Refiners should expect the unexpected
Trend spotting is easier said than done in the refining sector
Refiners will need to be nimble to survive in a world of reduced demand for fossil fuels from the transport sector and those plans need to be put in motion now if they are to survive.
Mol is a case in point. Around 70% of the company's output from its refineries in Hungary, Croatia and Slovakia, which mainly serve central European markets, is refined products for the transport sector. By 2030, the company plans to increase its non-fuel production, largely targeting the petrochemicals industry, to 50% of total output, compared with the current 30%.
"This does not mean we will destroy our capability to produce diesel and gasoline [if margins stay high]," says Ferenc Horvath, head of the company's downstream operations. "We want the flexibility to go in new directions—we would just create new opportunities."
This is a trend seen across the industry. Flexibility to change output is key in a sector where demand patterns alter rapidly in the short-term, let alone the long term.
One shift that refiners are preparing for is an imminent contraction in the fuel oil market. Historically, this is a product that refiners would rather not turn out because it makes little money, but the removal of a chunk of heavier crudes from the market thanks to Opec's cuts has led to reduced fuel oil output. At the same time, demand has been on the rise, with the result that fuel oil crack spreads have widened.
But a product in heavy demand in 2017 will be facing restrictions from 2020, when new cleaner bunker-fuel specifications are introduced in the shipping sector, the main market for fuel oil, reducing permissible levels of sulphur in the product. Wood Mackenzie forecasts around 1m barrels a day of demand will switch from high sulphur fuel oil to relatively clean gasoil.
Refiners also have to contend with less-easy-to forecast trends. For example, those hoping to make inroads into the petrochemicals market by producing naphtha and propane have seen a slice of demand removed by US tight oil production, which, as a by-product, produces ethane that can be used instead. This ethane doesn't need to pass through a refinery, so demand met by US ethane is lost to the refining sector.
Initially, most of this ethane, which is difficult to transport, was used in the US. But the development of export facilities means that ethane is now starting to displace refinery-produced naphtha and propane in other regions too.
And, then there is the rate at which electric vehicles will displace internal combustion engines in the global car fleet. The company that can forecast that trend accurately could end up as the last refiner standing.
Another structural change has been in refinery ownership itself. "In the beginning, we had the international oil companies and the national oil companies, but now you see the traders buying," says Tommy Mars, managing director for Europe, Middle East and Africa at consultancy Opportune.
Big names such as Shell and ExxonMobil have sold off their less profitable refineries, to be replaced by more downstream-focused firms, such as Russian oil trader Gunvor, which has bought three European refineries in recent years in Rotterdam, Antwerp and Ingolstadt with a total capacity of some 300,000 b/d.
This article is part of a report series on Global Refining. Next article is: Refining's big expansion