The International Energy Agency this week revised its forecast for gasoline and jet fuel for the rest of the year. In seemingly unrelated news, Philips 66 said it is turns a San Francisco refinery in a biodiversity plant. In separate news, Shell said it will permanently shake up a refinery in the Philippines. These news stories seem unrelated at first glance. A deeper look shows that they point to a changing sector. Refiners were among the segments of the oil and gas industry during the crisis. Normally they make 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 shook the demand for oil products and hence the margins of refiners.
Now, refiners need to change more than ever to survive.
Consolidation and closing: these were analysts expect would happen in the downstream sector as a result of the pandemic. It happens already. In addition to Shell, Marathon Petroleum earlier this month sei it would permanently drain two refineries with a combined capacity of more than 180,000 bpd of crude oil. More is likely to follow: despite a sharp drop in the demand for gasoline in many parts of the world, the demand for jet fuel has still recovered. This means that the revenue associated with selling jet fuel for another year or two, or possibly more, will not exist.
In this regard, the plan of Philips 66 is around close its Santa Maria refinery and transforming the Rodeo refinery into what it says will be the world’s largest sustainable biodiesel plant in the world makes perfect sense, especially when you add to the comparison increasingly stringent fuel standards, especially in California .
The state has plans to reduce carbon emissions from transportation by 20 percent over the 20 years of 2010 and 2030, the Wall Street Journal’s Rebecca Elliott wrote earlier this week. This provides a strong incentive for refiners to switch to biofuels, and this incentive is crucial for such transformation. In the wider national market, sustainable diesel, a fuel produced from various waste oils, and that’s what Philips 66 will make at the Rodeo refinery, accounts for only about 1 percent of total diesel sales. Yet California seems to be a lucrative market for it, as Marathon Petroleum and HollyFrontier also have innovative diesel plans for some of their refineries.
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But California is just a single market, one might note, not enough to drive the transformation of an entire sector. Just as this may be, it is also a growing biodiesel market. None other than Exxon recently signed up for a sustainable supply of diesel agreement with a company called Global Clean Energy Holdings, under which the supermajor will buy 2.5 million tons of renewed diesel every year from 2022 to sell on the California market and other markets. California may be a single market, but it happens to be the world’s largest market for sustainable diesel. And giving generous subsidies to biodiesel producers.
These developments suggest that the unusual effect of the pandemic on the oil and gas industry as a whole has prompted sector players to be aware of more nasty surprises and quick opportunities when they present themselves. At least, it has made some of them cautious and ready to act sooner rather than later. Although many believe that the worst is over now and the refrain of recovery time often plays over the headlines, all authorities that have 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 biodiversity plants, how are the refineries of the future likely to look after the pandemic? According to a Wood Mackenzie report from earlier this year, these will be complex facilities with a strong turn to petrochemicals. This is actually a continuation of an already existing trend: with demand for crude oil as fuel expected to decrease under pressure from EVs and other alternative fuels, it is expected by many that petrochemicals will one day become the main profit maker for refiners.
This future may not even be on the horizon yet, as EV sales make up only a small portion of total car sales, but the sector is preparing as governments step up their efforts to reduce emissions. These changing patterns of fuel demand, such as the pandemic, have an excess of sophistication. This excess will either need to be closed or repaid, as an analyst at Stratas Advisers told Bloomberg this week. There does not seem to be a third option, namely a strong recovery in oil demand and equally strong growth in this demand going forward. The imperative adjust-and-survive when refining says, “Convert or shut down your excess capacity”.
Demand for oil products, including petrol and diesel, will continue for a long time to come. Demand could even begin to grow from pre-pandemic levels at some point, depending on how the world treats the virus. But this is a dubious scenario. It would be safer to prepare for one that is much more likely: another army for longer, this time in fuels.
By Irina Slav for Oilprice.com
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