25% of refinery capacity could be ‘unnecessary’ by 2035

Source: Benjamin Hulac, E&E News reporter • Posted: Wednesday, February 21, 2018

Oil demand will taper off around 2040, but refineries are going to feel the financial squeeze of climate regulations far sooner, according to analysts with Moody’s Investors Service.

The industry is under pressure from governments that want to ratchet up rules to limit greenhouse gas emissions, potentially changing the outlook for electric vehicles and batteries that can store energy, the ratings agency said in a research note.

“Rising consumer interest and regulatory pressures are increasing demand for alternative fuel vehicles, leading both nations and automakers to target electrification of the transportation sector even more rapidly,” the note said, adding that this scenario could lead to “oil demand peaking sooner than expected.”

Demand from the wealthy bloc of Organisation for Economic Co-operation and Development nations will start declining “much sooner” than elsewhere, according to Moody’s.

All told, the shift is a “significant business and credit risk for global oil refiners, especially after the Paris Agreement of 2016,” the ratings firm said.

The refining and marketing industry — which changes raw petroleum varieties into usable products, like diesel and gasoline, and is responsible for more than 30 percent of global emissions — is often overlooked as a key business sector that has contributed to a warming planet. And unlike other industries, refineries face challenges on both sides of their supply chain — from changes to the oil industry and to the transportation industry.

The Paris climate accord, which the United States has not yet exited despite President Trump’s statements to the contrary, presses most nations to address warming before temperatures rise 2 degrees Celsius above preindustrial levels.

Under a 2 C scenario, the refining industry would be overhauled, “with many players exiting the market rather than hemorrhaging cash,” Carbon Tracker, a financial and climate think tank based in London, found in a November report.

Moody’s reached a similar conclusion. If oil demand started falling in 2020 and global leaders stuck to a 2 C goal, 25 percent of existing refining capacity worldwide would be “unnecessary” by 2035, according to the note.