Demand doubts, energy transition impede outlook for refining sector: IEA

London — Refineries will have to find a way to navigate both the move to decarbonization and the demand uncertainties brought on by the pandemic, the International Energy Agency said March 17.

In its latest medium-term oil report Oil 2021, IEA said "successfully managing the energy transition" will be the most important challenge for refiners in the coming years.

The report also said that the outlook for the refining sector is grim despite a modest rise in oil demand as chronic overcapacity is likely to persist.

Refiners will have to evolve as dominance of transport fuels ends and make way for the energy transition and an increasing reliance on petrochemicals.

The coronavirus pandemic offered a glimpse of the future, "when clean energy transitions are expected to dramatically affect transport fuel demand, and petrochemicals become the only growing, or stable, oil demand segment," the IEA said.

Global oil demand, including biofuels, will recover to reach 104.1 million b/d in 2026, up from 91 million b/d in 2020, according to IEA's forecasts.

But a third of oil demand growth in this period will be met by products bypassing the refining sector, such as NGLs and biofuels, which will prolong the crisis for many refiners.

Refineries will have to diversify into producing renewable diesel, green hydrogen, and chemical recycling products to navigate the energy transition.

Future prospects

Refiners will have to focus on petrochemical integration to offset declines in transport fuels.

Petrochemicals will continue to lead demand growth, with ethane, LPG and naphtha together accounting for 70% of the increase in oil product demand to 2026.

Refineries will also need to make important strategic decisions as the path to decarbonization will offer not only challenges but also opportunities.

The market for traditional refined products will shrink replaced by biofuels and other low carbon options.

More and more refineries, especially in the West, are already moving away from traditional oil refining and refocusing their business on producing cleaner fuels like renewable diesel, sustainable aviation fuel, biofuels and feedstock for polymers and chemicals.

Around 345, 000 b/d of refining capacity has already been converted to biorefineries and there are plans for 840,000 b/d to come online through to 2026, the report said. These figures do not include co-processing of renewable feedstock in conventional refinery units together with oil.

Global biofuels supply is expected to reach 3.3 million b/d by 2026 from 2.6 million b/d last year, according to the IEA.

Refiners also need to find ways to reduce the carbon intensity of their production activities.

Refining is the largest hydrogen-consuming sector, and many refineries are already building hydrogen electrolysis plants to reduce their carbon footprint.

Around 200 MW of electrolysis projects, associated with refineries, are expected to come online in Europe by 2026, according to the IEA.

"Another 1,100 MW worth of projects have not reached FID stage yet, but may come online in the same timeframe if favorable policies are adopted," it added.

Third wave of closures

The sector is currently experiencing a third wave of refinery rationalization. Global shutdowns of 3.6 million b/d have already been announced, but a total of at least 6 million b/d will be needed to allow utilization rates to return to above 80%, according to the IEA.

The IEA expects 8.5 million b/d of new refining capacity to come online from 2020 through to 2026, the bulk of which will be in China, the Middle East and India.

The pandemic thwarted the refining sector dragging refining margins down to the lowest in at least three decades as high-value oil products such as diesel, jet fuel and gasoline were at times trading below crude.

Refining activity fell almost 10% to 74.4 million b/d in 2020, a level last seen in 2010. This contraction was driven by the downward shift in transport fuel consumption trends.

The refining sector, which has a current capacity of 102 million b/d, is already struggling with excess capacity, and shutdowns are likely to gather pace.

"With 3.6 million b/d of announced refinery closures, net additions will amount to 4.9 million b/d, similar to net capacity growth in the last seven years, but almost double the forecast growth in demand for refined products," the report said.

Gasoline demand may have already peaked, according to the IEA, as efficiency gains and the shift to electric vehicles offsets mobility growth in emerging and developing economies.

Jet fuel demand will surpass 2019 levels of 7.9 million b/d only in 2024, the report showed.

Travel restrictions, changing travel habits, and the relatively slow progress of COVID-19 vaccinations in low-income economies will slow the recovery of the aviation sector, which was the hardest hit by the pandemic.