The energy transition, particularly the shift to electric vehicles, threatens to undermine demand for transportation fuels within a decade or sooner.
Oil companies and refiners are already grappling with weak refining margins and the threat of overcapacity amid uncertainty over the global economic outlook. From 2020, the IMO's new regulatory changes and environmental requirements will affect demand for key products.
How will refiners adapt to survive? We've identified 5 main strategies as companies strive to remain competitive.
1. High grade and selectively invest
International oil companies have moved to strengthen and streamline their portfolios, divesting standalone facilities to focus on the most efficient and profitable assets. Recently, oil majors have started to make selective investments to upgrade key refining assets, to protect their position in a ‘last man standing’ scenario.
2. Embrace alternative opportunities
While demand for transportation fuels declines, the market for plastics is positive, supported by improving living standards and population trends. Petrochemicals are a means for long-term oil demand growth and the oil industry is investing heavily in the crude to chemicals value chain.
Additionally, jet fuel demand is forecast to continue to grow over the long term, given the challenges of replacing it as the fuel for long distance aviation. Refiners with access to advantaged logistic connections to airports will have opportunities to take advantage of this demand.
3. Go green with biofuels
Refiners across Europe are converting weaker refining assets into bio-refineries. This helps to improve environmental sustainability and satisfies demand for cleaner fuels.
4. Secure offtake
Both BP and TOTAL are investing in the expansion of their fuels marketing activities in key demand growth areas, allowing vertical integration with their refining operations elsewhere and providing a long-term outlet for their refinery supplies.
5. Invest in technology
For years, refineries have been digitalising processes in efforts to reduce expenses, boost margins and stay ahead of the competition. This has put the industry in a position to take advantage of some of the latest advances in the technology space.
Out of these 5 strategies, can we pick the winners?
That depends. Geography and size will play a role: it’s likely that smaller refiners in oversupplied OECD markets will struggle the most. Those that can adapt – typically the bigger players – are likely to fare much better.
What happens if the energy transition accelerates?
However, all bets are off if the energy transition is faster than expected.
Under a faster energy transition, existing and viable technology trends accelerate, steering policy to shape far faster cuts to carbon emissions than what is expected under current pledges.
The adoption of electric vehicles and the switch to cleaner fuels could take a big chunk out of oil demand.
For refiners, this drop in demand means extensive capacity rationalisation. Only the fittest will survive.