Refiners struggle with demand dislocation between developed and developing world, biofuels, and the emergence of ultra-efficient vehicles
NEW YORK, August 26, 2008 – The refining industry is grappling with shifting scenarios for tomorrow’s energy landscape—including one case in which the United States could become a net exporter of gasoline by 2010, concludes a new analysis of the refining industry by global management consulting firm Booz & Company. The report, “Refining Trends: The Golden Age Or the Eye of The Storm? Part IV: Tough Choices,” explores rising demand for fuel in Asia and the BRIC nations (Brazil, Russia, India and China), mandates for biofuels, alternative technology vehicles, and the introduction of $2,500 automobiles. This confluence of factors is confounding an industry that counts on 20-year predictions to guide investment decisions made today.
“In the first half of 2008, the refiners went from exhilaration to desperation,” noted Andrew Clyde, Partner at Booz & Company. “The industry has never faced so many contradictory trends, both on the demand and supply sides.”
The refining industry has been in a golden age since 2002, with margins maintained at historic highs, and neither demand nor supply pressures pushing profits below their 2002 levels of $3-$5 per barrel. But while there’s widespread agreement that global demand will grow in the decades ahead, changes in the nature of that growth pose substantial threats to refiner margins and will significantly impact the industry’s ability to invest.
On the demand side, the debut of Tata’s $2,500 car generated global headlines as a signal to the refining industry that demand for transportation fuels would increase. Economic growth in developing economies is another key driver of demand. In fact, Booz & Company calculates that just a one percent annual growth rate among the BRIC countries would add three million barrels per day (bpd) of demand for ground ransportation fuels by 2025. A potential spoiler for this growth, however, is a move to non-oil based vehicles in Western countries. Yearly improvements of five to ten percent in battery weight-to-power ratios and reductions in battery costs may ultimately mark the end of the hydrocarbon era as we know it, the report states. And in the short term, the combination of high gas prices and economic downturn could translate into a significant drop in transportation fuels demand.
Debate over biofuels is also clouding the horizon for refineries. This year, the U.S. government set a mandate for the production of an additional 600,000 to 700,000 bpd of biofuels by 2012, more than the expected demand growth of gasoline in the 2007-2012 period. The European Union also has a mandate calling for 5.75 percent of transportation fuels to be served by biofuels by 2010, and 10 percent by 2020. Adding more uncertainty, a worldwide debate on whether crops should be grown for food or fuel is raising questions on whether these mandates are achievable. Clearly, the refining industry stands to benefit more from less biofuel supply.
Taken together, what just a few months ago looked to be an imminent, albeit modest fuel supply crunch by 2009-2010, has now turned into a situation of potential oversupply, according to the Booz & Company report. Such a shift would portend a number of changes worldwide, including the possibility of the U.S. becoming a net exporter of gasoline and the destruction of refiner margins in developed countries due to the costs of transporting the fuel to BRIC nations, where the demand will be.
“The growth of global fuel demands over the next two decades will give little comfort to refiners facing the destruction of their profit margins,” said Pedro Caruso, Booz & Company Principal. “Refiners face difficult choices ahead, whether it’s pulling the plug on projects in developed countries, getting into biofuels, or expanding into Asia.”
Additional findings of the report include:
The pace of capacity addition is picking up, despite high capital costs; distillation capacity has expanded 3-4 million bpd over the last four years, and is set to grow by approximately six million bpd between 2008 and 2012.
Strong economic growth, similar to that of the early 2000’s, will require distillation capacity to grow by 30 million bpd by 2025. A more moderate global economic growth will reduce this need down to 17 million bpd.
Primarily due to growth in Asia, global demand for transportation fuels will continue to grow through 2025 despite any increase in the use of alternative vehicle technology.
Plug-in hybrids, offering up to 70mpg, are not expected to be market-ready before 2010.
Fuel cell vehicles, promising 95mpg capabilities, will become available only after 2020.