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Murky outlook for oil demand

The state of activity in the refining sector is an interesting barometer for the things to come in the crude sector. After all, we use products and not crude. And crude is converted into the required products by refineries. The rate of conversion thus remains a ‘good’ indicator of crude demand.

And today, the refining industry is not in the best of the shapes.

Several refiners and oil majors have announced permanent closures in the United States and Asia, while analysts believe that some high-cost refineries in Europe could also be shut down over the next few years as margins for processing crude into fuels are expected to remain depressed, Tsvetana Paraskova, said in a piece for oilprice.com.

Refiners face the ‘adapt-or-die’ scenario in the wake of the pandemic. Closures and consolidation will be the two major themes in the downstream going forward, analysts are underlining.

The list of closures is interesting enough. Global majors are taking a lead, apparently in view of the industry’s changing landscape.

Phillips 66 has just announced plans to shut down the Rodeo Carbon Plant and Santa Maria refining facility in Arroyo Grande, California, in 2023. Phillips 66 also plans to reconfigure its San Francisco Refinery in Rodeo, California, to produce renewable fuels.

Marathon Petroleum is reportedly idling the Gallup and Martinez refineries indefinitely and is evaluating the strategic repositioning of Martinez to a renewable diesel facility.

Shell is also planning to transform its Tabangao oil refinery in The Philippines into a full import terminal to optimise its asset portfolio.

According to Wood Mackenzie, nearly 10 per cent of high-cost refineries in Europe, or 1.4 million barrels per day of capacity, are in serious threat of closure in Europe alone over the next three years, Alan Gelder, Head of Downstream Oil, and Gerrit Venter of Corporate Analysis told the press, last month.

The industry is reacting to demand patterns which continue to stay gloomy. The Paris-based International Energy Agency has recently revised down its gasoline and jet fuel demand forecast for the rest of the year.

For the refining sector, the petrochemical industry was their next bet. Hardly a few years back, refinery and petrochemical integration was being discussed as the way out for the industry. Seeking alternatives, the oil sector looked at petrochemicals as the step to grow out of the slowing global crude consumption. They looked at petrochemicals to take the industry out of the quagmire they were in with the changing crude consumption pattern. The refining sector was expected to play a lead role in this portfolio transition. With demand for crude oil as fuel expected to decline under pressure from electric vehicles and other alternative fuels, petrochemicals were expected to become at some point the main profit-maker for refiners.

Not anymore.

Analysts are beginning to question Big Oil’s choice in relying on petrochemicals for growth in the coming years.

With the coronavirus crisis shocking every major industry, they are now questioning the economics and the long-term rationale of Big Oil’s ‘safety bet’ on petrochemicals, especially in view of the energy transition and continued drive toward reduced use of plastics in developed economies.

However, the pandemic has caused some majors to pause and defer investments in the petrochemical sector. Chevron Phillips Chemical Company (CPChem) — a joint venture between Chevron and Phillips 66 — has deferred the final investment decision for its US Gulf Coast project, it was announced in end-July.

BP has also announced divesting its global petrochemicals business to UK’s Ineos for US$5 billion as part of the next strategic step in BP’s metamorphosis, from an oil and gas company to an energy company that could compete in the energy transition.

Saudi Aramco though remains an exception in this scenario. It continues to eye chemicals and petrochemicals as a key focus area of development, as it aims to become “the world’s preeminent integrated energy and chemicals company.”

Mid-July, Aramco anno¬unced a downstream reorganisation. Abdulaziz M. Al Gudaimi, Aramco’s Senior Vice Presi¬dent of Aramco Downstream described the move as helping “streamline its operations and reinforce their position as a major global energy and petrochemicals player.”

Kathy Kathy Hipple, an analyst with the Institute for Energy Economics and Financial Analysis (IEEFA), while talking to CNBC termed petrochemicals “the last frontier for the oil and gas industry”. Yet, petrochemicals were “a poor bet” from the beginning, even before the coronavirus crisis, underlined Hipple.

The current state of the global refining industry is enough to underline; the demand for most of the products is declining and that the energy sector is past its peak.
Source: Dawn

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