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Oil Markets Will Only Get Tighter

Oil Markets Will Only Get Tighter

OPEC has agreed to increase…

Climate Change Fight Is Bad News For Refineries

Refinery

International government efforts to slow down the rate of climate change would have a dramatic impact on the world’s oil refining industry, a new report from Carbon Tracker has suggested. This dramatic impact will come down to a quarter of refineries closing shop by 2035.

Under a scenario that envisages limiting the rate of global warming to 2 degrees Celsius by 2035, oil demand, says Carbon Tracker, will peak by 2020 and will start declining by 1.3 percent every year after 2020. This means that over a 15-year period, oil demand could fall by 23 percent.

Based on historical data, Carbon Tracker says, when there is lower oil demand, there are also lower refining margins. These margins, which Carbon Tracker estimates need to fall by US$3.50 a barrel by 2035, will squeeze smaller refiners out of the market, with only three-quarters of refineries remaining up and running.

How likely is this scenario? Very, it seems, as the report’s authors note the margin decline rate among global refiners last year was a composite US$5 per barrel. BP’s refining margin decline rate has hovered around US$5 per barrel as well since 1990, the report also notes. What’s more, when demand for oil and fuels weakens, the margin decline rate increases – all bad news for refiners.

And Carbon Tracker has more bad news. Based on earnings analysis of 94 percent of global refining capacity as of 2015, Carbon Tracker has found that the combined earnings before interest, tax, depreciation, and amortization could fall by more than half by 2035.

Related: Oil Prices Fly Higher On EIA Report

Who will survive under this scenario, when all governments push in the same direction against global warming? The largest refineries with complex operations, which currently sport the highest profit margins. Simpler operations could “become worthless.”

What’s more, new refineries that are currently being built are turning into excess capacity, the report suggests. The current amount of refining capacity is sufficient to meet global demand for oil products. Yet growing demand in Asia, for instance, is motivating an increase in refining capacity locally. This would necessitate more capacity closures in other markets, the report said.

By Irina Slav for Oilprice.com

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