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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Adapt Or Die: Refiners Face An Impossible Decision

Refinery conversion and closures: this is the shortest summary of things happening in the downstream industry right now. With the pandemic wreaking havoc on oil—and fuel—demand, refiners have found themselves not simply saddled with excessive stocks but facing a future that is shaping up to be quite different from the past.

In recent months, French Total announced the conversion of its La Mede refinery in southern France into a biofuels plant with a capacity of 500,000 tons per year.

“Biofuels are fully renewable, and an immediately available solution to cut carbon emissions from ground and air transportation,” Total’s president for refining and chemicals operations, Bernard Pinatel, said at the time, as quoted by Reuters.

The remark illustrates one of the drivers of this change that has driven all European oil companies to make major commitments in the field of renewable energy while moving away from their core business. Everyone is on a net-zero path these days.

In the United States, where the pressure to go green is definitely not as strong as it is in Europe, Marathon Petroleum recently applied for permits to convert its Martinez refinery into a biofuels plant because the demand for biofuels will be rising thanks to California: in California, the pressure to cut emissions is strong. And in the end, it all comes to demand and supply.

Fuel consumption in both Europe and North America has been flat or on the decline for more than a decade, Reuters’ John Kemp wrote in a recent column. The situation was the same in Japan, and the trend was not a result of a crisis. No, it was a result of fuel efficiency gains. These gains, in turn, shrank the fuels market in these key locations. The effects are only becoming painfully obvious now because of the effect the pandemic has had on demand as a whole.

Shell, for example, said earlier this month it would be shutting down its Convent refinery in Louisiana because it could not find a buyer for the facility. Separately, the supermajor said it would halve the capacity of its largest refinery in the world, Pulau Bukom in Singapore.

“Our businesses in Singapore must evolve and transform, and we must act now if we are to achieve our ambition to thrive through the energy transition. Our decisive action today will help Shell in Singapore stay resilient and build a cleaner, more sustainable future for all of us,” said Aw Kah Peng, Chairman of Shell Companies in Singapore, said commenting on the news.

Refinery closures are being announced around the world in response to the bearish outlook for fuel demand not just over the short but also over the long term as EVs take center stage, with carmakers spending billions on their electric car manufacturing platforms and preparing a host of new models due to hit the market in the next few years. Nobody seems to expect a recovery of oil demand to a state of solid growth.

Yet interestingly enough, the world’s largest EV market has also seen a surge in oil demand over the last decade, as per Reuters’ Kemp, along with its neighbors. China is actively building its refining capacity. Last year alone, Chinese refiners added close to 900,000 bpd in new refining capacity, prompting the China Petroleum and Chemical Industry Federation to warn that overcapacity will become a problem over the longer term.

Asian refineries, according to Kemp, are more competitive as they are close to the markets witnessing growing demand for fuels. The pandemic has disrupted this, certainly, but over the long term, demand may recover one the emerging economies of Asia return to growth mode. In Europe and the United States, on the other hand, the golden era of refineries may well be over.

By Irina Slav for Oilprice.com

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