The industrial landscape for oil refineries has been challenging of late, with the Covid-19 pandemic triggering a massive slump in demand for oil which resulted in many refineries across the world having to temporarily shut down. The question for anyone working in the industry is whether the sector will spring back as lockdowns lift across the world, or whether the impact of the pandemic was merely an accelerating factor within a process which was already underway. If the answer to this question is yes, what’s more, then the sector will have to accept that refinery shutdowns are becoming a fact of life and, having accepted that, start planning for the future.
Refining Capacity Dip Caused by Pandemic Cuts Across Operators
The evidence for the impact of the pandemic on the sector is widespread and undeniable. According to a report from Reuters, published in June of this year, the refining capacity across the US fell by 4.5% during 2020, the largest drop since the recession of 2012. The drop in capacity was driven by a 13% drop in gasoline consumption, and prices for gasoline and diesel hit a four year low. The result was that five refineries across the US shut down permanently. Three of the refineries in question were run by the largest US refiner of crude oil, Marathon Petroleum, while one was run by Shell and the other by independent HollyFrontier, illustrating the fact that this is an issue which cuts across operators and impacts the industry as a whole. Not that the problem is confined to the US, with closures – some tagged as temporary at the time – also happening across Europe and in Australia.
Over 2021, several refinery complexes saw workforce lay-offs - some as high as 60%. Indeed, Galp halted operations at the Matosinhos oil refinery complex in Portugal from early 2021, citing a 16% drop in throughput in the fourth quarter of 2020. The same thing is happening across Europe, With Neste closing the Naantali refinery which has previously refined 55,000 barrels per day (bpd), and Gunvor closing the loss-making Antwerp refinery – previously dealing with 115,000 bpd – with no plans to reopen it if the market picks up.
In Australia, the collapse of the oil refining industry has resulted in their now being just two refineries in the country, after Exxon Mobil closed the 86,000 bpd Altona refinery in February, following on from BP closing the Kwinana refinery in November of last year, and converting it into a fuel import terminal. Of the two remaining Australian refineries, Geelong in Melbourne is the largest, with a capacity of 128,000 bpd, but is by no means guaranteed to remain in operation with the owners, Viva Energy, accepting a government subsidy but refusing to rule out closure.
An Infrastructure as Fragile as Any Other Given the Right Circumstances
The fragility of the sector as a whole was underlined not merely by the impact of the pandemic, which, in all honesty, left hardly any sector completely untouched, but also by the example of Texas, a part of the world which, over and above almost anywhere else, could surely be expected to be able to cope with any temporary issues caused by wider conditions. This proved not to be the case in February of this year, however, when unseasonably freakish arctic weather – temperatures dropped as low as -13°C in Austin, -15°C in Dallas and -23°C in Amarillo – led to the largest refineries in North America having to be shut down across the state. These closures were temporary, of course, but they serve to underline how fragile the infrastructure upon which the industry is based can be, and how external events of varying size and type can lead to not just interrupted operations but complete shutdowns.
Pre-Pandemic Predictions of a Downturn
Prior to the pandemic, experts were already predicting a major downturn in the oil refinery sector across Europe, with companies having to rationalise their presence across the continent, particularly in light of the ageing nature of many of the refineries themselves. Consultants WoodMac, writing in August of this year, predicted a 9% drop in capacity across Europe in the period between 2022-2023, with clients being sent a list of allegedly under-threat refineries which included BP’s 377,000 bpd Rotterdam refinery, Total’s 102,000 bpd Grandpuits refinery in France and Petroineos’ 200,000 bpd Grangemouth refinery in Scotland. At the same time, Goldman Sachs predicted refinery rates in 2021-2024 to be 3% lower relative to 2019, something which they felt would lead to more competition and permanent closures.
Although the short term issues may well have been driven by the temporary impact of the pandemic, a study published as long ago as 2017 predicted exactly how things were going to unravel across the oil refining sector, with the key driver of change being a global switch away from fossil fuels prompted by concerns about climate change. The report was published by environment think-tank Carbon Tracker, Swedish investment fund AP7 and Danish pension fund PKA, and while the environmental think-tank might be expected to lean heavily toward predicting a bleak future for oil refining, the investment and pension fund are merely offering a clear-eyed assessment of where they think investors would or wouldn’t be wise to put their money. The report predicted companies such as Chevron CVX.N, Royal Dutch Shell RDSa.L, France' Total TOTF.PA and China's largest refiner Sinopec could see profits from refining drop by 70%, a prediction based on commitments to limit global warming to 2 degrees Celsius, under which, according to the International Energy Agency, the demand for oil would drop by 23% between 2020 and 2035.
Another prediction is that overall earnings for refiners could fall by as much as 50% by 2035, from a figure of $147 billion in 2015. Given that the recent COP26 committed governments around the world to measures which would hit targets at or around 2 degrees Celsius – depending upon interpretations of the various conditional and unconditional commitments – the direction of travel identified in 2017 has clearly remained the same and has, if anything, accelerated.
Pivoting and Repurposing - with Renewables Front and Centre
The response, across many parts of the oil refining industry, has been to think of ways of repurposing the existing infrastructure in order to ensure that defunct sites can continue to bring in revenue. The obvious answer is to convert what was once an oil refinery into an oil terminal. This is the possibility being explored by ExxonMobil for the Slagen refinery in Norway, with the refinery continuing to operate until any such conversion – currently the subject of a consultation with employees – has taken place. Given that the longer term direction of travel is away from oil and toward renewables, however, the more forward thinking companies are probably those which are pivoting their refinery sites toward renewable technologies. There are examples of this approach from across Europe:
Total is planning to convert the Grandpuits refinery in France – which has been temporarily shut down since February this year – into a biofuels and plastics recycling complex.
Eni is evaluating the conversion of the Livorno refinery in Italy into a biorefinery. This would be the latest step in wider moves to shift the company as a whole onto a more environmentally sustainable footing, with two other refineries in Italy already having undergone a similar conversion. The long term aim is for the company to achieve carbon neutrality by 2050.
Neste, having ceased refining operations at the Naantali refinery in Finland, announced plans to develop the Porvoo refinery – in their own words - "towards co-processing renewable and circular raw materials."
In Germany, the Heide refinery has reduced staff numbers by 106 positions, but is looking to the future with confidence due to plans to change the business model of the plant to concentrate on the production of green hydrogen.
The Greening of Infrastructure Starts with the Clean-up
We’ve written in the past about the repurposing of decommissioned oil and gas rigs as geothermal energy sites, and the redevelopment of oil refineries that are surplus to requirements follows the same pattern – older, environmentally damaging infrastructure being retained thanks to the role it can play in supplying the environmentally friendlier energy of the future.
At Separo we’ve spent many years earning a global reputation for the excellence and flexibility of our tank cleaning and recovery services. When an existing oil refinery becomes defunct and needs to be repurposed, one of the over-riding priorities is to deal with the remaining waste and pollution left by what have often been decades spent refining crude oil. The solutions we offer can be scaled up or down depending upon the size and scope of the refinery, and can play a key role in helping to ensure that the oil refineries of yesterday help to play a part in the green fuel revolution of tomorrow.
