Decarbonisation Technology - November 2021

Site emissions become a new metric for competitiveness

Sitesmust be competitively strong and lowemissions to be sustainable as these provide cashflow to support both investment and returns to investors

Alan Gelder Wood Mackenzie

Global oil demand growth is to stall then demand is to fall The energy transition is under way, with the global community increasingly focused on reducing greenhouse gas emissions. Recent policies, such as the EU’s Fit for 55 proposal, are increasingly focused on decarbonising key sectors of the economy, reducing the demand for refined products. Compared to Wood Mackenzie’s base case outlook, such proposals are a downside risk in the mid-2030s and beyond. In the near term, global oil demand is recovering from the pandemic and we are expecting global oil demand to exceed 2019 levels in Q3 2022. Despite 2017 being the peak in global sales of internal combustion engine passenger cars, growing global populations, rising urbanisation, and increasing economic activity continue to drive oil demand higher, with our energy transition scenario projecting oil demand to peak at near 108 million b/d in the mid-2030s. The outlook for the refining sector is one of muted recovery. Despite recent capacity rationalisation, new sources of supply outpace demand growth. Refinery utilisations and margins will improve, but not repeat recent highs. Once global oil demand has peaked, the refining sector faces sustained capacity rationalisation. The refining outlook is not totally bleak, as the demand for petrochemicals is expected to grow through to 2050, supporting greater integration as a way of capturing volume and value growth. The refining sector is challenged by the energy transition as demand for its traditional products is set to fall. Growth opportunities lie in petrochemicals and low carbon liquid fuels (either

biofuels or synthetic e-fuels), both of which are core competencies of refiners, who safely operate large-scale continuous chemical transformation processes. While evolving their product mix, refiners also need to decarbonise operations. Emissions reduction is key to achieve our net-zero ambitions Refining is an energy-intensive sector and its emissions account for around 3% of global energy sector CO 2 emissions. Around 80% of these refinery emissions are from fuel combustion to support chemical transformation and treating reactions. Emissions are very site specific, but in general the more sophisticated the refinery (as measured by Nelson Complexity), the higher the carbon emissions, as the greater the chemical transformation of low value products into transport fuels and petrochemical feedstocks. Wood Mackenzie analysis shows refinery emissions are, however, poorly correlated with site profitability, as complexity is only one of the key drivers of site net cash margin. Location, scale, and crude diet are other key drivers of site profitability. At present, only Singapore and Europe impose a carbon charge on the emissions from their refiners. European refiners are exposed to a carbon charge of over €50 per tonne as of September 2021. This has a material adverse effect on their profitability as there are no similar charges imposed on imports of refined products from other regions, so they are currently unable to pass on those costs. European refiners do enjoy the benefit of free allowances to reflect the emissions of the most efficient process