Bryan Glover
UOP LLC, A Honeywell Co.
Des Plaines, Ill.
Outbreak of the coronavirus (COVID-19) last year brought the most sudden and serious downturn on record in our industry, altering the course of capital investment strategies for many oil and gas companies. The petroleum industry had never suffered the magnitude of demand shock that we experienced in 2020, with global demand for refined fuel products falling 9% in just a single month to make it the steepest and deepest decline in history. The only event that even comes close is the oil shock of 1979, when the demand drop—not nearly as deep—unfolded over a period of several months.
Today, macroeconomic conditions are more stable than at any time during the past year. Projects that were suspended are now starting to resume, and we are beginning to see inflation in commodities related to refining and petrochemicals—both signs of a gradual recovery. While oil demand is forecasted to continue gaining strength through 2021, it will not likely achieve prepandemic levels at least until 2022. World GDP, which declined by about 4% in 2020, is forecasted to grow by more than 4% this year before settling into the 3.5% range in the coming years.
The economic shock caused by the global pandemic led many industrial companies to adopt defensive financial strategies. Oil and gas companies halted new investment decisions to focus on projects already in construction. Alongside reducing employment, to further preserve cash, many also deferred discretionary maintenance and catalyst purchases. To reduce losses, others adjusted product slates and even idled capacity—some of it permanently.
Before the 2020 demand shock, peak demand for global transportation fuels was anticipated to occur in the mid-2030s. After the shock, widespread industry views suggest the peak has advanced 3-5 years, with maximum fuel demand to be about 2 million b/d lower than predicted before the pandemic. Demand is still growing in emerging economies, driven by demand for personal and commercial transportation. In developed economies, however, demand for some products is already declining, and refiners are looking at their investments differently. They are increasingly evaluating their capital investments through the lens of transformation to new product slates, including a shift to renewable fuels production and increasing petrochemicals production.
As the industry evaluates ways to benefit from this slowly emerging growth, refining and petrochemical companies remain cautious about investments in new capacity, the types of investments they will make, and even the types of feedstocks they will use.
We believe that most refiners will maintain conservative balance sheets for the next couple of years, holding cash to maintain investment flexibility. Projects that once were viewed as an acceptable investment with an 8-12% internal rate of return now are unlikely to proceed at rates below 15-20%. These higher thresholds will ensure that only the most profitable projects will proceed. We are seeing this materialize through a growing number of projects under development that will use the latest available technologies to improve the bankability of their capital investments.
In some cases, new refinery complexes will be built where growing domestic demand can supplant importation of refined fuels products. Everywhere else, capacity expansion will be met by modernization and expansion of existing complexes, either by pursuing integration with petrochemicals, converting to renewable feedstocks, or by adopting new technologies to improve the economics of producing crude-based fuels at a lower cost of production and with a smaller environmental footprint.
The first route—integration of refining with petrochemicals as part of a planned, evolutionary capital strategy—is the refinery of the future. This is attractive because, in the next 30 years, population growth and rising GDP will drive a 50% growth in petrochemicals demand, making it the fastest-growing category of refined products during that investment horizon. Even today, petrochemicals projects represent roughly a third of the industry’s capital projects.
For the industry’s existing assets, many of the fuels-focused refineries can produce 10-15% of their output as petrochemicals, and they are increasingly moving in this direction. For new projects, today’s modern integrated refining and petrochemicals complexes are now producing as much as 80% petrochemicals. Meanwhile, the first plants designed to produce 100% petrochemicals are already in the planning stages and beginning to attract financing.
Many refiners also are converting portions of their existing refining operations from petroleum to renewable fuels, driven by stricter environmental regulations, government policy and incentives, public attitudes, and changing risk profiles. Despite last year’s drop in fuels demand caused by COVID-19, there was an unprecedented increase in industry interest in producing renewable fuels from waste oils, cellulosic waste, and even crops grown specifically for fuel production.
Renewable fuels production provides a way for refiners to achieve their environmental goals with minimal disruption. They can use the existing fuels infrastructure and the large existing installed base of vehicles as a ready market for their renewable fuel products.
Many of the companies that are not diversifying into increased petrochemicals or renewable fuels are investing in advanced technologies that emphasize desulfurization and octane improvement to produce the most valuable traditional fuels products at the lowest cost and with the least waste.
In many ways, the pandemic has accelerated changes in the refining industry that were already well underway. The crisis provided the latest driving force for molecule management through application of the most efficient technologies that generate the most reliable economic value.
As an industry, we have made more improvements in molecule management in the last 5 years than in the previous 20 years. Modern molecule management-based designs provide a route to continued profitability for many years without sacrificing strategic shifts.
There is no standard configuration or collection of technologies that will provide a one-size-fits-all solution. Rather, molecule management is a model that is unique to each refinery—accounting for changing product demand, available feedstocks, new technologies, and tightening environmental regulations—to remain competitive in terms of the cash cost of production and capital efficiency.
The author
Bryan Glover is president and chief executive officer of UOP.
