Oil Refiners Are Being Forced To Adapt Or Die
By Irina Slav - Aug 16, 2020
The International Energy Agency this week revised down its gasoline and jet fuel demand forecast for the rest of the year. In seemingly unrelated news, Philips 66 said that it is turning a San Francisco refinery into a biofuels plant. In separate news, Shell said it would permanently shutter a refinery in the Philippines. These news stories only seem unrelated at first glance. A deeper look shows they point to a changing industry. Refiners were among the worst-hit oil and gas industry segments in this crisis. Usually making their money from the price difference between crude oil and oil derivatives, this time refiners could rely on the usual stable demand for oil derivatives. The coronavirus pandemic slashed oil product demand and, consequently, refiners’ margins.
Now, more than ever, refiners need to change to survive.
Consolidation and closures: this was what analysts expected would happen in the downstream industry as a result of the pandemic. It is already happening. Besides Shell, Marathon Petroleum earlier this month said it would idle permanently two refineries with a combined capacity of over 180,000 bpd of crude oil. More will likely follow: despite a strong rebound in gasoline demand in many parts of the world, jet fuel demand is yet to recover. This means the revenues associated with jet fuel sales will be non-existent for another year or two, or possibly more.
In this context, Philips 66’s plan to close its Santa Maria refinery and transform the Rodeo refinery into what it says would be the world’s largest renewable biodiesel plant makes perfect sense, especially when you add to the equation increasingly stringent fuel standards, particularly in California.
The state plans to reduce carbon emissions from transport by 20 percent over the 20 years from 2010 and 2030, the Wall Street Journal’s Rebecca Elliott wrote earlier this week. This offers a strong incentive for refiners to switch to biofuels, and this incentive is crucial for such transformation. On the wider national market, renewable diesel fuel, a fuel produced from various waste oils, which is what Philips 66 will be making at the Rodeo refinery, only makes up about 1 percent of total diesel sales. Yet it seems California would be a lucrative market for it, as Marathon Petroleum and HollyFrontier also have renewable diesel plans for some of their refineries.
Related: Oil Prices Fall Back After A Brief Rally
But California is just a single market, one might note, not enough to drive the transformation of a whole industry. Accurate as this may be, it is also a growing biodiesel market. None other than Exxon recently inked a renewable diesel supply deal with a company called Global Clean Energy Holdings, under which the supermajor will buy 2.5 million barrels of renewable diesel annually starting in 2022 to sell on the California market and other markets as well. California may be a single market, but it happens to be the world’s largest market for renewable diesel. And it is giving away generous subsidies to biodiesel producers.
These developments suggest the pandemic’s unprecedented effect on the oil and gas industry as a whole has made sector players wary of more nasty surprises and quick to snap up opportunities as they present themselves. At least, it has made some of them wary and ready to act sooner rather than later. Although many believe the worst is now over and the demand recovery refrain is frequently playing across headlines, all authorities that issue forecasts on oil and gas supply and demand have their own refrain: uncertainty remains; the future is unclear. Some will change and survive. Many will not.
So, besides biofuels plants, how are the refineries of the post-pandemic future likely to look? According to a Wood Mackenzie report from earlier this year, these will be complex facilities with a strong bend to petrochemicals. This is actually a continuation of an already present trend: with demand for crude oil as fuel expected to decline under pressure from EVs and other alternative fuels, petrochemicals are expected by many to become at some point the main profit-maker for refiners.
This future may not be even on the horizon yet as EV sales continue to only make a tiny part of total car sales, but the industry is preparing as governments step up their efforts to cut emissions. These changing fuel demand patterns, as well as the pandemic, have created a refining capacity excess. This excess will either have to be shut down or be repurposed, as a Stratas Advisers analyst told Bloomberg this week. There appears to be no third option, namely a strong recovery in oil demand and equally strong growth in this demand going forward. The adapt-and-survive imperative in refining says, “Convert or shut down your excess capacity”.
There will continue to be demand for oil products, of course, including gasoline and diesel, for a long time to come. Demand could even begin growing from pre-pandemic levels at some point, depending on how the world handles the virus. But this is a doubtful scenario. It would be safer to prepare for one that is much more likely: another lower for longer, this time in fuels.
