Oil refining capacity set to shrink by a quarter during low-carbon transition

A quarter of global refining capacity will leave the market or be forced to close by 2035, sparking calls for investors to be aware of the risk of "wasting capital" on new investments into the oil sector.

A new report launched today (2 November) by Carbon Tracker has revealed that oil demand could halve during a “swelling tide” of climate regulations and advances in clean technologies.

Refineries can account for a quarter of an oil majors’ balance sheets, and the report warns that up to 80% of earnings could be exposed by 2035 as demand stalls. Investors have been urged to take note of the analysis and map investments appropriately.

Carbon Tracker’s senior analyst and co-author of the report Andrew Grant said: “A 2°C pathway sees oil demand peaking followed by major rationalisation in the global refining industry. Many players will exit the market rather than haemorrhage cash. Investors should beware that the risk of wasting capital extends to all new investments, including expansions or upgrades to existing facilities.”

The report analysed 492 refineries representing 94% of global capacity, in what is believed to be the first examination of how the oil industry would change during the low-carbon transition. Analysis is based on the International Energy Agency’s 450 scenario, which predicts that oil demand will peak in 2020 before declining by almost a quarter up to 2035.

But the industry, worth $147bn in 2015, predicts that oil demand will grow steadily up to 2035. Carbon Tracker had previously warned that the sector is underestimating the impact that technologies advances like electric vehicles (EVs) will have on transport fuels, which account for 70% of refinery profitability.

Produced in collaboration with Danish pension fund PKA and Swedish pension fund AP7, the report warns that fossil fuel giants Shell and Chevron have 60%-70% of profits at risk, with ExxonMobil and BP potentially losing 50% of profits.

Budgets burst

The Carbon Tracker analysis draws on the recommendation of the Taskforce on Climate-related Financial Disclosures (TCFD), set up by the G20’s Financial Stability Board. The Taskforce, backed by more than 100 companies with $2trn of assets under management, notes that there is already enough oil capacity to meet future needs in the 2˚C scenario. It is estimated that 21% of existing refineries are already unprofitable.

Companies and investors are already taking care to future-proof assets and portfolios. The value of investment funds committed to selling off fossil fuel assets jumped to $5.2tn, doubling in just over a year between 2015 and 2016.

Pricing mechanisms are also proving their viability as part of the transition. Bank of America, Barclays and Hermes Investment Management have introduced the world’s first investment-grade carbon pricing system for the power sector, aimed at aligning company operations with a 2°C pathway.

Under the initiative, utility firms would need to adopt a carbon price range between $30 – $100 per tonne by 2030 to limit global warming to 2°C. In fact, the €256bn market grouping of 14 of the largest European publicly-listed energy firms look set to collectively overshoot the required “carbon budget” to keep temperature rises below 2C by 14% – equating to 1.3bn tonnes of greenhouse gas emissions.

Matt Mace

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