Economic and Market Outlook

Before we provide the technical assessment of the synergies between oil refining and petrochemicals, we need to have a good look at the global and regional economic framework in which strategic investment decisions are being made. A good understanding of markets, economic drivers, and outlooks is essential to any discussion of the refining and petrochemical markets. In fact, due to their interaction with and dependence on the global energy market, we will give an overview of the trends and predictions for global energy supply and the impact these trends have on the oil refining and petrochemical sectors. The data we show in this book is based on our own assessment of energy supply and demand, and takes into consideration the global energy outlook reports of all major energy companies that post their assessment reports on the public domain. It is very difficult to predict the future behavior of markets and industries, so the statements made in this chapter reflect our opinion and may differ from the opinion of other industry experts and authorities.

As an example, none of the outlooks that were published a few years ago would have predicted the COVID-19 pandemic and its devastating impact on the global economy, on consumer behavior, and on oil prices. While we most certainly need to consider the short-term effects of COVID-19, we also have to assume that in the not too distant future, the global economy will recover and consumers as well as manufacturers and providers will reach a new equilibrium that will determine if the current predictions will prevail or if adjustments to the global energy outlook will be required. The reduced economic activity as a result of mandatory restrictions has caused changes in the energy supply and demand patterns. It is our opinion that it will be necessary to adjust the methodologies and metrics that we use to monitor the energy markets and to predict future trends. There will be lessons learned and newly discovered opportunities to increase efficiencies in workflows and processes. There will be changes on consumer behavior based on the experience from living with the current restrictions caused by COVID-19. However, we also believe strongly that the overall trends and predicted developments will continue to be valid. Changes will most likely have impact on regional markets and specific market sectors. There will be a decrease in employer commuting traffic to and from work in high population density areas as companies and employees got more comfortable with the benefits of remote, home office work. Long-distance travel will stay at a lower level than it was before for the same reason. Remote working and video conferencing gain in acceptance, and people learn how to use it more efficiently and confidently. These are just two examples of change that will occur. However, the global trends and the envisioned energy transformation as predicted will continue, and the statements derived from those predictions will stand despite COVID-19 and its global impact.

Global Energy Markets

The global energy market is dominated by fossil sources and will be for a long time. Despite all efforts to drive toward a transition away from fossil fuels and energy sources, we must be realistic in what we can expect and what can be achieved in what timeframe. We will explain in more detail our view on the transition and w'hat can be achieved by when in this chapter. For the purpose of simplicity, we look at three fossil energy sources and define the non-fossil energy sources in three groups. This makes a total of six energy sources to look at

• • Coal
• • Crude oil (conventional and unconventional)
• • Natural gas (conventional and shale gas)
• • Renewables (biofuels, bioenergy, hydropower)
• • Nuclear (traditional and small-scale)
• • Wind/Solar (onshore, offshore).

Table 3.1 shows our assessment of the current global market share for each of these sources, for the predicted market share in the year 2040, and for the short-term and long-term trends we believe these groups will experience.

In general, the overarching theme for developing the global energy and power generation sector is decarbonization. This will be measured against the decrease in global emissions of carbon dioxide, which has been determined to be one of the main culprits for causing global warming and changes in the global climate. Since the combustion of all fossil fuels results in the formation and emission of carbon dioxide, all energy companies have agreed to work on concepts and technologies that will allow the industry to reduce carbon dioxide emissions, by decarbonizing the sources for energy and power generation. This transition will be executed in two phases, of which only the first phase is clearly defined.

• Phase 1: Transition from sources with high carbon intensity to sources with low carbon intensity. This phase is defined by the commitment to phase out coal and crude oil, the two fossil energy sources with the highest carbon intensities,

TABLE 3.1

Global Market Shares Power Generation

from power generation and from manufacturing of fuels. At the same time the industry will increase the use of natural gas, the fossil fuel with the lowest carbon intensity, for power generation and fuel manufacturing. In parallel, a lot of the capital investment will go into the development and implementation of other fuel and power sources as renewables, wind and solar.

• Phase 2: Transition from low carbon intensity sources to non-fossil energy sources. And here is where the predictions get a bit fuzzy. While there are technical feasible and commercially available alternatives, none of them has the potential to replace fossil energy sources yet.

The transition to low or zero-carbon-intensity energy sources and the resulting reduction in carbon dioxide emissions is not driven by the energy market, but by environmental concerns and political intervention. This fact complicates the analysis of the energy markets and explains some of the challenges we face in implementing the required changes.

The political journey to where we are today started in 1992 with the United Nations Convention on Climate Change (UNFCCC). During this convention, all participating parties or nations signed an agreement that states (1) that global warming is occurring and (2) that it is predominantly caused by human-made carbon dioxide emissions. As a countermeasure, it was agreed to reduce the emission of greenhouse gases (GHG), including carbon dioxide as the main component.

In 1997, the agreement from the UNFCCC was adopted in the Kyoto Protocol, a treaty developed by over 190 member nations. The Kyoto Protocol was entered into force in 2005. The first commitment period started in 2008 and ended in 2012. The second commitment period was developed under the name Doha Amendment in 2012. However, as of Q1 2020 only 137 member nations have signed the Doha Amendment. It requires 144 nations to accept the treaty to enter into force. But several nations have changed their approach to fighting global warming, one of them being the USA. These nations believe that a global approach to the problem does put certain nations into economic disadvantage and that a national, focused approach, defined by setting their own targets and by acting independently from other nations, is a more efficient and quicker way to fight global warming.

