The downstream starts on path to net zero
By Kurt Barrow, VP of Oil Markets, Midstream, and Downstream at IHS Markit
The energy transition accelerates
Oil demand fell by 10% in 2020, and downstream margins—not to mention all our economies and personal lives—were shocked by the coronavirus pandemic. One of the more remarkable and perhaps enduring outcomes of 2020 is that green issues were not set aside but increased prominence. Indeed, we believe 2020 will be a pivot point for accelerating the energy transition—the decarbonization of energy consumption.
As always, petrochemical feedstock markets will be buffeted by energy markets dynamics. A central challenge for petrochemical producers will be the supply of oil-based feedstocks when oil demand is declining rapidly.
While little energy decarbonization has occurred over the past 30 years, we see five forces converging that will increase the pace of change within refined product markets.
- Follow the money: Investment funding is flowing away from oil and to renewables and related industries as investors to reevaluate medium-term oil demand prospects and climate risks. Larry Fink, the CEO of the largest asset management company Blackrock, stated in his 2020 letter to CEOS, “We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.”
- Green economics: Decades of policy support and successful technology innovation has made it less expensive to go green now than ever before. Following cost reductions in solar and wind power, “E-day”—when EVs are cost-competitive with oil-powered vehicles even if subsidies wane—will likely take place within the next five years due to lower battery costs.
- Government green policies: During economic downturns, longer-term concerns tend to get set aside. That was not the case for the environment in 2020. The European Union, China, Japan, and others increased—not decreased—their commitments to address climate change by announcing net-zero emissions targets. Currently, over 100 countries and two-thirds of global GHG emissions are covered by these commitments and earlier targets (e.g. 2030) are being added with increasing specificity.
- Corporate net-zero commitments: 2020 was also a historic year for corporate net-zero announcements. In oil, the six European IOCs are at the fore with net-zero commitments. Across economies, companies will increasingly pressure suppliers within their supply chains, including fuels and petrochemical suppliers, to have a plan to reduce carbon.
- Societal shifts and the pandemic: The pace and magnitude of change created by the pandemic have demonstrated what is possible in a crisis. They have highlighted our global interconnectedness and human fragility. While an immediate health crisis is very different from a slow-moving environmental trend, these two global-scale events are being linked to press for an ambitious climate response.
As a result of these forces, the future energy markets will look very different than the past.
Changes in mobility are at the heart of a successful oil transition. With increasing demand to move people and goods in every major transportation sector, the end-use sectors are undergoing massive shifts as they adapt to decarbonization mandates. Some sectors and applications will electrify, but others will require low-carbon liquid fuels, hydrogen, or other fuels, but will address in earnest this decade. Incorporating the accelerating transition into our rivalry scenario (base case) reduces oil demand by about 3 million B/D in 2030 versus our prior outlook.
Reinventing refining towards a net-zero goal
In addition to emission reduction from the end-use sectors (Scope 3), some companies are beginning to craft strategies that more completely address energy transition in refining and downstream value chains (Scopes 1 and 2). Advanced biofuels and petrochemicals integration are central to many strategies being deployed.
Biofuels and biointegration
Biofuels are one solution to decarbonize liquid fuels. California and Western European markets now have significant incentives for low carbon renewable fuels, and a wave of renewable diesel investment has followed. While these pathways have one-third to half of the carbon intensity per barrel, they generally rely on niche waste/by-product feedstock with limited scalability and a step change is needed to achieve a much greater scale. Still, we foresee a convergence of agricultural feedstocks, chemicals, fuels, and biomass, including opportunities to capture CO2 streams and generate green-gas products from large integrated manufacturing sites.
While not specifically a “decarbonization” approach, the transition is creating divergent demand trends between refined and petrochemicals products. Unlike peaking oil demand, base olefins plus aromatics demand is forecast to increase by 65% by 2040 in rivalry.
Additionally, natural gas liquids (NGLs) have contributed notably to the global oil feedstock supply—55% currently—but growth will ebb as oil production declines and gas production growth slows. As a result, petrochemical feedstock buyers will be confronted with shrinking supplies from both traditional sources—straight-run naphtha from refineries and NGLs from oil and gas fields.
This will drive refiners and integrated operators to “go deeper into the crude oil barrel” to find feedstocks. Which technology are employed, where these plants are built, what they will cost and how the feedstock economics will change for the whole market is a focus of IHS Markit at present.
Sustainable hydrogen and waste recycle
Hydrogen has again attracted attention as a potential zero carbon fuel for certain applications. For example, we initially see a path for heavy duty road and rail transport in deep decarbonization markets like California, Japan, and Europe.
The primary challenge is the cost to manufacture and distribute sustainable hydrogen (e.g., from renewable power into a water electrolyzer or natural gas reforming with CCUS). Today, both of those routes at world-scale are estimated at 3-5 times current fuels, including prevailing carbon credit purchases. Incentives, scale and innovation may reduce the cost, or they may not. The few European refinery electrolyzer projects are in the 10-40 MW range, making the overall site emissions reduction modest. Similar to biointegration, the opportunities to integrate waste as a supplemental feedstock – including recycled plastics waste – is an inspiring concept. However, it is early days for these technologies and costs are currently high. Still, these types of projects could create meaningful decarbonization for the oil downstream.
The exact path and pace of the energy industry’s transition is uncertain but accelerating. The prospect of falling refinery runs is heightening feedstock supply concerns and spurred an intense discussion on risk mitigation strategies. Petrochemical producers need to consider revisiting and testing their strategy to address these climate-related feedstock challenges.
 Primary energy demand increased 63% from 1990 to 2019 and while fossil fuel’s share remained remarkably steady at about 80%.
 IHS Markit Plastics Sustainability Study
 IHS Markit From Fuels to Chemicals multiclient
 IHS Markit Process Economics Program: Crude Oil to Chemicals and Oxidative Coupling of Methane