Moody's: Carbon transition poses increasing risk for global oil refiners

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Global oil refiners face significant carbon transition risks in the coming decades as a tightening regulatory environment and technological changes impact demand, Moody's Investors Service says in a new report. Oil consumption is responsible for more than 30% of carbon emissions globally, making oil refineries and the consumption of refined products key targets for carbon reduction policies.

"Carbon transition risks facing refiners include lower demand for refined products over time due to policy initiatives, vulnerability to changing consumer preferences and technological shocks, especially in the transportation sector," according to John Thieroff, a Moody's Vice President.

Moody's base case scenario expects oil's incumbency, particularly as a fuel for heavier forms of transportation, to lead to continued demand growth through 2040, and that the transition to alternative fuels will be gradual. However, Moody's expects demand in the OECD will peak much sooner, with fuels for passenger fuel vehicles coming under greatest pressure. Further, there is considerable risk that demand for refined product could reduce faster than anticipated.

"We see more than 10% of existing global throughput capacity at risk of closure by 2025," Thieroff says. "An oil demand peak by 2020 consistent with a 2 degree pathway would render up to 25% of existing global refining capacity unnecessary by 2035, although we don't see that scenario as likely at this time."

Emission-related regulations for refineries and refined products will increase noticeably in coming decades and will vary by jurisdiction. The timing and costs of carbon-pricing regulations will also vary considerably by nation, allowing refiners in jurisdictions slower to regulate to generate higher operating margins.

In addition, carbon-pricing effects will likely be unevenly distributed; however, fuel produced primarily in export markets with higher carbon prices would face competitive disadvantages against products with lower or zero carbon prices.

While policies are designed to reduce oil consumption, Asia is likely to add significant capacity to meet its own growing energy appetite. Middle Eastern refining capacity is also likely to expand significantly. At the same time, refiners in western Europe and the US East Coast face the threat of stranded assets amid declining demand for light passenger vehicle fuels. These refiners will be forced to become competitive in distant export markets or face the possibility of closure.

Other transition risks emerge via the changing preferences of consumers and technological advances. Oil and gasoline demand face risks from progress in automotive and energy storage technology as well as cleaner technology fuels.

"Accelerated growth in alternative fuel vehicles and electric vehicles will exacerbate declining demand, but the difficulty of predicting the degree and speed of rising popularity for alternative fuel vehicles poses challenges in itself," says Thieroff. "Producing these vehicles require changes to the manufacturing process, heightened coordination with auto-parts suppliers, improvements in battery life and costs, and the spread of supporting infrastructure such as power-charging stations."

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