Alan Gelder, Wood Mackenzie, UK, explains why the European downstream sector needs to adapt; doing nothing is not an option.
T
he global pandemic has provided the European downstream sector with a glimpse into the future and clearly demonstrated that doing nothing is not an option for securing long-term survival. The pandemic, through various government lockdown measures, has shown a potential future of lower demand for transport fuels. This was a world in which the commercial viability of large swathes of European refining capacity was challenged, as Wood Mackenzie’s Refinery Evaluation Model indicates that only a handful of sites were cash positive in 2020 (so had a positive net cash margin [NCM]). Figure 1 also compares the 2019 NCM profile, where almost 70% of sites were cash positive. A cash positive position is key for sustained commercial success as it provides funds for future investment and returns to investors.
Demand growth will not suffice Since the end of March 2021, global oil demand has recovered strongly from the nadir of April 2020 when it had collapsed by around 20 million bpd compared to the previous year. 2Q21 global oil demand is already 13 million bpd higher than 2Q20 levels. Wood Mackenzie projects oil demand to reach about pre-pandemic levels on a global basis towards the end of 2022. This is surely supportive for European refining? The return of global oil demand to above pre-pandemic levels is necessary but insufficient for European refining’s commercial success for reasons of both demand and supply. Wood Mackenzie’s outlook of European demand is still 600 000 bpd below 2019 levels by the end of 2022, arising from a slow regional economic recovery and the gathering pace of energy transition, in which Europe is a leader. On the supply side, very few refining projects under active development pre-pandemic were cancelled. Project completion has been slower than originally anticipated and the commissioning of mechanically complete facilities has been delayed given the poor refining margin environment. Even before the pandemic, new sources of supply were expected to outpace demand growth. The loss of three years of global demand growth hence poses a serious challenge to refiners as global utilisation is not anticipated to recover back to pre-pandemic levels during this decade unless refineries close. European refinery utilisation is particularly challenged as the new capacity additions are more competitive. As a region, it therefore struggles to export its growing surplus of gasoline (Figure 2). Low utilisation and low refining margins are synonymous, so the commercial viability of the European refining industry is challenged for much of the current decade. The risk of rationalisation of competitively weak sites and poor margins for standalone fuels
June 2021
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HYDROCARBON
ENGINEERING
