ERTC 2021 Covid-19 provides a warning to refiners tha adaption is key to thrive in the energy tran
Getting European refining Fit for 55
ALAN GELDER Wood mackenzie
ALAN GELDER Downstream Global SME, Wood mackenzie
European refining has recovered from the doldrums of last year’s pandemic. Despite demand still being 500 kbd less than 2019 levels, European refinery utilisation is within touching distance of the historical five-year average. A com- bination of capacity rationalisation, high export flows to West Africa and the United States have provided support, particu- larly for gasoline-oriented configurations. As mobility restric- tions ease further, 2022 European refinery gross margins are expected to strengthen. The energy transition is all about supply- ing the w rld’s grow- ing needs for energy and mobility in a more sustainable way. This take many forms, but for the oil valu
0% 10% 20% 30% 40% 50% 60% 90% 80% 100% 70% Base case Fit for 55 What marks the winn rs over the com- ing year? Any new refineries will need to be large coastal sites that are heavily inte- grated with petrochemicals to ensure they are highly competitive. We can evidence this already, as our preliminary nalysis of the existing European refining land- scape highlights the competitive strength of integrated refinery/petrochemical sites for 2019. the energy transition will likely deliver the same results. Europe’s refiners need to adapt to declining local demand, and a shifting social and political landscape. Business responses must extend beyond the tradi- tional levers of selective investment and cost control to also reduce carbon inten- sity in both operations and their supply of liquid fuels. The core competences of operating integrated refinery /petrochem- ical 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 to the production of liquid fuels and petrochemicals. In a world aspiring to restrict the global temperature rise to less than 2°C, the disruption to the global refining indus- try could be even more severe. Wood Mackenzie’s accelerated energy transi- tion suggests far greater penetration of battery technology and hydrogen into the vehicle fleet. In such a scenario, localisa- tion becomes a key theme – refiners work- ing 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 essen- tial to establish a road map for the future. The basis of the road map is the decision tree opposite. Refining is, after all, a conversion indus- try – one that must transition away from carbon-intensive feedstocks such as crude oil and into products and services that the consumer still values. ■
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BEV sales would need to account for half of all new car sales in the EU by 2030, compared to a third in our current base case outlook 85% 80%
Fit for 55 signals further downside for European oil demand In our recent outlook to 2050, European demand peaks in 2022 before it starts an inexorable decline of 150 kbd per year to 2030. European refiners become increasingly reliant on export markets. This is particularly the case in north-west Europe, as demand is projected to fall fastest there because of electrification in transport. The EU’s Fit for 55 proposals require materially faster EVadoption than this out- look post-2030, with all the EU’s new passenger car sales required to be battery electric by 2035. The proposals, if adopted, would increase the rate of European v hicles or green/blu hydrog n via fuel cell in heavy-dut commercial t ucking. Liquid renewables – biofuels – are via- ble alternatives, particularly given the reduced need for investment in distrib - tion infrastructur . chain, it is largely about the penetration of cleaner energy from renewables. The main carrier echanisms are electric- ity, livered by either battery in elect ic
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Figure 1 BEV sales in EU required to meet Fit for 55 target
OECD Europe refinery utilisation Source: History IEA MODS, Forecast Wood Mackenzie
oil demand decline. Despite the continued need to sup- ply demand for the dwindling stock of ICE passenger cars, commercial vehicles, the marine and aviation sec- tors, the EU’s proposals require refiners to re-think their business models. Carbon pricing and renewables create risks and opportunity Carbon pricing remains central to the EU’s plans to decarbonise, with free allowances being phased out and the Emissions Trading Scheme (ETS) potentially extended to other transport sectors. The cost of carbon is already a major drag on European refinery earnings. EU ETS prices are now in the range of €50–60 per ton, which is 10 times higher than the lows of 2016. Despite free allowances, the cost of carbon emis- sions can range from US$0.5 to 1.0/bbl of crude pro- cessed, which can largely eradicate the free cash flow of less competitive assets. Carbon costs appear to be a one-way bet under the latest proposals. Refining will not, at least initially, be protected by a Carbon Border Adjustment Mechanism (CBAM), so the high costs of carbon emissions will disadvantage European play- ers relative to their international competitors. It does, however, provide a strong incentive to decarbonise existing operations. The Fit for 55 package also proposes to raise the share of renewables in Europe’s transport sector to achieve a 13% carbon emissions reduction by 2030. The main change versus the existing renewable fuels legislation is an emphasis on the growing use of renew- able fuels of non-biological origin, which creates oppor- tunities for refiners to diversify their businesses to the provision of low carbon fuels. Refiners will need to adapt to survive Adaption is key, as the outlook for petrochemicals remains robust and refiners can re-tool to play a pivotal role in the circular economy, through chemical recycling of petrochemical wastes, liquid biofuels (for petrochemi- cals, sustainable aviation fuel and stationary uses) along with efuels (synthetic fuels produced from combining green hydrogen and captured CO 2 ). These factors play to the strengths of large, coastal highly competitive inte- grated refining and petrochemical sites. It is critical for refiners to clearly understand their cur- rent competitive position and what they need to do to secure a future top quartile position to ensure longev- ity and free cash flow from their core business so they can invest to adapt for the future. Such sites also need to secure the offtake of their liquid products in hard- to-decarbonise sectors whilst they make progress on decarbonising both their operations and their products. As James Cameron in his search for the Titanic said “Hope is not a strategy” so doing nothing is not an option. Prepare to be “Fit for 55” and the potential upside to regional oil demand if it arrives late.
n ed TO ADAPT The sheer scale of global oil demand, its ssoci ed ecosystem, and the typical long life of vehicles and industrial equip- ment result in a slow rate of change. The energy transition could potentially take decades to achieve. For refining in Europe, the consequence of the energy transition is that the industry needs to adapt. As local demand for refined prod- ucts is set to fall, the global market for xpo ts remains highly competitive, mak- ing refiners relatively sanguine given the long timescales involved. Covid-19 was a glimpse into the poten- tial future, given the recent collapse i demand for transport fuels, as national, ate, and l cal governments restricted mobility to slow the spread of the pan- demic. These restrictions have returned to some degree to slow the spread of the pandemic. European refinery uti- lisa ion fell b low 70% in Q2 2020 and has r overed slowly due to the over- hang of product stocks. By year end, we expect refinery utilisation to still be 10 percentage points down on the five-year average. Earlier this year, TOTAL’s chief execu- tive Patrick Pouyanne said refining mar- gins at such low utilisation levels are “utt rly catastrophic”. Our preliminary analysis indicates that over two-thirds of European refineries will be loss mak- ing this year. For those refiners, this is a stark message that if they fail to adapt,
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Integrated Re nery only
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Preliminary 2019 European net cash margin integrated vs r Source: Wood Mackenzie REM Chemicals
Become rst quartile integrated re nery/ petrochemical site
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