Published on Tuesday, March 31 2020
Authors : Robert Auers and John Auers

The drastic lockdown measures being employed to stop the spread of the COVID-19 virus is resulting in a drop in petroleum product demand that is unprecedented in both magnitude and speed.  With no place to sell their products, refiners are scrambling to cut throughputs.  This is resulting in the “End of the Line” (with apologies to Supergroup, “The Traveling Wilburys”) for generally positive trends in refinery utilization across the globe over the past several years.  From very healthy levels of 90+% in the U.S. and 83% globally, utilization rates are diving and the bottom is as hard to predict as the progression of this pandemic and when it will ultimately come under control.   What we can predict is that until the lockdown measures are removed, refinery utilization will fall to levels not seen for decades (or even ever).  This will present significant challenges for refiners and not just economically, but also operationally.  Among the problems they’re facing are extremely uneven demand impacts (gasoline and jet falling much more rapidly than diesel), minimum unit turndown limits, a difficult work environment due to “social distancing” restrictions, and product specification challenges.  Regional differences, both in regards to COVID impacts and geographic factors (such as access to export markets) and differences in refinery configuration/capabilities will also play major roles in how individual plants react to and weather the COVID pandemic.   And of course, like in any other business, the financial strength of parent companies will be very important in being able to get through this very difficult environment.  In today’s blog, we begin our discussion of these issues, which we will continue in subsequent blogs.

COVID-19 Demand Impacts

 The global demand collapse seen in the second half of March, and likely lasting through all of April (and probably longer), is likely to dwarf anything ever seen before.  While the picture remains very uncertain, global oil demand in April looks likely to be down more than 15 MMBPD, and possibly more than 20 MMBPD (15 to 20%), from last year.  Jet fuel demand is seeing the most dramatic declines as air travel collapses, with gasoline consumption also seeing unparalleled decreases as “shelter in place” guidelines empty the streets.  Diesel is holding up much better (have to get the toilet paper to Walmart and Costco somehow), but demand is still likely to be down 5-10% globally year-over-year for the month of April).  The new IMO regulations that took effect in January have also served to boost diesel demand, helping to at least partially offset the global demand collapse.

Demand impacts will vary on a regional as well.  As most of the world has been entering different versions of “lockdowns” over the past 2-3 weeks, Chinese economic activity and petroleum demand has been increasing (though still well below pre-COVID levels).  Some specific countries, such as Japan, South Korea, and Sweden, have been able to avoid complete lockdowns (thus far) and while demand has declined even in those countries, the situation is not as dire as in most other developed countries across the globe.  Latin America has also not been as impacted, and considering it is the most important destination for U.S. product exports, does provide cushion for U.S. refiners, at least for now.  Also, many frontier economies (notably in Africa), do not have the ability to impose lockdowns, and will likely see activity remain closer to normal. These frontier economies, however, only account for ~5% of global demand. 

In our current Base Case (highly uncertain and dependent on developments in the war against the pandemic), we expect global demand for the year to be down 3-7 MMBPD from 2019.  In this scenario, where we assume most lockdown measures can be rolled away in June, the strongest losses are concentrated in the second quarter, when demand is forecast to be down by between 13 and 15 MMBPD from year ago levels.  Both the annual and peak quarterly losses are higher than anything seen before.  By comparison, the largest previous year-over-year decline in global petroleum demand was 2.6 million BPD, and 1981 was the only other year in the last five decades with over a 1 million BPD decline.

Challenges Faced by Refiners

 Given the lack of product demand, refiners have and will continue to reduce utilization and, at times, shut down altogether due to low (or negative) margins and/or a complete inability to move product.  In the current extreme situation, refiners are limited in how they can react.  First, the “turndown” rate, or ability to reduce feed rates below design levels is limited, with the minimum rate on any given unit varying widely and typically between 40-70% of design rate.  Several things limit turndown, including distillation column weeping, heat balance concerns and minimum reactor liquid hourly space velocities (LHSV’s).  Further, unit operating costs do not decline significantly at lower throughput rates.  Staffing and maintenance requirements remain constant and even energy costs and other variable costs do not decline in line with throughput rates.  As a result, large, multi-train refiners typically have more ability to efficiently adjust utilization as they can shut down individual units without completely shutting down the entire refinery.   Of particular concern for those single train refineries is the action of shutting down a refinery if it becomes economically necessary.  Such an action is tricky in the best of circumstances and the COVID restrictions makes it even more challenging; as a result, they could make the decision to continue to operate at a loss to minimize the risks associated with shutdown and eventual restart. 