By Irina Slav for Oilprice.com
https://oilprice.com/Energy/Energy-General/Oi...r-Die.html
By Irina Slav - Aug 16, 2020
The International Energy Agency this week revised down its gasoline and jet fuel demand forecast for the rest of the year. In seemingly unrelated news, Philips 66 said that it is turning a San Francisco refinery into a biofuels plant. In separate news, Shell said it would permanently shutter a refinery in the Philippines. These news stories only seem unrelated at first glance. A deeper look shows they point to a changing industry. Refiners were among the worst-hit oil and gas industry segments in this crisis. Usually making their money from the price difference between crude oil and oil derivatives, this time refiners could rely on the usual stable demand for oil derivatives. The coronavirus pandemic slashed oil product demand and, consequently, refiners’ margins.
Now, more than ever, refiners need to change to survive.
Consolidation and closures: this was what analysts expected would happen in the downstream industry as a result of the pandemic. It is already happening. Besides Shell, Marathon Petroleum earlier this month said it would idle permanently two refineries with a combined capacity of over 180,000 bpd of crude oil. More will likely follow: despite a strong rebound in gasoline demand in many parts of the world, jet fuel demand is yet to recover. This means the revenues associated with jet fuel sales will be non-existent for another year or two, or possibly more.
In this context, Philips 66’s plan to close its Santa Maria refinery and transform the Rodeo refinery into what it says would be the world’s largest renewable biodiesel plant makes perfect sense, especially when you add to the equation increasingly stringent fuel standards, particularly in California.
The state plans to reduce carbon emissions from transport by 20 percent over the 20 years from 2010 and 2030, the Wall Street Journal’s Rebecca Elliott wrote earlier this week. This offers a strong incentive for refiners to switch to biofuels, and this incentive is crucial for such transformation. On the wider national market, renewable diesel fuel, a fuel produced from various waste oils, which is what Philips 66 will be making at the Rodeo refinery, only makes up about 1 percent of total diesel sales. Yet it seems California would be a lucrative market for it, as Marathon Petroleum and HollyFrontier also have renewable diesel plans for some of their refineries.
Related: Oil Prices Fall Back After A Brief Rally
But California is just a single market, one might note, not enough to drive the transformation of a whole industry. Accurate as this may be, it is also a growing biodiesel market. None other than Exxon recently inked a renewable diesel supply deal with a company called Global Clean Energy Holdings, under which the supermajor will buy 2.5 million barrels of renewable diesel annually starting in 2022 to sell on the California market and other markets as well. California may be a single market, but it happens to be the world’s largest market for renewable diesel. And it is giving away generous subsidies to biodiesel producers.
These developments suggest the pandemic’s unprecedented effect on the oil and gas industry as a whole has made sector players wary of more nasty surprises and quick to snap up opportunities as they present themselves. At least, it has made some of them wary and ready to act sooner rather than later. Although many believe the worst is now over and the demand recovery refrain is frequently playing across headlines, all authorities that issue forecasts on oil and gas supply and demand have their own refrain: uncertainty remains; the future is unclear. Some will change and survive. Many will not.
So, besides biofuels plants, how are the refineries of the post-pandemic future likely to look? According to a Wood Mackenzie report from earlier this year, these will be complex facilities with a strong bend to petrochemicals. This is actually a continuation of an already present trend: with demand for crude oil as fuel expected to decline under pressure from EVs and other alternative fuels, petrochemicals are expected by many to become at some point the main profit-maker for refiners.
This future may not be even on the horizon yet as EV sales continue to only make a tiny part of total car sales, but the industry is preparing as governments step up their efforts to cut emissions. These changing fuel demand patterns, as well as the pandemic, have created a refining capacity excess. This excess will either have to be shut down or be repurposed, as a Stratas Advisers analyst told Bloomberg this week. There appears to be no third option, namely a strong recovery in oil demand and equally strong growth in this demand going forward. The adapt-and-survive imperative in refining says, “Convert or shut down your excess capacity”.
There will continue to be demand for oil products, of course, including gasoline and diesel, for a long time to come. Demand could even begin growing from pre-pandemic levels at some point, depending on how the world handles the virus. But this is a doubtful scenario. It would be safer to prepare for one that is much more likely: another lower for longer, this time in fuels.
By Irina Slav for Oilprice.com
https://oilprice.com/Energy/Energy-General/Oi...r-Die.html
