The Uncertain Fate of the Refinery Industry in the NZE World
The refinery industry stands as a subset within the the oil and gas sector. At the heart of its operations lies the process of converting raw oil and gas extracted from the earth into various petroleum products. While commonly associated with the production of fuels utilized in automobiles, ships, and aircraft, the refinery landscape extends far beyond transportation fuels.
Many people don’t realize that refineries actually make a lot more than just fuel. They’re also big producers of various chemicals, which is why they’re sometimes called petrochemical producers. Among the many things refineries make, plastics and fertilizers stand out. These products are important for our modern way of life and show just how diverse the refinery industry’s contributions really are.
The refinery industry is at a critical point, facing uncertain times ahead. While it’s crucial for keeping our economies running and our lifestyles intact, refineries are under pressure to change how they operate. Climate change and the need to cut emissions are forcing them to rethink their approach. It’s a challenging time for an industry built on fossil fuels.
Refineries are facing a twofold challenge. Firstly, they must mitigate emissions from their core operations to comply with stringent regulations and societal expectations. Secondly, they confront the reality that their traditional fuel products are gradually becoming obsolete due to the global shift towards decarbonization.
No clear solution to decarbonize its own emissions (yet)
It becomes evident that this sector occupies a significant portion of the global greenhouse gas (GHG) emissions landscape. Industrial processes collectively contribute a staggering one-third of worldwide GHG emissions, with oil refining and chemical and petrochemical industries accounting for a substantial share. Recent data from Isella (2022) highlights that oil refining alone generates 9% of industry emissions, while the chemical and petrochemical sectors contribute a formidable 21%.
These numbers only give us a glimpse of how much the refinery industry affects the climate. Apart from the pollution they directly produce, there’s also the pollution caused when their products, like fuel, are used (so called Scope 3 emission). When you add this to the emissions from transportation, which uses a lot of their fuel, it adds up to a quarter of all the greenhouse gases released globally. That’s why refineries are under so much scrutiny — they play a big part in making climate change worse.
Addressing emissions from refinery processes presents a formidable challenge, underscored by the industry’s designation as a “hard-to-abate” sector. Unlike more straightforward emissions sources such as power plants and transportation, where viable decarbonization technologies like solar photovoltaics, wind energy, and electric vehicles exist, refineries present a labyrinth of complexity.
Research on decarbonization of refinery process is ongoing. A straightforward idea, such as capturing carbon emissions, have been suggested, but it complicated to put into action. It is because refineries are like complex chemical factories, with lots of different processes that produce emissions in different ways and amounts. Another approach is to switch the current process into more environmentally friendly, but this would require developing new technologies for each part of the refinery.
The erosion of refinery’s products relevance
Experts predict that we’ll need less and less petroleum in the coming years. Major organizations like the International Energy Agency and the U.S. Energy Information Administration all agree that the demand for oil will peak around 2030 to 2040. A clear sign of declining relevance of refinery as the world fuel producer.
You can see why refinery industry is under pressure by looking at the product fraction of a typical refinery. About one-third of what comes out of refineries becomes gasoline, and another third becomes diesel fuel. But now, more and more electric cars are being used, and they’re becoming just as affordable as traditional cars. So, soon, most of the money refineries make from selling fuel could disappear. This could make refineries unprofitable and their assets could be left unused.
While some may contend that the onset of this decline is decades away, it’s crucial to recognize that refineries represent capital-intensive investments with operational lifespans spanning 20 to 30 years (thus expecting stable revenue during its lifetime). Should profitability wane prematurely, companies risk insolvency, unable to service the debts incurred during construction.
Some demands, such as aviation and shipping sectors may persist in their reliance on petroleum products in the coming decades, due to the lack of clear decarbonization pathways — they are among the hard-to-abate industries. However, given that refinery output for jet fuel and marine fuel constitutes a modest fraction — around 10–15% — of total production, they do not represent the primary concern for the refinery sector. Nonetheless, should consensus emerge favoring non-petroleum alternatives for decarbonization in these sectors, it would pose yet another challenge for the refinery industry.
