Ten downstream issues to watch in 2020
The current year began much as did the previous one, with both cautious optimism and significant uncertainty. Refined product demand is growing, and crude supply is relatively ample. But trade disputes and geopolitical volatility continue to lurk, and it seems increasingly likely that the 2020s will represent an inflection point for the oil industry.
1. What if marine gasoil demand is a dud?
After years of anticipation (or dread), a new era has
commenced for shipping, with the maximum allowable sulfur content
for bunker fuel now set at 0.5% rather than 3.5%. As expected, the
price of high sulfur fuel oil has suffered while very-low sulfur
fuel oil (VLSFO), has emerged as the star of the oil barrel.
However, marine gasoil has so far not enjoyed much of a post-IMO
bounce; what if the global demand uptick turns out to be marginal
or even non-existent?
2. Will the recent spate of regulatory backtracking
continue?
Environmental policy has often found itself at odds (both
legitimate and imagined) with economic growth. However, the urgency
among those on both sides of the debate has certainly increased. In
countries ranging from the United States, Mexico, and even France,
efforts to roll back environmental regulation are bumping up
against economic considerations.
3. How will tightening specifications impact the global
gasoline pool?
Countries accounting for around half of global gasoline
demand have recently - or will soon - enacted tighter gasoline
specifications. Several other countries are expected to follow suit
by 2022. How will this impact the global trade flow of gasoline and
its blending components? Moreover, given that these changes
inevitably put a financial burden on refineries, how will this
affect industry rationalization?
4. What will "Oil-to-Chemicals" mean for "traditional"
refineries?
Due to their large scale, high degree of sophistication,
and flexibility— do crude-oil-to-chemical (COTC) plants have
the potential to be an imminent threat to traditional refiners by
squeezing costs and dictating margins? Will refiners invest further
downstream in the retail sector to secure offtake, or will they
embrace alternative opportunities such as biofuels?
5. Are US refineries actually out of the
woods?
In June 2019, the 330,000 b/d Philadelphia refinery
experienced a catastrophic explosion, leading to its permanent
closure. This, in turn, reduced chances for additional
rationalization in the US East Coast any time soon, and the rest of
the US refining industry is pretty well positioned. The biggest -
or perhaps only - threat to the industry may be enactment of
burdensome carbon/GHG regulations.
6. Renaissance or retreat for African refining?
Sub-Saharan Africa's import dependence has increased
dramatically in the last two decades, due to both fast-growing
demand and local refinery rationalization. Six new refineries have
been proposed, but very few have been completed. If none of these
refineries come onstream, the region's net product deficit will
reach 2.4 million b/d by 2030. However, it they all are developed,
this would put substantial pressure on refineries in Europe, India,
the US, and the Middle East that currently depend on exports to
Sub-Saharan Africa.
7. What will Brazil and Mexico's divergent downstream
tracks mean for Atlantic Basin trade?
- Brazil: Brazil's NOC Petrobras has privatized its fuel distribution and retail subsidiary and forged ahead with plans to divest half of its refining capacity, while cancelling the scandal-marred 165,000 b/d Compere refinery project outright.
- Mexico: In Mexico, the government is delaying or
diluting various aspects of the previous administration's ambitious
Energy Reform market opening, thereby tilting the scales back in
favor NOC Pemex.
Both countries still have a long way to go to execute their respective downstream visions, but product exporters in Europe, the US, and elsewhere will be watching closely.
8. How will refiners compete against c-store giants in
fuel retail?
The value of a strong non-fuel offering is greater
now that fuel demand is at or nearing decline in so many markets.
So it is unsurprising that traditional refiner-retailers are
developing, expanding, or (re)investing in the non-fuel space more
aggressively than in years past. However, c-store giants like
Alimentation Couche-Tard and EG Group are also expanding
aggressively.
9. How long will biofuels' second revival last?
After an initial surge in popularity in the early 2000s,
the biofuels sector has progressively faded off the policy radar -
or at least settled into autopilot. Yet we are now witnessing a
worldwide resurgence in interest abetted by a new wave of
government mandates and technological developments. Will biofuels
continue to play an important role in the increasingly decarbonized
future of transport? Or will markets focus more on efficiency gains
and electrification?
10. Where are the next refining "pinch points"?
What will the aforementioned issues mean for the future of
industry rationalization? Structural trends certainly favor the US,
Asian, and Middle Eastern refining industries, while disadvantaging
Europe, Latin America, and Russia. However, government policy could
end up moving the needle, with the result having a major impact on
refinery supply and regional trade flows.
The top 10 downstream issues to watch in 2020 full
report is part of the IHS Markit Refining and Marketing
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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.