The theme for this year’s AFPM Operations & Process Technology Summit, which recently took place in San Antonio, Texas, was ‘Maximising your molecular advantage: practical solutions for today, forethought for tomorrow.’ The AFPM’s President and CEO, Chet Thompson, explained that the theme was all about creating efficiencies within operations that can lead to greater profitability as well as an ability to respond to changing circumstances within the industry.
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It is certainly true that our industry is undergoing significant changes, as could be seen throughout the conference presentations, which covered topics including cybersecurity, digital transformation, and the renaissance of investment in the US petrochemicals industry.
A recent report from McKinsey & Co. also speaks to the changes that the downstream sector is undergoing. In its ‘Global Downstream Outlook to 2035’, the management consulting firm forecasts that oil demand growth will slow to 0.5% per year between now and 2035.1 Demand for road transport is expected to peak by 2026, with demand for oil overall reaching its highest point by 2032. Meanwhile, petrochemicals will continue to see demand growth, alongside those sectors with poor fuel substitutes, such as aviation.2
McKinsey suggests that the pace of change will vary by region, with Europe and North America witnessing a 0.3% per year fall in demand for liquids from 2018 to 2035. However, developing regions such as Asia, Africa and Latin America are expected to see some growth across most fuels, particularly LPG, naphtha and transport fuels.
Despite the weakening outlook for global demand, McKinsey forecasts a 1.3% per year growth in distillation capacity up to 2023, largely as a result of greenfield additions in Asia and the Middle East. Ultimately, this will result in an increase in global overcapacity as well as a decline in utilisation. While IMO 2020 will result in a short-term boost in utilisation as refineries work to supply low-sulfur diesel, McKinsey expects this to be offset by 2022 as refineries increase the supply of low-sulfur residual fuel oil and shippers invest in installing scrubbers. This is likely to have the greatest impact on Europe, with utilisation experiencing a fall from 83% in 2020 to 67% in 2023, resulting in capacity rationalisation. However, refineries on the US Gulf Coast are likely to fare better, with only a slight fall in utilisation from 86% in 2020 to 84% in 2023, while utilisation in Asia is likely to rise beyond 80% by 2025, and up to 85% by the early 2030s.
Despite the challenges that lie ahead, McKinsey & Co. remains upbeat about the future of the refining sector, and suggests a number of themes that will likely prove essential for refiners looking to develop a long-term strategy to thrive. Emily Billing, a Consultant in McKinsey’s Houston office, and Tim Fitzgibbon, Senior Expert, explain: “First, more efficient assets can be restructured to shift refiners to the left-hand side of the cost curve. Second, refiners with marginal assets should be looking out for the best approach and timing for exit. Third, any new projects should be evaluated based on realistic views on short and long-term market conditions and project economics. Fourth, as lengthening supply chains create a need for investment in logistics capacity, some players may see opportunities to diversify their assets or offerings. Finally, investors should be looking for opportunities in the margin cycle to acquire assets at a bargain price.”2
- ‘Global Downstream Outlook to 2035’, McKinsey & Co., (July 2019).
- BILLING, E., and FITZGIBBON, T., ‘Global refining: profiting in downstream downturn’, McKinsey & Co., (September 2019).