Please note that this global trend might differ if we look at regional level. Demand for petroleum in developing countries might keep increasing (since EV adoption is expected to be slower) or at best stabilize even in 2050. Governments may also protect National Oil Company (NOC) given its importance to the national energy security or because nation still got a significant oil and gas reserve. Hovewer, considering the fact that petroleum products are highly traded comodity, global supply and demand shock will affect profitability of NOCs in most countries.
In practical terms, the refinery industry’s long-term viability may hinge on its pivot towards petrochemical production. Refineries serve as the primary suppliers of the essential chemical building blocks used in a wide array of consumer goods, including plastics, pharmaceuticals, textiles, and fertilizers. Despite their carbon content, the demand for these products is expected to persist over the next three decades.
However, current refinery operations prioritize fuel production for the transportation sector, with petrochemicals often being a secondary output. Should refineries shift their focus towards petrochemicals to remain relevant in the future?
Implications — What it means for refinery industry’s future
It’s evident that refinery (and the oil industry at large) is a sunset business. Their traditional business model is gradually eroded as their products lose relevance and they face increasing pressure to decarbonize. This situation translates to requiring more investment for less potential revenue. Investors must weigh whether investment in cutting emission is an attractive proposition.
I believe the refinery industry could face one of three potential outcomes:
1. In regions with abundant and inexpensive crude oil reserve, refineries may persist until 2050 by maintaining the status quo. Particularly in nations which are less concerned about climate change, they may continue extracting oil, serving a shrinking market segment.
2. Conversely, regions with expensive oil supply, such as Europe, Japan, Korea, and possibly China, may see the demise of traditional refineries. However, there’s a chance that policies like the EU Carbon Border Adjustment Mechanism (CBAM) could protect European refineries from competition with cheaper but dirtier petroleum products from Middle East.
3. There’s also a promising avenue dubbed “oil to chemical.” Some players in the industry may pivot towards petrochemical production. This practical approach is in the top mind of refinery players, considering that petrochemical process is their “butter and bread”.
The shift towards “oil to chemical” is already underway. For example, Aramco’s CEO announced a $100 billion investment in petrochemicals over the next decade. Similarly, in China, projects like the Zhejiang Petrochemical complex highlight this trend. This massive undertaking involves the construction of two refineries, each capable of processing 400,000 barrels of oil per day (C&EN, 2019). Developing countries are also starting ride the momentum. Indonesian NOC, Pertamina, is undergoing major revitalization on its refinery assets (RDMP project) to increase fractions of petrochemicals output. Such major projects have the potential to profoundly impact global supply and demand dynamics .
There’s fierce competition ahead. Despite petrochemicals being a growth area beyond 2050, it’s important to note that they currently make up only 15% of total refinery output. If everyone rushes to shift their focus to petrochemicals, the market could become oversaturated, leading to an excess of supply. While petrochemicals are expected to grow, the demand won’t match that of fuel. This means only the most profitable players will survive by making the shift to petrochemicals.
In any case, flexibility will be the key feature needs to be enhanced in the future. From refinery business perspective, both of the demand (petroleum products), supply (feedstock for process), as well as the process itself to make the product, are changing. This dynamic forces refinery to optimize its reactors and processes to flexibly shift the between product fractions.
The three scenarios I outlined earlier assume that investors have modest interest in new clean technologies investment, given the decline in future revenue from petroleum products. However, I’m hopeful for a fourth scenario to emerge — a future where the refinery industry reinvents itself to produce environmentally friendly liquid products, essentially becoming a “green refinery.”
What does this mean? A green refinery would invest in producing biofuels from sustainable sources, use renewable energy (RE) to power its high-temperature processes, capture and utilize CO2 emissions as a carbon source, and promote plastics recycling to reduce reliance on fossil fuel for carbon source. In my next article, I’ll delve into this concept further.
This article is not possible without the support and review from Mohammad Farkhan Hekmatyar Dwinanda, an expert in refinery process from Pertamina Indonesia who is currently completing his master degree in University of Queensland, Australia.
