Jet fuel demand revival key to refiners' survival

The Covid-19 outbreak has accelerated the timeline to address some of the structural problems faced by refiners if they are to survive. There is no one-size-fits-all solution but there will be a change in refining direction moving forward, according to panellists at the virtual Platts Asia-Pacific Petroleum Conference (Appec) 2020.

The theme of Covid-19's unprecedented impact on oil products demand was evident throughout this year's event, as refiners shared thoughts on how to survive the Covid-19 crisis that has strained refining margins.

The general trend moving forward would be that simple refineries will seek to divest, complex refineries will move into petrochemicals, integrated petrochemical refineries will seek more feedstock flexibility and oil majors will start to move into the renewables fuel space, said Indian refiner Nayara's vice-president Ashutosh Deshpande.

Several Asian refiners are considering closing down as the market emerges from a record demand crunch in the second quarter of 2020, after local governments initiated Covid-19 lockdowns that limited demand for transportation fuels such as gasoline, jet fuel and gasoil.

Australian refiner and marketer Viva Energy is mulling a full shutdown of the 128,000 b/d Geelong refinery, while Shell last month announced the permanent closure of its 110,000 b/d Tabangao refinery in the Philippines. Refining NZ is considering converting its 135,000 b/d Marsden Point in New Zealand to an import terminal.

Refineries are exhausting their operations and financially fragile refineries will be driven out of the market, said Japanese refiner Cosmo Oil's general manager of crude and tankers, Mitch Kawaguchi. Refineries have already maxed out gasoil-to-jet-fuel yields and it is not sustainable in the long run, Kawaguchi added.

Gasoil refining margins or the Argus Singapore 10ppm gasoil price to Dubai crude swaps are starting to show cracks amid the onslaught of supply against subdued regional demand. The margin fell to a three-month low of $3.27/bl on 4 September, with it last lower on 14 May at $2.83/bl. Gasoil margins also fell below gasoline margins yesterday, for the first time, according to Argus data.

Middle distillates demand will have to return for the refineries to survive. Jet fuel demand is expected to rebound as early as next year with possible vaccinations and populations getting used to the new normal. There are already some bright spots, with jet fuel demand rising in June-July, but demand is unlikely to return to 2019 levels just yet, said Kawaguchi.

Refiners are operating in special circumstances given the complete collapse of demand from just one product, jet fuel. Until jet fuel demand returns, run rates will remain under pressure and refineries will have to look at other ways of re-optimising, said Savvas Manousos, head of global trading at Maersk.

One silver lining for refineries in India is that most cater to domestic demand, which already recovered in August although is still below pre-virus levels, said Nayara's Deshpande. There is also much upside potential for oil product consumption in India as demand per capita remains very low. Government plans to grow the Indian economy will help domestic demand, which local refineries will be well placed to tap with their expertise in domestic logistics and local marketing, Deshpande added.

It is difficult to provide a blanket answer as to whether refineries will close in this climate, as factors such as access to domestic markets, integration of petrochemicals, access to high-growth markets, supply chain synergies and securing product outlets all play a part in keeping a refinery in business, the industry executives said.

But the return of jet fuel demand will cause a series of events to unfold that could support refinery margins. The gasoil and jet fuel yield ratio is currently at its maximum and is pressuring gasoil margins, the bedrock of even complex refineries, equipped with hydrocracking and coking capacity.

By Aldric Chew