WoodMac: High carbon tax could erode up to 60% of Asia’s refining earnings 

Oct. 11, 2021

A high carbon tax could erode up to 60% of Asia’s total refining earnings by 2027, said Wood Mackenzie at the Global Energy Summit Focus Week.

The refining industry accounts for only about 3% of global energy sector emissions, according to Wood Mackenzie’s analysis. This refers to Scope 1 and 2 emissions from process operations required to convert crude oil into refined products within the refinery.

“Asia is the largest contributor to refinery emissions globally. The energy transition will manifest itself in three main challenges for refiners,” said Sushant Gupta, research director, WoodMac.

“Firstly, reduced market size for refined products which leads to poor refinery margins and refinery closures. Secondly, the transport fuel demand is hit the hardest, which accounts for more than 50% of refinery production. Refiners will have to re-configure and shift to petrochemicals. And lastly, a possibility of a high carbon tax on refining industry as part of broader decarbonization efforts. While a carbon tax might sound like a good idea, the reality is that a global uniform carbon tax or policy is unlikely, which will make it difficult for refiners to pass on the costs of carbon to its customers. The inability to pass through carbon costs could have material impact on refinery margins.

“At $30/tonne carbon price, we estimate the average impact on refining margins would be $0.55/bbl of oil equivalent. This rises to $2.10/bbl at $100/tonne of carbon price. For 2027, we estimate that 60% of Asia’s total refinery earnings could be wiped off in a $100/tonne carbon price scenario.”

According to Alan Gelder, vice-president, WoodMac, “only highly competitive sites that generate significant cash will survive the energy transition, as their cash generation capabilities will provide funds for investment in decarbonization as well as rewarding investors.

“Environmental sustainability has to be a key priority for refiners. They will need to find their own unique decarbonization solution and yet still remain economically viable.”

Some early responses in the short term to decarbonizing the refining sector include process optimization such as improving furnace efficiency, low temperature waste heat recovery and fluid catalytic cracking (FCC) unit optimization. The industry could also consider switching combustion fuel from fuel oil or coke to cleaner fuels such as natural gas or green hydrogen. A switch from burning fuel oil to natural gas can reduce emissions by up to 30%. A switch to cleaner feedstocks could also be an option, Wood Mackenzie said.

For deeper decarbonization, refiners will have to consider low carbon technologies such as electric heating, carbon capture and storage on FCCs, hydrogen and gasifier units and biomass gasification, the firm continued. They will also have to consider the use of renewable power and green hydrogen.

Refinery–petrochemical integration provides a platform for long-term site viability, said Johnny Stewart, principal analyst, WoodMac. “About 70% of Asia’s total refining capacity is already integrated with petrochemicals, but the average chemicals yield from the integrated refineries is only about 13 wt%. In contrast, the new integrated refinery sites in China have yields of over 40 wt% chemicals. So, there is a long way to go. When we rank refineries based on their net cash margin in our asset-benchmarking service, REM-Chemicals, we find integrated refinery petrochemical sites lead the pack. Looking at South Korea’s Onsan site as an example, investment in petrochemical integration provides higher value that far outweighs the cost of emissions,” Stewart said.

Gupta continued: “As every refinery is unique, there is no silver bullet. Refiners must start with identifying sources of their emissions and work out most cost-effective ways to reduce their carbon footprint. There will not be a blanket solution for the refining industry but a combination of solutions to solve this complex refining decarbonization problem.”