Published on Tuesday, February 25 2020
Authors : John Auers and Robert Auers

The early days of the new decade of the 2020s has shown to be a challenging one for refiners, with both anticipated and unanticipated events leading to an uncertain and challenging environment for industry participants.  In thinking about this situation and challenges faced by refiners, the ZZ Top classic, “Got Me Under Pressure,” comes to mind.  It certainly appears that a variety of forces are working to pressure the companies involved in producing, transporting and refining crude oil.  Among these are: government policies, geopolitical turmoil, natural disasters, market shifts, technological advances.  As evidenced by the dramatic impacts on petroleum demand from the Wuhan novel Coronavirus (COVID-19), both the timing and magnitude of these forces are very hard to predict.  Even a much anticipated and planned for event such as IMO 2020 has not had the impacts on the market (at least not yet) that many industry participants and analysts (including ourselves) had expected, especially on distillate prices. While COVID-19 will eventually be in the rear view mirror (hopefully soon), there are sure to be other such “black swan” events with which the industry will have to contend.  The IMO rules will also be followed by other regulatory interventions.  Some of these could be existential in nature for the industry as interest groups pressure policy makers to reduce and even do away with petroleum usage entirely, perhaps making – “She might get out a nightstick and hurt me real, real bad” – sound tolerable.

 

In an effort to help the industry understand the impacts of some of the most important regulations, trends and developments, TM&C is in the process of completing updates of two of our regular reports analyzing the industry and providing forecasts of important market aspects (supply, demand, capacity, and pricing) – the 2020 Crude and Refined Products Outlook (C&RPO) and the 2020 Worldwide Refinery Construction Outlook (WRCO).  These publications are issued on a biannual basis.  In each case, we have attempted to forecast how markets will look “Ten Years After (or 5 or 20 years for that matter).”  For a brief glimpse of the analysis which was conducted in each of the reports, please read on.   

Crude and Refined Products Outlook (C&RPO)

The Crude and Refined Products Outlook has the broader scope of these two reports.  The C&RPO covers the entire spectrum of the petroleum products markets, from crude oil through finished products, and has been in publication for well over a decade.  The overall purpose of the report is to provide a comprehensive, independent price deck which can be used as a basis to evaluate capital projects or other strategic initiatives, including acquisitions.   Our forecasts are supported by analysis of key drivers and background information on critical assumptions.

Our forecast of global petroleum markets, includes over two dozen crudes in seven geographic regions. Pricing relationships are developed to evaluate light/heavy spreads, comparisons between North American and global marker grades, and sweet/sour spreads.  Commentary is provided in multiple report sections which describe how pricing relationships will react over time in response to key market and regulatory developments.  Forecasts for product prices are also provided in the same seven geographic regions and include not only the key transportation fuels of gasoline, diesel and jet fuel, but also feedstocks, intermediates and specialty products (LPG, naphtha, VGO, asphalt, petroleum coke, etc.).

In order to develop the price sets, we prepare petroleum products demand forecasts for the U.S., Europe, Asia Pacific, and the Rest of the World through 2040, considering expected GDP and population growth, improved efficiencies, and increasing use of alternatives (both with market driven and regulatory motivations), etc.  To this end, we include a forecast for Electric Vehicle (EV) penetration and their likely impact on global petroleum demand.  Appendix tables detail global Alternative Fuels production growth, a forecast of RIN prices through 2035 and data on the California Low Carbon Fuel Standard Program.  We also include detailed information regarding midstream crude oil infrastructure, identifying possible bottlenecks.  Particular emphasis is given to pipelines serving the Permian Basin, Western Canadian Sedimentary Basin (WCSB), Bakken, and Cushing, OK.  This is accompanied by a crude oil and NGL production forecast for each of the major U.S. producing regions (Permian, Bakken, Eagle Ford, Niobrara/Rockies, Anadarko, and Gulf of Mexico) and for total U.S. and Canadian crude oil production.  Lastly, we include a list of probable global refinery construction projects with details regarding capacity, expected crude quality (light, medium, heavy), expected product slate, cost and downstream unit capacity.

We have just completed the 2020 edition of the C&RPO, and it is being issued today (February 25).

Worldwide Refinery Construction Outlook (WRCO)

Each year, numerous global refining projects are announced, generally with the best of intentions and with a keen desire to see the projects come to fruition.  Many of these projects are complete refineries while others are expansions to existing facilities. If all were to be completed, the world would be awash in surplus product and the margins for all would be poor.  TM&C catalogues each of these announced projects and forecasts which will be actually constructed in the biannual WRCO.

Critical metrics are determined for each refining project including location, owners, construction timing, capacity additions, downstream unit capacities and cost. Crude slate changes and product yields are estimated for each project. Our assessment of each project results in the determination of a Probability Index for the project.  Each is assigned a ranking of one to five based on our judgment of the likelihood for completion.  Projects with a one or two are deemed as unlikely to be constructed while a five has the highest probability and is generally already in the construction phase. The probability rankings are based on the economic rationale, regional crude and product balances and the financial standing of both the project and sponsors and the owners’ past track record for project completions.

The soon-to-be-released study (expected in early March) details 220 announced projects which include 94 new refineries.  If all were constructed, they would add 24.9 MMBPD of new crude processing capacity in the next five years.  As this would far exceed global demand growth, the TM&C probable list (projects rated as a three or higher) has been pared down to 82 projects which would add 6.3 MMBPD of new capacity.  This “probable list” includes 13 new refineries and would require approximately $250 billion of new investment.  The WRCO provides a listing of each refinery on the project lists as well as the associated downstream units and capacities.

Turner, Mason & Company is continually monitoring developments in the global petroleum markets and assessing how they will impact the industry.  Considering the dynamic events impacting the petroleum industry (IMO, COVID-19, trade wars, low carbon standards, EV incentives, sanctions, OPEC policy, etc.), the future landscape of the petroleum industry is as uncertain as ever. TM&C not only executes regular and comprehensive studies of the industry, such as the C&RPO and WRCO, but also one-off studies focusing on specific issues, such as the recent report we completed on options available to overcome bottlenecks impacting the production and transportation of Western Canadian crude – Clearing the Bitumen Bottleneck.  We also use the findings of these studies and our expertise to assist clients in all segments of the petroleum supply chain in specific and focused consulting engagements.   For more information on our subscription studies or our consulting capabilities, please call us at 214-754-0898 or visit our website at turnermason.com.