Most refineries that shut in 2020 may only reopen as terminals, renewable plants
Expectations for a slow post-pandemic fuel demand recovery, which already shut down two million barrels per day of refining capacity in 2020, will limit owners options in the future.
Demand erosion in 2020 for products like jet fuel, coupled with a weak outlook, means many closed refineries won’t go back to running crude, said Joseph Israel, president and CEO of Par Petroleum.
“If you look at the recent months, the refinery closure list is pretty long, about two million barrels per day around the world,” Israel said during a Reuters Events Downstream conference in November.
Surviving refineries need to have a built-in flexibility to change the yield to maximize products that still have demand. The built-in flexibility also means capacity to run different grades of crude, he said.
“Some refineries are not fortunate to have this flexibility,” Israel said.
Some refinery owners “don’t have the balance sheet to hold and wait for better days,” he added.
Par Pacific, which owns Par Petroleum, lists in its website 208,000 barrels per day (bpd) refining capacity in plants in Hawaii as well as in the Rockies and the Pacific Northwest. Its New York-listed shares traded in mid-November at less than half of where they were a year ago.
Post-Covid three-year demand outlook
Total world crude oil demand was about 100 million bpd in 2019, roughly aligned with supply. The expectation at the time was for demand to grow along with increased economic activity.
Before Covid-19, the projected world demand growth was for a 6 million bpd increase in 3 years. Then demand for oil dropped by 20 million bpd in the month of April or about 20% of the total, he added.
Many refineries had no option but to idle, he said.
Some of these refineries that shut down in 2020 “will become terminals, some of them will become renewable diesel or biofuel plants,” Israel added.
Covid and oil demand took divergent directions in mid-2020
Since the start of the pandemic, statistics related to Covid-19 hospitalizations in the world “only got worse month by month,” Israel said.
Until the second quarter, oil demand deteriorated along with the intensification of the pandemic.
However, since about mid-year “oil demand took the other direction, and improved month by month” even as the pandemic continued to intensify, he added.
“So in September-October we’re already back to 95% of pre-Covid numbers.” Nevertheless, the consensus for the oil demand loss in 2020 is likely to be about 8.5 million bpd worldwide, he added.
Changing demand profile
In 2020, “emerging economies lost 3.3 million bpd and you can see the U.S., Europe and all the industrialized countries with the same dynamic,” he said.
The 2020 loss also included “3 million bpd of gasoline demand, 3 million bpd of jet fuel demand, and 1.7 million bpd of diesel demand,” he said.
Early in the pandemic, as lockdowns were imposed, “gasoline got hurt the most and then from that point the recovery was the fastest,” he added.
As for diesel, it has felt an impact correlated with economic growth.
“The jet fuel loss this is definitely by far the worst impact and also the most consistent,” he added.
Pre-Covid there were 110,000 to 125,000 flights per day with that dropping to only 35,000 in the spring,” he said. It has only recovered to about 60,000 to 65,000, with international flights hit the most, he said.
Market oversupplied despite cuts
“So if you are an oil producer and you see 8.5 million bpd of demand evaporating you have to do something,” Israel said.
“OPEC countries are expected to reduce oil production in 2020 by 3.8 million bpd and non-OPEC is expected to cut 3.1 million bpd so 6.9 million bpd of the oil, almost 7 million bpd compared to the 8.5 million bpd demand loss,” he added.
“We are still 1.6 million bpd per day oversupplied,” he added.
“Expectations in the market are that OPEC plus is about to do something,” he said.
Another factor that threatens to worsen the oversupply is the return of significant production in Libya that did not exist last year, about 800,000 barrels per day, he added.
“We do have a weak economy globally, we have uncertainty, and all being very bearish, it’s a recipe for a very weak oil market,” Israel added.
“After the spring we had the price stabilize around $40 per barrel. This is low and the trend is even lower,” he added.
Margins extremely low, lower utilization rates
“Demand dominates refining margins and margins are extremely low in Europe, Asia, and U.S.,” Israel said.
“If you are a refiner, and this is your margin and demand environment, you are going to hit the brakes,” he added.
“In the U.S. the historical utilization rates have been 85% to 95% utilized capacity. In 2020 70% up to 80% down and back again to the mid-70s, really struggling to go beyond that,” he said.
Around the world, the “same dynamics” are playing.
China is the only economy that managed to return to growth. Third quarter figures showed its GDP is back in the green for China. But the U.S. and Europe are still struggling behind, he added.
Changes in the product mix
The other element “is really the product mix or what we call the yields,” Israel said.
“When jet fuel isn’t needed, or isn’t needed like in the past, and when gasoline was not needed in the spring, refineries needed to do something in their process, in their crude selection,” Israel said.
“If you are a refiner, you want to drop jet to diesel. To help eliminating this extra jet production, you want to maximize gasoline vs. jet fuel,” he added.
“And then you probably want to blend down the sulfur in your fuel oil mix down to LSFO (Low Sulfur Fuel Oil) . This is for power generation or bunkering,” he added.
“As you do that, you change your crude selection, you go up and down on units, accordingly, and you just continue to monitor this demand profile” daily, he added.
Another aspect changed is storage. The future oil market is still in contango, though not as much as in the spring. All oil storage capacity is being used, including offshore, he said.
The one certainty is that 2021 is likely to be volatile
“We’ll need to continue to minimize our cost structure to hang in there, to stay visible, to stay profitable, maybe,” Isreael added.
By Renzo Pipoli