Is the Refining Sector in Crisis?

Is the Refining Sector in Crisis?
McKinsey & Company provides an answer.

Demand for light products such as gasoline, diesel/gasoil, and jet/kero largely drives refinery utilization. Even in the case of a delayed energy transition, light product demand will plateau by the middle of this decade.

So concludes global consultancy McKinsey & Company in its new report “Global downstream outlook to 2035.” According to the research, light product demand will fall by 2.8 million barrels per day (bpd) from 2019 levels by 2035, assuming current trends. If the energy transition accelerates, the demand decline during the period will be a more dramatic 11.7 million bpd, McKinsey predicts.

The consultancy foresees a particularly sharp drop in light product demand in Europe and North America, but it points out the one region – Africa – could actually see demand grow by 1 million bpd by 2030 under a delayed energy transition.

McKinsey noted that it attributes the overall global decline in light product demand to the following factors:

  • uptake of electric vehicles
  • efficiency gains and uptake of low-emission aviation and marine fuels
  • increased plastics demand reduction and recycling
  • reduced renewables and storage costs
  • residential heat electrification
  • electrification of European Union low- and medium-temperature heat.

Given the above scenario, is a crisis underway in the global refining sector? According to McKinsey, it is not. The firm asserts the industry, though projected to contract in some regions, will likely remain “very large in all scenarios.” Moreover, its accelerated energy transition case projects the global refining sector will still produce 94 million bpd of liquids in 2035.

“The downstream world is changing rapidly, and refiners must adapt to build in resilience,” commented McKinsey Senior Expert Tim Fitzgibbon. “First in core refining and retail operations – by embracing digitalization, and potentially investing in decarbonization and better integrating into petrochemicals – and then within the wider portfolio.”

Fitzgibbon identified additional areas of opportunity for refiners.

“Many refiners can capture pockets of growth by directing investments both into emerging markets and further down the value chain,” he concluded. “They should also consider placing big bets on emerging value pools including new energy services, new mobility, and advanced fuels. These shifts are essential to achieving every penny of potential profitability as the product and geographical market mix shifts beyond recognition.”

To contact the author, email McKinsey has posted an executive summary of the report, which includes projected refining capacity closures by 2035, on its website.


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