ERTC 2024
Back to the future? Where next for refining?
ALAN GELDER wood mackenzie
Global refining margins defied geopolitical ten- sions that drove their elevated status through 2022 and 2023, collaps- ing to below five-year his- torical averages by the
Refiners need to plan now to adapt and determine which energy transition pathway yields a competitive advantage for the future strategic drivers of earnings (net cash mar- gin, NCM) and carbon emissions. Refinery owners will respond to the relative position of their sites compared to peers and quad- rant position, as shown in Figure 2 . Key risks and uncertainties There are many risks and uncertainties with any outlook. Aside from geopolitical events, growing demand for refined prod- ucts is pivotal to improving the sector’s health. Hence, the strength of the econ- omy is key, as is the penetration rate of alternatives such as electric vehicles. Refining relies upon efficient inter- regional trade, so trade barriers/restric- tions (increasingly in vogue politically) distort competitive positions and regional utilisation levels. This could introduce regional winners and losers, but trade bar- riers generally lower GDP levels, which hurts the sector overall. Liquid biofuels remain uncompetitive without some form of support, so govern- ment policy remains a key risk. However, the ‘old ways’ of value chain integration based on a secure supply of advantaged feedstocks is critical for initial success. Refiners need to plan now to adapt and determine which energy transition path- way yields a competitive advantage for the future, which is likely to be site-specific.
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end of Q1 2024. They now appear to be stuck at floor levels, as shown in Figure 1 .
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Back to the future? Has the refining sector come full circle to pre-pandemic concerns of over-supply and the looming threat of rationalisation? The refining sector is, by nature, highly competitive, as it sits between the global commodity markets of crude oil and refined products. The oil/refined products supply chain is highly adaptable, so despite the ongoing geopolitical tensions, current weak refining margins reflect surpluses that have appeared as: • Oil demand is at record levels, but 2024 annual growth has been downgraded as the year progressed, particularly for the US and China. Crude oil prices have weakened, dragging refining margins lower. • OPEC+ is restraining oil production to retain balance in the oil market, which held light/heavy crude price differentials narrow, reducing the value of refinery complexity. • Refining capacity additions have out- paced demand growth, and these projects are now largely operational or in the latter stages of commissioning. • Freight rates have fallen, not through the easing of the Red Sea disruption, but from cleaning crude tankers so they can move diesel/gas oil cargoes in very large parcel sizes. OPEC+ production restraint has ena- bled this optionality, with the freight rate reduction lowering the support for refining margins from prior trade inefficiencies. • Even liquid biofuels facilities are suffer- ing low utilisation from over-capacity, most evident from low Renewable Identification Numbers (RIN)/certificate prices. Where next? We do not consider the outlook for refining
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Figure 1 Weekly global composite gross refining margins (2 Sept 2024)
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Figure 2 Individual refinery NCM vs Scope 1 and 2 emissions intensity ranking (2023)
to be quite so bleak. Several factors are set to improve, notably: • The surge in refinery capacity additions is largely complete, and demand for refined products is projected to continue growing until the early 2030s. This should improve overall refinery utilisation and lift margins from 2025/2026 onwards as demand growth outpaces capacity additions. • This growing pull on oil will be increasingly satisfied by medium/sour volumes, reward- ing refiners that have invested in complexity. • Petrochemical margins have been weak
due to the significant capacity overbuild in China over recent years, which has low- ered the value uplift from petrochemical integration. As this capacity overhang is eroded, in conjunction with the rationali- sation of weak standalone steam crackers, petrochemicals will return to adding value to integrated sites. • Growing decarbonisation of ‘hard-to- abate’ sectors requires additional volumes of liquid biofuels. We envisage a refining sector increas- ingly focused on being competitive in both
Contact: alan.gelder@woodmac.com
November 2024 Decarbonisati n Technolo gy Powering the Transition to Sustainable Fuels & Energy
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Powering the transition to sustainable fuels and energy
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