Changing fuels landscape

Some studies are suggesting that over the next 20 years global oil demand may grow by only 1% per year. However, this growth is far from homogeneous. Demand in OECD (Organisation for Economic Co-operation and Development) countries will decline as fuel efficiency improvements proliferate and as the region increases its use of alternative fuels.

At the other end of the scale, demand in China, India and OPEC (Organization of the Petroleum Exporting Countries) will grow at a faster pace – although here too demand will slow compared with historical levels.

We expect this growth in world oil demand to be met through increasingly diverse sources. Although conventional crudes will still account for the majority of liquid fuels produced, a larger contribution will come from unconventional sources including oil sands, shale oil, biofuels, natural gas and gas to liquids (GTL).  

Changing demand patterns

In some forecasts, global diesel demand is expected to grow by up to 2% per year. This is driven by further dieselisation of passenger cars, the increased use of heavy-duty vehicles in all regions and the potential demand for additional marine distillate fuels (anticipated as Emission Control Areas spread).

At the same time fuel economy improvements, the switch to hybrids and increased use of alternative fuels mean the demand for diesel and gasoline in OECD countries will fall.

Changing demand patterns mean that there will be a shortage of refining capacity in some regions, but an excess in others.

Most of the anticipated refinery capacity expansions will be in Asia Pacific, the Middle East and Latin America, with very limited investment and further rationalisation expected in Europe and North America.

New hydrocrackers and coking units will be brought on stream in a number of regions; primarily to increase the production of much needed middle distillates. However, most hydrocracking and coking units are likely to be constructed in Asia Pacific, where diesel demand growth is expected to be highest, and in the Middle East, driven by prospects for higher diesel and gasoil exports to Europe, which will remain short of these products.

Looking at the refining trends region by region is the best way to build up a picture of the future developments of transportation fuels.

Oil demand outlook

Europe

Europe is likely to experience the smallest demand growth for distillate fuels amongst all regions owing to:

• A sluggish economic recovery and the increasing use of biodiesel (up to B10) and alternative fuels.
• Heavy fuel oil demand is declining as marine demand falls and as power stations switch to natural gas. In addition, gasoline export opportunities to the US continue to decline.
• Stringent emission regulations, to be introduced via the Emissions Trading System (EU ETS) in 2013, mean European refineries will need to become more energy efficient in order to reduce CO₂ emissions.

The construction of additional hydrotreating and hydrocracking systems in this region is unlikely, given the negative emissions impact these units have on a refinery complex.

Along with the overcapacity that already exists in the region, this situation is leading to refinery sales, extended shutdown periods and terminal conversions. Some Russian companies (including Rosneft and Lukoil) are taking this opportunity to expand their refinery network across Europe, and Indian and Chinese oil companies have also made selective acquisitions.

As for renewables, studies indicate that by 2020, owing to the limited availability of land, around half of the bioethanol and 40% of the biodiesel in Europe will need to be imported, if the source of renewable fuel remains first generation.

However, the recent European Commission proposal on Indirect Land Use Change (ILUC) caps the use of food-crop-based biofuels to 5%. This may make it difficult to meet the 10% renewable fuels mandate for 2020 without significant increase in the use of second generation biofuels, such as those from municipal waste or cellulosic feed stocks.

A major challenge is added by the fact that by 2017 biofuels will need to meet greenhouse gas (GHG) savings targets of 50% for EU biofuel producers and a minimum of 6% GHG saving for fuel suppliers.

Rapeseed oil, the most common biodiesel feedstock in Europe, does not currently meet the 2017 threshold without improvements to installations. However, biodiesel producers might be able to mix rapeseed with other feed stocks with higher GHG savings, or use ethanol in lieu of biodiesel to fulfil part of the biofuel target.

Oil companies are expressing more interest in producing hydrogenated vegetable oil (HVO) in their refineries in order to meet their renewable obligations, initially as a supplement to bioethanol and biodiesel use.

North America

In North America the demand for gasoline is in long term decline owing to increased bioethanol use, the introduction of stricter passenger car fuel economy targets and the uptake of hybrid engine technology.

