Changes in the amount, location and composition of demand create multiple challenges for the refining industry

Changing global energy dynamics pose multiple challenges for the global refining industry. The main difficulty arises from the prospect of falling oil demand (a much more serious challenge for the refining industry than for the upstream), but the range of regional shifts in consumption and changes in the composition of oil demand in favour of lighter products such as ethane, LPG and naphtha also pose major challenges.

The share of these lighter products in total oil demand rises from just under 20% today to 23% in 2040 in the STEPS and to 30% in the SDS. This is underpinned by rising demand for oil products as feedstocks for petrochemicals. On the other side of the ledger, transport fuels – notably gasoline – face headwinds from the rise of alternative fuels and efficiency improvements. Demand for heavy fuel oil also registers a notable decline.

This poses critical questions for traditional refining business models.

Today, refiners typically earn most of their profit from selling road transport fuels such as gasoline and diesel. Prices for petrochemical feedstocks – the main sources of demand growth in both scenarios – often trend lower than crude oil prices.

Refiners are positioning themselves to meet these challenges by either processing growing volumes of lighter crude oils or deepening integration with petrochemical operations. Higher levels of integration would provide a hedge against a possible peak in demand for road transport fuels, bring operational synergies and enhance feedstock flexibility. There are even more ambitious schemes being pursued to bypass refining operations and produce chemicals directly from crude oil, which are likely to gain more traction in the case of accelerated energy transitions.

However, there is a risk that, in anticipation of weak oil demand growth in some sectors such as passenger transport, companies may overinvest in other sectors where sustained growth is expected, such as petrochemicals. Today, for example, many large oil companies have stated their intent to invest in petrochemicals, potentially creating an investment influx and capacity growth higher than the rate required by demand growth; this possibility is examined in Section III.

Yet another challenge comes from the refining industry itself. A wave of new refining investment is set to boost global capacity in the coming years. In the STEPS, some 15 mb/d of new capacity comes online between 2018 and 2040, primarily in developing economies in Asia and the Middle East – the regions benefiting from either advantaged feedstock or rising domestic demand. This would upend the traditional order of the global refining industry.

In the SDS, the reduction in oil demand intensifies the pressures across the industry, with only the most competitive assets set to thrive. Growing contributions from NGLs and biofuels-to-liquids demand create additional pressure. This report estimates that in this Scenario, more than 40% of today’s existing refineries would face the risk of lower utilisation or closure by 2040.