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High carbon tax could erode up to 60% of Asia’s refining earnings

A high carbon tax could erode up to 60% of Asia’s total refining earnings by 2027, says Wood Mackenzie, a Verisk business (Nasdaq:VRSK), at the Global Energy Summit Focus Week.  

According to Wood Mackenzie’s Emissions Benchmarking Tool, the refining industry accounts for only about 3% of global energy sector emissions. This refers to Scope 1 and 2 emissions from process operations required to convert crude oil into refined products within the refinery. 

Wood Mackenzie research director Sushant Gupta said: “Asia is the largest contributor to refinery emissions globally. The energy transition will manifest itself in three main challenges for refiners.  

“Firstly, reduced market size for refined products which leads to poor refinery margins and refinery closures. Secondly, the transport fuel demand is hit the hardest, which accounts for more than 50% of refinery production. Refiners will have to re-configure and shift to petrochemicals. And lastly, a possibility of a high carbon tax on refining industry as part of broader decarbonisation efforts. While a carbon tax might sound like a good idea, the reality is that a global uniform carbon tax or policy is unlikely, which will make it difficult for refiners to pass on the costs of carbon to its customers. The inability to pass through carbon costs could have material impact on refinery margins.  

“At US$30 per tonne (t) carbon price, we estimate the average impact on refining margins would be US$0.55 per barrel of oil equivalent (bbl). This rises to US$2.10/bbl at $100/t of carbon price. For 2027, we estimate that 60% of Asia’s total refinery earnings could be wiped off in a US$100/t carbon price scenario.”   

Vice president Alan Gelder said: “Only highly competitive sites that generate significant cash will survive the energy transition, as their cash generation capabilities will provide funds for investment in decarbonisation as well as rewarding investors. 

“Environmental sustainability has to be a key priority for refiners. They will need to find their own unique decarbonisation solution and yet still remain economically viable.” 

Some early responses in the short term to decarbonising the refining sector include process optimisation such as improving furnace efficiency, low temperature waste heat recovery and fluid catalytic cracking (FCC) unit optimisation. The industry could also consider switching combustion fuel from fuel oil or coke to cleaner fuels such as natural gas or green hydrogen. A switch from burning fuel oil to natural gas can reduce emissions by up to 30%. In addition, a switch to cleaner feedstocks could also be an option. 

For deeper decarbonisation, refiners will have to consider low carbon technologies such as electric heating, carbon capture and storage on FCCs, hydrogen and gasifier units and biomass gasification. They will also have to consider the use of renewable power and green hydrogen.  

Principal Analyst Johnny Stewart suggested that refinery–petrochemical integration provides a platform for long-term site viability. “About 70% of Asia’s total refining capacity is already integrated with petrochemicals, but the average chemicals yield from the integrated refineries is only about 13 wt%. In contrast, the new integrated refinery sites in China have yields of over 40 wt% chemicals. So, there is a long way to go. When we rank refineries based on their net cash margin in our asset-benchmarking service, REM-Chemicals, we find integrated refinery petrochemical sites lead the pack. Looking at South Korea’s Onsan site as an example, investment in petrochemical integration provides higher value that far outweighs the cost of emissions,” Stewart said.

Gupta said: “As every refinery is unique, there is no silver bullet. Refiners must start with identifying sources of their emissions and work out most cost-effective ways to reduce their carbon footprint. There will not be a blanket solution for the refining industry but a combination of solutions to solve this complex refining decarbonisation problem.”  

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