Limited growth is expected in the local distillate market but export opportunities exist and there is likely to be a decline in fuel oil demand. Inland refineries have been benefitting from improved economics due to the lower WTI (West Texas Intermediate) crude price versus Brent crude as local US and Canadian crudes flow into Cushing in Oklahoma. This economic benefit is likely to spread to the Gulf Coast refineries as more crude flows in that direction.

Fuel imports in the region will fall as domestic demand declines and the use of biofuels increases.

Refineries continue to shift their focus to the production of diesel for export. They may also capitalise on the opportunities for GTL from shale gas and for light tight crude oil (shale oil). However, refineries will need to invest so that they can process heavier crudes and Canadian oil sands.

As for biofuels, the Renewable Fuels Standard (RFS-2) sets a 36 billion gallons requirement in 2022 but it is unlikely that production will meet this target. This is due to declining gasoline demand, difficulties in approving higher ethanol blends and challenges in production of advanced biofuels.

Only a portion of this volume relates to biodiesel. In 2013, the biodiesel volume requirement is expected to increase from 1 to 1.28 billion gallons.

The industry was able to meet the 1 billion gallon requirement in 2012, and is expected to be able to meet the higher limit in 2013 but with some challenges.  Biodiesel blending in the US still has room for steady growth over the next several years provided the right market conditions are present.

Asia Pacific

Non OECD Asia is expected to be the fastest growing region in the world, with refinery expansions of 9 mb/d anticipated to 2030. Strong regional demand is driving capacity investments and a significant quality upgrade of fuels is expected, as specifications are moved in line with international standards.

One of the fastest growing countries is China. Here the growing domestic demand for fuels will be met by additional local capacity and we have also seen the formation of joint ventures between local refineries and Middle Eastern oil companies who export crude to China.

China capacity additions

While the country has renewables aspirations it is also concerned by the food vs. fuel conflict and is experimenting with non-food alternatives such as Jatropha-based biofuels.

India, another fast growing country in the region, is emerging as a global refining hub. Here, aided by lower operating costs and tax advantages, massive new complex refineries, focused on export markets such as Asia Pacific, Europe and even North America, have been successfully brought on stream.  The efficiency of these refineries adds further pressure to markets such as Europe, which have refining overcapacity.

In the OECD countries in Asia Pacific, such as Japan, South Korea and Australia, demand is falling as the region feels the effects of increased energy efficiency and the use of renewable fuels.

In Japan, the Ministry of International Trade and Industry regulated targets for heavy fuel oil conversion have forced the closure of some refineries. Here, just as in Europe, refineries are closing or turning their focus to the export market.

Other regions

In the Middle East, rapid expansion of refinery capacity is expected to meet local and export market demands. A significant amount of new refining capacity will be added in Saudi Arabia, with the formation of several JVs between Saudi Aramco and international oil companies.

Local fuel consumption is growing rapidly with increased gasoline demand for passenger cars, distillate for trucks and heavy fuel oil for industrial power plants, but export opportunities to Europe and Asia will also be pursued. Shell’s GTL plant in Qatar is also now fully operational and will create capacity for speciality diesel fuel.

In Latin America, the expansion of upstream oil exploration by Petrobras is leading to additional refining capacity investments in Brazil. These will be focused on increasing current refinery complexity, allowing the processing of local heavier crudes, as well as in grass roots refineries.

Additional capacity in Brazil, Venezuela and Columbia will produce diesel fuel to meet growing local demand. The region is a heavy user of biofuels and mandates exist in many of the countries and, if technology allows, the trend is for higher blending ratios to be introduced.

A major shift in the oil market is taking place between OECD countries, where demand has already peaked, and non-OECD countries where significant growth is forecast. 

In the Atlantic basin the impact of overcapacity has already had an impact and is forcing refinery closures and sales.

The differences in fuel production and demand mean the trend towards more international trade of fuel will continue and refineries need to be more knowledgeable about the varied fuel specifications and exchange agreement requirements of their global customers.

Increasing demand in some regions means export opportunities are being pursued by refiners

Fuel marketers also need to understand the various sources of fuel and quality implications to ensure trouble free operation.  By working closely with an additive supplier who understands the global specification landscape and its implications on the production of fuels, refiners can be better prepared to meet the export fuel specifications they target with their products.

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