply, and blue hydrogen accounts for 95% of the market. The sector can therefore expand the range of products that are being refined, with hydrogen-natural gas blends being developed for hybrid turbines, a method refiners and generators are considering for lowering their emissions impact.

Electrification of refineries will be the catalyst for lasting change within the industry. The power required to refine petroleum products is excessive and a drain on the finite resources at our disposal. By powering refineries through renewables, there is the dual benefit of reducing emissions and expanding clean energy.

Moreover, electrification comes hand-in-hand with the digitalization of refineries. The development of ‘digital twins’ to analyse production capacity and improve efficiencies in real-time, is another indicator of the methods in-place to mitigate Carbon, Nitrogen and Sulphur Oxides from the refining process as much as possible.

What Is To Come?

While it isn’t easy to anticipate what technologies are best to solve our climate concerns, there is a growing belief at the IEA, that the industrial and intellectual pursuit of solutions needed to solve the crisis are only being developed.

“In 2050, almost half the reductions come from technologies that are currently at the demonstration or prototype phase.”

The refining sector is undergoing a transformation that requires a strong commitment to carbon reductions, but also a curiosity towards how best to utilize the technologies at their disposal. If the IEA’s claim is true, we have to make do with what we have got and where we can make the greatest impact. By focusing on efficiencies of energy systems and the capture of emissions, the refining industry has integrated measures to achieve decarbonisation and set itself on the road to net-zero.