Time to turnaround
Global oil demand will undergo significant disruptive changes over the next decade and refiners will need to invest and adapt to remain competitive
The refining industry has shown itself to be adept and flexible in the past, reacting to and overcoming whatever market conditions it confronts. The last few decades have brought remarkable changes operationally as the industry has striven to cut costs and remain profitable, while at the same time investing in increased complexity.
There have been periods of upheaval as weaker operations were closed and as new entrants came into the business. Indeed, larger multinational refiners closed or sold facilities and in turn helped create quite large independent refining businesses. Companies have tended to exhibit more operational flexibility, with a focus on meeting market needs, while at the same time complying with ever more restrictive government regulations on product quality and other requirements, all of which necessitated significant stay-in- business capital investment.
Each year has seen its challenges and the response has, in most cases, varied regionally. The US has become a major supplier of refined products to Latin America and other parts of the world thanks to its aggressive competitiveness, which has been reinforced by its access to increasingly low-cost feedstocks, low energy costs and high complexity – often integrated with petrochemical units. Europe, faced with dwindling local demand, has become a key gasoline supplier to the US, Latin America and Africa. China has overbuilt its refining system, while continuing to battle from high energy costs and a lack of indigenous feedstocks, leaving it with excess volumes for export.
Refiners have seen demand continually increase at a global level, although some sectors such as residential and industrial and a few regions such as Europe, Japan and Australia have seen rather consistent periods of decline or flat growth since the start of the century. Between 1990 and 2009, global refined products demand rose nearly 19.7 million b/d, largely in terms of distillates and gasoline.
Petrochemical feedstocks demand grew faster, but the additional volume was just a fraction of that required for transport fuels at 3.8 million b/d.
The pace of change was even more rapid over the following decade, with consumption of the key transportation fuels jumping an additional 8.6 million b/d.
Petrochemical feedstock demand surpassed even that, rising by over 3% a year or about 3.6 million b/d, and the sector’s share of overall oil demand rose to nearly 13% in 2019 from roughly 7% in 1990.
“Technological Technological advancements in electric mobility, efficiency improvements in almost all oil sectors and regulatory tightening in CO2 emissions will create the perfect storm, which will significantly slow the pace of oil demand growth starting in 2025-2030. But it’s too early to call for a plateau”
— Claudio Galimberti, S&P Global Platts Analytics
This will help set the future direction for the industry as petrochemical feedstock demand growth will continue to outpace that of transportation fuels, as well as other refined products.
In response to such developments a number of refiners have been gearing and will continue to gear their refinery configurations toward the production of more petrochemicals, turning crude into chemicals, rather than traditional refined products.
The change is already underway, as the refining industry demonstrates its ability to successfully adapt to a changing market environment, even though another challenge looms large: natural gas liquids’ relentless growth, primarily from US shale formations, produced from y-grades fractionation, which bypasses the refining system and accordingly reduces crude demand and refining utilization.
Evolving product demand
World oil product demand has now reached 102 million b/d, after growing by an average of nearly 1.6 million b/d per year since 2009. The pace of the increase has, of course, varied by year and across regions. In 2010, the traditional Organization for Economic Co-operation and Development nations represented about 40.7 million b/d of oil demand, around 45% of the world total. By 2019, the share of oil consumption for the major industrialized nations dropped to just around 40%. More importantly, the growth in demand in the OECD nations over that period only amounted to around 1 million b/d, while the rest of the world saw a gain of 14.6 million b/d. Almost all of that occurred in the non-OECD Asia.
Technological advancements in electric mobility, efficiency improvements in almost all oil sectors and regulatory tightening in CO2 emissions will create the perfect storm, which will significantly slow the pace of oil demand growth starting in 2025- 2030. But it’s too early to call for a plateau. Demand is expected to increase to around 114 million b/d by 2030 or just around 1% a year. The fastest growth is expected to occur in petrochemical feedstocks demand, which leads to new types of chemical refineries.
The other significant growth will occur in the transportation sector, albeit at a far slower pace. Gasoline demand is set to slow in US, although it continues to grow in non-OECD countries for at least the next 10-15 years. Diesel demand will be robust for the next two decades globally as there appear to be little threat from fuel substitution in heavy-duty freight, a major source of transportation diesel demand. Jet fuel demand is projected to be strong due to a lack of fuel substitutes and strong underlying growth in consumption of air transport, fueled by the swelling middle classes in emerging markets. It is noteworthy that transportation fuels account for over 50% of overall oil product demand, with much of the regulatory environmental pressure continuing to focus on this sector.
Non-OECD Asia represented around 30% of overall demand in 2019, which is expected to grow to an estimated 34% by 2030. Additional key growth areas include Latin America and the Middle East. On the other hand, Europe, Japan, Australia and potentially some regions in the US such as the West Coast will see demand declines, due to a combination of heavier regulation of fossil fuels and changing consumer preferences favoring alternative fuels. China is likely to see vigorous growth until the 2030s, when a combination of slowing economic growth, a decline in the working age population and growth in alternative powertrains could begin to dent oil demand. However, India and Africa are likely to see continuous oil demand growth well into the 2040s due to the underlying population trend and still huge economic development potential to be fulfilled in the decades to come.
On the working age population and growth in alternative powertrains could begin to dent oil demand. However, India and Africa are likely to see continuous oil demand growth well into the 2040s due to the underlying population trend and still huge economic development potential to be fulfilled in the decades to come.
As the product, regional mix and growth rates change, refiners will adapt their systems to meet the requirements.
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