In addition, as we discussed earlier, the demand decrease is not constant across all product categories.  Jet fuel is a middle distillate, similarly to road diesel, but is slightly lighter (less dense).  In an ideal situation, the large majority (>80%) of jet fuel at a given refinery could be blended into diesel.  However, diesel has a higher flash point spec and lower sulfur specification than jet fuel (jet fuel can still contain up to 1,000 ppm sulfur while diesel is limited to 15 ppm).  As a result, many refineries have limits regarding their abilities to hydrotreat jet to the necessary 15 ppm level and remove sufficient light ends to meet flash.  A reduction in overall throughput rates may help resolve some of these limits for the time being, as DHT capacity will be freed-up by reduced crude runs and typically-flooded stripper columns will have an easier time of meeting flash specs at reduced rates.  Similarly, gasoline demand will be harder hit than overall middle distillate demand, disproportionately hurting refiners configured for high gasoline yields.  Again, at reduced rates, many refiners will have more flexibility to better optimize diesel/gasoline yields.   Still, some refiners will be able to react to the changing product demand patterns better than others.  As a result, those refiners which are better able to maximize diesel and minimize gasoline and jet yields are likely to be able to efficiently and economically operate at higher utilization levels than their competitors who are more constrained in their abilities to adjust yields to market demands.

Lastly, geographic location will be a major determinant in how effectively individual refiners can respond to the current crisis.  Coastal refiners are advantaged in that they have access to export markets, although that option is becoming more limited as demand is also falling in those markets (though not as rapidly in Latin America as domestically).  Inland refiners, meanwhile, have a more limited reach in terms of potential end-use markets and may be forced to decrease utilization levels more rapidly as local markets collapse.  All of these factors will determine how individual refineries react in the current environment.

Specific Examples

The 130 MBPD Come-by-Chance refinery in Newfoundland, Canada, is the first facility in North America that has announced it is completely shutting down and will reportedly stay idle for two to five months.  Many larger refineries have announced plans to shut down specific major units.  ExxonMobil’s Baytown refinery, for instance, plans to shut the smaller of its two FCC units and to shut down a 90,000 BPD crude unit at its multi-train Baton Rouge refinery.  PBF has gone so far as to not only cut rates to minimum operating levels (reportedly by 30%) across its entire 6 refinery, 1+ million BPD system, but also to sell five of its hydrogen plants for a combined $530 million to improve liquidity.  Valero has reported that they have reduced throughputs by an average of 15% at 6 of their 12 refineries and that more cuts are on the way.  While other companies haven’t been as public about their specific plans, most (if not all) other U.S. and Canadian refiners have been reducing rates, and we believe they are operating at 60-80% of capacity.  

Global utilization trends are similar. India’s largest refining entity, government-owned IOCL, has announced plans to reduce crude runs by 25-30%. Tupras, the dominant refiner in Turkey, has said crude runs will be reduced by 20-50% at refineries across its system.  Total crude runs in Europe look to be down by at least 1.3 MMBPD from normal levels.  Additional cuts can be expected and more refineries are expected to completely shut down, at least temporarily, as refined product storage becomes limiting in the coming weeks.

Lastly, the current difficult environment will further pressure already marginal refineries (particularly in Europe, developed Asia, Russia, and the USAC) to permanently shut down.  It will also likely lead to cancellation or postponement of some new projects and capacity additions around the world.  As a result, once COVID-19-related lockdowns are eased and petroleum demand returns (and adding in the positive impacts of low crude prices), this could lead to a fairly bullish environment for refiners, pushing global refinery margins and utilization levels higher in the medium to longer term.

In this rapidly changing and very uncertain environment, Turner, Mason & Company is continuing to follow developments in how the COVID-19 pandemic and response is impacting petroleum demand.  As we see more data, we will be adjusting our analysis in how refiners are responding, on a plant by plant, regional and global basis.  Some high level aspects of these analyses will be presented and discussed in this blog over the next few weeks and possibly months.  We will be incorporating the analysis in a detailed and comprehensive way in the next edition of our Crude and Refined Products Outlook (C&RPO), scheduled to be issued in the summer.  As always, the C&RPO will include a detailed forecast of both crude and refined product prices, product demand, refinery capacity changes, and a variety of other key industry parameters.    For more details about this publication or other TM&C services, please visit our website or give us a call.


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