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Refiners face changes in regional supply/demand balances, affecting global trade flows and refining margins. North America will reduce its need for gasoline; Europe will get shorter in diesel;, and Asia will continue to be thirsty for fuels in general. Click to enlarge.

The refining industry is grappling with shifting scenarios for the future energy landscape, including one case in which the United States could become a net exporter of gasoline by 2010, according to a new analysis of the refining industry by global management consulting firm Booz & Company. In 2007, the US imported

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 global introduction of ultra low-cost automobiles such as the $2,500 Tata Nano. This confluence of contradictory factors is confounding an industry that counts on 20-year predictions to guide investment decisions made today, according to the analysis.

In the first half of 2008, the refiners went from exhilaration to desperation. The industry has never faced so many contradictory trends, both on the demand and supply sides.

—Andrew Clyde, Partner at Booz & Company

Since 2002, the refining industry has maintained margins at historic highs, with 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, with a corresponding impact on 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. Booz & Company calculates that a one percent annual growth rate among the BRIC countries would add three million barrels per day (bpd) of demand for ground transportation fuels by 2025.

A potential spoiler for this growth, however, is a move to non-oil based vehicles in Western countries. Yearly improvements of 5-10% 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.

A combination of lower demand and increased biofuels use could lead the US to become a net exporter of gasoline. Click to enlarge.

For the first seven months of 2008, US oil demand declined to a five-year low compared with the same period in previous years, according to the American Petroleum Institute. Product imports were down steeply in both July and for the first seven months of 2008, compared with 2007.

In 2008, through the week of 15 August, the US imported an average of 1.044 million barrels of gasoline per day, down 8.6% from 1.142 million barrels per day for the same in 2007, according to data from the Energy information Administration.

Debate over biofuels is also clouding the horizon for refineries. This year, the US 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% of transportation fuels to be served by biofuels by 2010, and 10% 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 US 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. Refiners face difficult choices ahead, whether it’s pulling the plug on projects in developed countries, getting into biofuels, or expanding into Asia.

—Pedro Caruso, Booz & Company Principal

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 70 mpg, are not expected to be market-ready before 2010.
• Fuel cell vehicles will become available only after 2020.

Resources

• Refining Trends: The Golden Age or the Eye of The Storm? Part IV: Tough Choices

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