Wood Mackenzie: how the energy sector is changing

Oil demand takes a hit; demand from petrochemicals bucks trend

Global oil demand has been hit hard this year due to COVID-19 and changes in consumer behaviours.

Research Analyst Qiaoling Chen said: “In the long run, global GDP might not return to pre-crisis levels and this causes a permanent loss in jet fuel and diesel/gasoil demand through to 2040.

“However, the transport sector will remain a sustainable oil demand growth centre for at least another decade, particularly in developing economies in Asia Pacific, due to expansion of the middle class and relatively low penetration of electric vehicles. We estimate transport demand will decline by more than 7 million bpd this year, of which 62% is coming from the road segment.

“On the contrary, the petrochemicals sector shows resilience during the pandemic, with demand expected to increase by 1 million bpd this year, supported by capacity expansions in China. In the longer term, the petrochemical feedstock sector will take over as the leading growth sector globally.”

Integration with petrochemicals is way forward for refining industry

2020 was expected to be an outstanding year for the refining industry due to changes in the IMO’s bunker fuel quality requirements. However, COVID-19 instead turned it into one of the worst years in refining history.

Research Director Sushant Gupta said: “We expect 2020 refining margins to be the weakest in the last 20 - 25 years. Besides the shock from COVID-19, the refining industry is also facing more sustained challenges in the mid- to long-term as the world moves towards a lower carbon energy system.

“These include overcapacity, lower margins, refinery closures, a need to re-configure refineries to align with changing demand and the additional cost of refinery carbon emissions. Refinery closures will become a reality in Asia. For China, we estimate that about 1.2 million bpd of teapot refinery capacity to close. Outside China, about 2.2 million bpd or 18 refineries are at high risk of closure.

“Given all these challenges the only way to survive during this transition is to make sites more competitive and create a differentiation from peers. Integration with petrochemicals and upgrading will provide optionality to maximise margins. The real value-add comes in when a site moves towards a second-generation integrated site with over 45% chemicals output. The value-add ranges from US$7 - 10/bbl of crude oil on top of stand-alone refining margins. Such sites are extremely competitive and will be the last man standing in any low margin environment.”

Is gas clean enough?

As the energy transition accelerates, gas demand is set to rise with particularly strong growth from LNG. However, the LNG industry also faces competitive challenges in the new world. If LNG is to safeguard its position in the future energy mix, it must be carbon competitive.

A new ‘green’ LNG trend has emerged over the last 18 months or so, with six ‘carbon-neutral’ cargoes from Shell and Jera being delivered or agreed with Asian buyers, and one long-term supply tender has been announced by Pavilion. Despite these cargoes representing a very marginal share of the overall LNG market, these deals have caused a stir in the industry.

Principal Analyst Lucy Cullen said: “Full carbon-neutrality from wellhead to consumption is an ambitious goal for the entire LNG industry, but targeted reductions in upstream and liquefaction processes can still achieve sizable reductions. And this aligns well with greater pressure from corporate carbon targets.

“Whether emissions are controlled in the value chain or as part of the sale through offsets, all carbon reductions come at a cost. And ultimately this will result in greater differentiation between projects by buyers and investors - with green LNG either sold at a premium or ‘dirtier’ LNG being penalised.

“But if ‘green’ LNG is to become more mainstream, transparency and standardisation of emission measurements which does not exist today will be key. Now is the time for industry to work together to address this challenge.”

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/20102020/wood-mackenzie-how-the-energy-sector-is-changing/