US refiners staggered by a year of historic disruptions are focusing on the longer-term risks that they hope they can control through adaptation.
The American Fuel and Petrochemical Manufacturers (AFPM) conference on 12-13 April reflected the US downstream sector's growing focus on investing in line with environmental, social and governance (ESG) criteria — extending the life of refining sites through renewable conversions and navigating an energy transition that will curb long-term demand for their products. Products that drove the last century could be forced out of the current one through a combination of regulation and consumer attitudes toward single-use plastics and petroleum transport fuels.
The industry must counter "an increasingly loud narrative" that sustainability requires removing fossil fuels from the market, and show that petroleum products will be needed "for generations", AFPM chief executive Chet Thompson says. "More progress on sustainability can happen with us in the mix than without us."
Refiners and petrochemical producers have some advantages when it comes to keeping the attention of institutional investors. The industry has avoided the track record of capital destruction attributed to upstream producers, portfolio managers told the AFPM conference. And downstream operators stand out as promising opportunities with undervalued ESG strengths, analysts and investors said.
Opportunities to convert equipment to produce currently lucrative renewable diesel and sustainable aviation fuels — as well as access to export markets where oil demand will keep growing for decades — can set downstream companies apart in the energy space. "I think it is also important to realise that investors do not see this just as an issue or a risk, but they also see it as an opportunity for us," Dutch chemicals group LyondellBasell's executive vice-president, Torkel Rhenman, says.
But what and how investors consider risk factors, particularly beyond environmental concerns, remains hard to track. Downstream firms have for years gathered data on environmental and safety performance that are now used in those evaluations. But social considerations — including diversity, community involvement and supplier selection — follow less certain metrics. Criteria used by major investors are evolving and opaque — something the finance sector knows must change. "Everyone is pushing for all of us to report more and be more transparent in how we operate," investment firm Harmony Capital's lead investor, Robin Wehbe, says. "If we leave things up to government, they are not going to make things easy for us."
Culture shock
The last year has put the US refining sector through its biggest demand and operating shocks in decades. Domestic gasoline demand sank to a near 30-year low last spring as efforts to contain Covid-19 slashed travel and limited business activity. More than 1mn b/d of US and Canadian refining capacity shut in 2020, while hurricanes in western Louisiana left refineries there idled for months.
And disruptions this year have already proven costly. February's winter storm led to the largest one-week drop in refining rates in over a decade and drove up gas and electricity costs in the midcontinent and Gulf coast. Independent refiner Valero expects to report a first-quarter loss of up to $835mn, largely because of the storm.
But the industry hopes for resurgent fuel demand this summer as the US emerges from widespread lockdowns. Estimated domestic diesel demand has surged beyond pre-Covid levels to more than 4.1mn b/d, and estimated gasoline demand has climbed to about 5pc below the strong levels of early April 2019. "At the end of the day, the world needs what we do," Phillips 66 executive vice-president of refining Bob Herman says. "Our biggest challenge is to stay together and keep pushing the narrative, how important we are to modern life."
