Published on November 2nd, 2017 | by Joshua S Hill0
Shifting Tides Could Strand 25% Of Global Oil Refining Capacity By 2035
November 2nd, 2017 by Joshua S Hill
A quarter of all global refining capacity could be stranded and forced to close by 2035 if demand continues to fall and climate regulations and rapid clean technology advances continue to impose themselves, according to a new report published this week by Carbon Tracker.
The London-based think-tank Carbon Tracker this week published Margin Call: Refining Capacity in a 2°C World, a new report which investigates the impact on oil demand made by limiting the rise in global warming by 2035 to 2°C — referred to by Carbon Tracker as their “2D” scenario. Carbon Tracker analyzed 492 oil refineries which together represent 94% of global capacity in what the think-tank believes is the world’s first analysis of how the oil industry will fare “in meeting a transition pathway aligned with international objectives to limit climate change to 2°C based on clean and revolutionary technology.” The report is based on the International Energy Agency’s (IEA) 450 scenario, which expects oil demand to peak in 2020 before declining by 23% over the next 15 years (ie, by 2035).
“A 2°C pathway sees oil demand peaking followed by major rationalisation in the global refining industry,” said Andrew Grant, senior analyst at Carbon Tracker who co-authored the report. “Many players will exit the market rather than haemorrhage cash. Investors should beware that the risk of wasting capital extends to all new investments, including expansions or upgrades to existing facilities.”
Carbon Tracker concludes that under a 2D scenario the oil industry will experience “major rationalisation” (defined by Investopedia as “a reorganization of a company in order to increase its efficiency”) and lead to “many players exiting the market rather than haemorrhaging cash.” Specifically, Carbon Tracker predicts rationalization equivalent to 25% of 2016 capacity, requiring a net 14.1 million barrels of oil per day (mmbbl/d) of throughput must be rationalized by 2035.
2017-2035 rationalization in the 2D scenario
In total, the report concludes that, in order to maintain a 75% utilization rate, there must be a global reduction of 19.6 mmbbl/d net capacity, and allowing for new capacity this means a total of “24.7 mmbbl/d of the 2016 refining stock that would need to be closed — approximately a quarter of existing capacity.”
“The consequences of achieving a 2˚C world are far more detrimental to the refining sector than the upstream sector, as it results in structural over-capacity and associated poor refining margin environment, which can only be addressed by sustained capacity rationalisation,” explained Alan Gelder, Wood Mackenzie Vice President Research.
Action taken to address these implications, however, are not overly likely, considering that the oil industry expects demand for its product to continue to grow steadily through to 2035 — led by transport fuels such as diesel, gasoline, and jet fuel, which accounts for 70% of industry refinery probability. This is even more problematic because transport fuels are the most profitable, but are similarly the most at risk due to the rate of technological change in road transport.
If action is not taken, therefore, companies like Total and Eni — whose refineries, like all oil majors, account for a quarter of their assets on the balance sheet — are the most exposed and are risking 70% to 80% falls in earnings from their refineries by 2035 as demand falls compared to their own predictions. Oil majors like Shell and Chevron risk a 60% to 70% fall, while ExxonMobil and BP risk a 40% to 50% fall. In total, EBITDA (earnings before interest, tax, depreciation and amortization) for all the refineries measured in Carbon Tracker’s analysis (94% of 2015 global capacity) could fall by more than 50% by 2035 from an estimated $147 billion in 2015.