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Refineries to Remain Competitive Under Potential Climate Change Scenarios
Benchmarking and global trade flow analysis applied to understand which refineries at risk of closure under 450 Scenario and New Policies Scenario.
A major oil and gas company needed to understand if its refineries would remain competitive under potential climate change regulations.
Solomon’s benchmarking data and global trade flow forecasts for transportation fuel demand helped the company understand which of their refineries may be impacted.
The company learned its refineries would remain competitive under both the 450 Scenario and the New Policies Scenario.
CLIMATE CHANGE SCENARIO AGREEMENTS TO IMPACT DEMAND FOR REFINING CAPACITY
Shareholders of a major oil and gas company asked management whether the company’s refineries would remain competitive under potential guidelines resulting from the Paris Climate Agreement as originally adopted in December 2015. The long-term goal of this agreement is to limit the increase in the average global temperature to well below 2 degrees Celsius by the end of the century relative to mid-19th century temperature levels. Under the agreement, member countries pledged to decrease their carbon emissions by a set amount. If each country met their goal, Solomon estimates global demand for transportation fuel would fall by 32%. As a result, more than 31% of the world’s total refining capacity of 97 million barrels per day may no longer be needed for production of transportation fuels. Seeking to prepare its refineries for climate change scenarios, the company turned to Solomon for help.
BENCHMARKING, TRADE FLOWS ANALYZED UNDER TWO CLIMATE CHANGE SCENARIOS
Solomon utilized its benchmarking database and information around global trade flows for transportation fuel demand to help the company understand which of their refineries they should focus on to improve performance.
Solomon examined the refineries’ competitiveness under two different climate change scenarios: The 450 Scenario and the New Policy Scenario. Under the 450 Scenario, countries would limit carbon dioxide concentration in the atmosphere to 450 parts per million. The New Policies Scenario
incorporates existing energy policies of nations worldwide, as well as an assessment of results likely to occur from planned changes, particularly climate pledges submitted for the Paris Climate Agreement.
REFINERIES TO REMAIN COMPETITIVE
While some improvements could be made in operations, Solomon found the client refineries would remain competitive under both climate change scenarios. Solomon forecasts that European refineries faced greater risk of capacity reductions and possible shutdowns due to reduction in the global demand for transportation fuels resulting from the Paris Climate Agreement. North American refineries with both competitive net cash margin and cost of transportation fuels faced less potential impact than other regions.
Figure 1. Regional Comparison of Cost of Transportation Fuels
Refineries that perform well in terms of Solomon Carbon Emissions Index (CEI™) and Solomon Energy Intensity Index™ (EII™), and are processing lighter, sweeter crude oil, will be better-positioned to remain competitive. The operator’s refineries ranked in the top 50% for regional refiners in both CEI and EII. These refineries also ranked in the top 50% for capability in processing light sweet crude.
FURTHER ANALYSIS REQUESTED WITH 2018 FUELS STUDY RESULTS
Since the initial assessment by Solomon which was based on the 2016 Worldwide Fuels Refinery Performance Analysis (Fuels Study) results, the Sustainable Development Scenario (SDS) climate scenario was introduced. SDS calls not only for limiting worldwide temperature increases not more than 2 degrees Celsius like the 450 Scenario, but also for ensuring universal access to affordable, reliable, and sustainable modern energy services by 2030, and substantially reducing air pollution. Solomon plans to update the analysis with consideration for the SDS climate change scenario and based on the 2018 Fuels Study results.
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