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Up to 25% of global refining capacity at risk from decarbonization

Policymakers' attention to reducing global carbon emissions, along with shifting transportation preferences among consumers, could place up to 25% of global refining capacity at risk by 2035, analysts said.

According to its World Energy Outlook 2017, under which global temperatures are projected to increase between 2.5 and 3.0 degrees Celsius by the end of the century, the International Energy Agency expects global oil demand to remain robust through 2025.

However, if countries enact more aggressive policies to limit global temperature increases to 2 degrees by the end of the century, global oil demand could peak by 2020, according to the IEA.

Moody's Investors Service said in a Feb. 20 report based on the IEA's assumptions that aggressive policies aimed at reducing carbon emissions could render up to one-quarter of global refining capacity "unnecessary by 2035," while the IEA's baseline policy scenario could place 10% of global refining capacity at risk by 2025.

Moody's said the most at-risk assets are "lower-complexity refineries in the import-saturated European and US East Coast markets."

According to the report, refineries accounted for 3% of global C02 emissions in 2016, but those businesses face most pressure from efforts to curb CO2 emissions that occur downstream of the refining process.

"[It is] likely that future greenhouse-gas policy will focus on influencing fuel consumption through fuel-efficiency standards, electrification requirements, and the elimination of subsidies, among other means," the report said. "Carbon transition risks facing refiners include lower demand for refined products over time due to policy initiatives, vulnerability to changing consumer preferences and disruptive technological shocks, especially in the transportation sector."

U.S. refiners could find shelter from waning domestic demand in the export market.

S&P Global Ratings Director of U.S. energy infrastructure Michael Grande said in January, "The U.S. to me isn't going to be the first [region] to shut [refineries when refined product demand turns]. Europe is going to be the first one to shut. You have a lot of capacity in [the Asia-Pacific] and the Middle East. So does that mean the U.S. becomes a net exporter for these other areas?"

President Donald Trump has announced his intention to withdraw from the Paris Agreement on climate change, putting U.S. carbon policy into question, and U.S. refiners have recently talked up their efforts to grow exports into Latin America, a region that has been relying on imports due to low refinery utilization.

"Even if refinery utilization improves, we think that demand growth will outweigh that improvement in refinery utilization and we'll still see strong export demand into those regions," Valero Energy Corp.'s senior vice president of supply, international operations and system optimization, Gary Simmons, said during a Feb. 1 earnings call.

Even if transportation fuels produced for domestic consumption by U.S. refiners are not subject to carbon regulation, rule changes across borders could complicate business for U.S. refiners that seek to export their production.

"Refiners in more lightly regulated jurisdictions may generate higher operating margins, and the lack of consistent prices on carbon, or agreement about who pays, add to refiners' uncertainty, particularly for exporters," the report said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.