An assessment of the potential future scenarios and how they’ll impact refiners, from changes in product demand patterns to ever-more-stringent environmental regulations.

Over the last four decades, refiners have had to adjust to a relentless stream of changes in product demand patterns and ever-more-stringent environmental regulations. Making the adjustment takes time and requires a detailed assessment of the potential future scenarios.

Years ago saw that arrival of the unleaded gasoline mandate, followed by the introduction of oxygenates to gasoline. Next came the trend for ultra-low levels of sulphur in diesel. Over the last 10 years or so, the momentum in dieselisation, changing crude slate, and the need for tighter integration with petrochemicals have given refiners even more new things to think about.

Each time, refiners have displayed remarkable flexibility in reconfiguring their facilities and operating strategies. Now further challenges lie ahead. Two in particular will have a profound impact on refiners.

First is the International Maritime Organization’s (IMO) MARPOL 73/78 Annex VI (IMO 2020), in which the allowable sulphur content of marine bunker fuel will be dramatically reduced from 3.5 to 0.5 percent. Achieving full residue conversion is likely to be extraordinarily capital intensive if not wholly necessary, but cost-effectively reducing fuel oil exposure is always a good idea as it has a clear link with maintaining competitiveness.

Secondly, a global energy transition is underway. For instance, the industry is recognizing battery electric vehicles gaining consumer acceptance. Currently, about 50 percent of refinery output worldwide is directed towards road transportation fuels. As such these substantial moves towards electrification have significant potential to reduce demand for diesel and gasoline.

Disruption #1: IMO 2020

Although clean air concerns have driven the IMO 2020 legislation, it is not necessarily a compliance issue for refiners.

After 2020, ships that are not fitted with scrubbers will not be able to use high-sulphur fuel oil. However, that does not mean that refiners will not be able to find outlets for these ships, as about 50 percent of the current high-sulphur fuel oil market is not marine fuel so will not be affected by the IMO regulations. In addition, there will be a limited number of ships fitted with scrubbers that can process it. Alternatively, other refiners that have spare residue conversion capacity may take it, but at a price.

At Shell Catalysts & Technologies, we consider IMO 2020 to be a margin opportunity rather than a compliance issue. There are a variety of low-hanging options and technology solutions that can help refiners to take advantage of IMO 2020.

Disruption #2: The energy transition and changes in the mobility sector

It’s a fact that the world today needs more energy. However, as energy consumption increases, carbon dioxide emissions must decrease. As such, renewable energy and diversified supplies are key, including solar power, wind farms, and biofuels.

Additionally, politicians are currently under increasing pressure to improve air quality, particularly in urban areas. Some analysts argue that this factor now has a greater influence on transport policy decisions than the wider concerns about climate change.

But when could the arrival of new mobility options such as battery electric vehicles, which are an important and growing part of the transport mix, cause significant disruption for the refining industry?

The timeline is highly uncertain and there is a wide range of predictions. Shell’s view is that the internal combustion engine will continue to power most vehicles over the next couple of decades. The lack of sufficient charging infrastructure and electric engine and battery manufacturing capacity provide some reasons to anticipate a relatively slow pace of change globally, as does the current perceived high cost of the vehicles. The existing world fleet of passenger cars is also unlikely to be replaced through consumer choice alone unless there are incentives or penalties to encourage a switch.

The International Energy Agency believes that, even by 2040, only 7.5 percent of the two billion cars that will be on the road will be electric. This percentage does not include trucks, ships, and planes. It appears unlikely that any of these will be running on batteries at scale any time soon.

In the short-term, the world is going to continue to need gasoline, diesel, and jet fuel for some time. Furthermore, demand for petrochemicals remains robust and, of course, petrochemical facilities need refineries.

Alternative points of view

There are other points of view. For example, some suggest that as ride-hailing fleets adopt increasingly affordable electric car technology and self-driving technology becomes more common, global demand for oil will start dropping in as little as three or four years from now. In this extreme scenario, it is predicted that some 95 percent of people will not own a private car by 2030.

Although Shell expects a relatively orderly transition that would give refineries a couple of decades of relatively slow-changing demand patterns, it does not have all the answers. There are other possible, credible futures to which refiners should remain open.

Consequently, we have invited David Hampton, an independent strategy consultant with particular experience in energy, to provide an external view on how the energy transition could affect the refining and petrochemical sectors over the next 10–15 years, and beyond.

Response options

Nearly all refineries have untapped potential. With legacy technologies generating suboptimal yields or that have poor reliability often have the potential to improve. However, pacesetting refineries can still achieve higher margins with smart investments.

Many refiners will be able to adjust their operations to meet the dynamics of future markets better without major capital expenditure. Latest generation catalysts will be key and many promising opportunities centre around revamps, so this issue also explores some of the latest thinking, and technology developments, for revamping some of the principal technology blocks.

IMO 2020 and the energy transition could both have a major impact on an ill-equipped refiner’s profitability. As with the changes that the industry has overcome over the years, from unleaded gasoline to dieselisation, businesses will need to rise to the challenge again.

We hope the following articles will provide insights to help you to do that:

• Minimising the amount of bottoms sent to the bunker fuel pool by integrating an existing visbreaker with the vacuum distillation unit (VDU), solvent deasphalting (SDA) unit and hydrocracking unit (HCU) or fluidised catalytic cracker
• How innovation in FCC Feed nozzle technology can help in responding to the bunker fuels challenge
  
• Turning IMO 2020 to your advantage with the SCOT ULTRA process

Key takeaways

• IMO 2020 is on the horizon, the global energy transition is underway, renewables are on the rise and electric cars are an important and growing part of the transport mix.
• Refiners that develop the best responses can optimise the opportunity to enjoy a sustainable and profitable future.
• There are many bottom-of-the-barrel upgrading options to choose from, but there is no one-size-fits-all solution.
  
• Revamps, applying state-of-the-art catalysts and thermal conversion technologies are likely to provide compelling responses, especially as they can require less capital expenditure than other options.