Enforcing a politically driven program bears certain risks that will cause severe resistance in the industry who must implement it. We have no intention to comment on global warming nor do we want to take part in the dispute about the interpretation of climate data and the conclusions drawn from that interpretation. But we want to highlight that enforcing the energy transition program gets its most resistance from two main sources:

• • The lack of practicality and feasibility of utilizing certain energy sources due to availability and/or sustainability.
• • The lack of economic benefit of utilizing certain energy sources, mainly driven by the cost of utilization.

Saving the planet is a noble cause and deserves all the support we can give. Ruining the global economy will not support that cause, but in fact cause more damage than it will do any good.

This sets the stage for the evaluation and discussion of all six energy sources and their future role in the global energy and power generation mix.

Coal

Coal is a solid fossil fuel that is formed from peat, which itself is formed from remains of plants in tropical wetlands that existed millions of years ago. The pressure of layers of rocks and soil that laid down on top of the peat transformed the peat into the rock formation that we know as coal. There are different kinds of coal with slight differences in composition and use:

• • Lignite - also called brown coal; lignite is mostly used as solid fuel for electric power generation
• • Sub-bituminous coal - like lignite, sub-bituminous coal is used as solid fuel for electric power generation, but is also a source for light aromatic hydrocarbons for the chemical industry
• • Bituminous coal - bituminous coal is mostly black in color, but can be found in dark brown color as well; it’s a dense, but soft rock that breaks easily and burns quickly; bituminous coal is used as solid fuel in power plants, as heating medium in manufacturing processes, for blacksmithing and as source to make coke for the steel industry
• • Anthracite - a hard, black rock that burns longer and is used mainly in residential and commercial space heating

Other materials that would fall into this group are

• • Peat - the precursor of coal; peat is mostly used in very specific application such as whiskey distilleries
• • Graphite - natural graphite is used in electrodes for the steel industry as well as in batteries; powdered graphite is also used in pencils or as lubricant; it is very difficult to burn and, therefore, not suitable as solid fuel.
• • Charcoal - charcoal can be produced by heating wood in an airless atmosphere; charcoal is produced mostly for private use as solid fuel for grilling.

The main component of coal is carbon. The composition of coal is completed by hydrogen, sulfur, oxygen, and nitrogen. The combustion of coal in the process of power generation or heating generates significant amounts of carbon dioxide as well as soot, mercury, and carbon monoxide. The air pollution caused by the decades of burning coal is main contributor to carbon dioxide emissions. It is estimated that up to 50% of the global carbon dioxide emissions stem from burning of coal. It also contributed to diseases such as asthma and cancer. In addition, the mining of coal in all its forms - deep underground mining, surface mining, or mountaintop mining - created severe environmental problems. All these factors are playing a role in the decision of many countries to abandon coal-based power generation and heating with a less carbon-intensive or zero-carbon fuel or energy source.

For example, if the carbon dioxide emissions are the baseline representing 100%, switching to other fuels or energy sources can lower the carbon dioxide emissions significantly. Switching to natural gas as fuel for power generation is the most common decision. We estimate that using natural gas can reduce the carbon dioxide emission by about 60%-40% of the base level set by coal. Some sources claim that the reduction can be as high as 80% to about 20% of the baseline emissions. Another example we w'ould like to mention is hydroelectric power. We will talk about types of hydroelectric power plants later in this chapter. Hydroelectric power has been reported to reduce carbon dioxide emissions by approximately 99% based on typical carbon dioxide emission numbers reported for such facilities. However, there are reports that indicate that carbon dioxide and methane emissions from the decomposition of plants (trees, bushes, grass etc.) and organic matter that was or will be flooded by the artificially created water reservoir have been underestimated. These reports also highlight that the extremely low numbers of carbon dioxide emissions from hydroelectric power neglect the emission created during the construction and decommissioning of the hydroelectric power plants. However, even the corrected numbers still represent a huge reduction of >95% of carbon dioxide emissions compared to coal.

Despite all these negative effects of using coal as energy source, it is still heavily used in China (largest coal producer in the world), in South and Southeast Asia, and even in the USA. A lot of countries such as Germany have declared that they will shut down their coal-fired power plants within the next few years. Even China has announced that it will level out the use of coal for power generation. Only still growing economies such as South and Southeast Asia have plans to build and operate new coal-fired power plants. The main driver for this decision is the low cost of coal and its application in pow'er generation as well as its availability. And developing countries may not put as much focus on issues such as pollution and health concerns as fully developed countries do. But the pressure of decarbonization will also reach developing countries, and it seems inevitable that coal as an energy source will decline over the next 20-30years and will be replaced by natural gas and renewable energy sources.

There are only very few factors that could change that picture. Better, more efficient and less expensive gasification technologies could allow' the use of coal and similar products such as petroleum coke in the generation of methane-rich gas that will be the feedstock for fuel manufacturing, petrochemicals, chemicals, and a source of energy for power generation. The commercial development of a direct digestion process for coal could also change its fate as direct digestion has no carbon dioxide or other emissions. Unless a technology like the ones mentioned above emerges and becomes commercially available and proves to be environmentally and economically acceptable, the fate of coal seems to be sealed.