Outlook 2021 +
COVID-19 has not altered the challenges, but there is a clear shift in focus.
Market trends in theRefining, Petrochemicals and Energy segments
In many respects, 2020 was an unprecedented year. The outbreak of the pandemic in the first quarter and general social distancing led to the sharpest global decline in economic activity since World War II. As a consequence of mobility restrictions, demand for liquid fuels hit all-time lows, which had an instant impact on the crude oil market, pushing oil prices below production costs. The three largest oil producers (the US, OPEC and Russia) had no choice but to cooperate. The biggest ever production cuts (10 mbd) agreed between OPEC and Russia, combined with the US production decrease (of more than 3 mbd over a year) caused by the price slump, helped to adapt crude oil supply levels to demand for liquid fuels, which gradually started to recover as the mobility restrictions were eased. As refineries did not reduce their throughput capacities in response to the major decrease in demand, capacity utilisation rates fell to record lows, driving refining margins below production profitability thresholds.
The outbreak of the pandemic and its direct consequences triggered a dramatic shift in the economic, social and political agenda. Significant changes can be seen, for example, in the approach to climate protection, especially in terms of increased awareness and sense of responsibility for climate among businesses, regulators and consumers. A growing number of companies are announcing strategies to achieve carbon neutrality, embarking on carbon reduction programmes, or looking for sustainable ESG financing for green investment projects. On September 9th 2020, PKN ORLEN, as the first oil company in Central and Eastern Europe, made a declaration to become a net zero business by 2050.
This refocusing also involves change in strategic and business thinking among businesses, which until recently had been based on long-term analyses and forecasts underpinned by a sense of control over the world, nature or human capacity to mitigate adverse developments.
An event without precedent, such as the COVID-19 pandemic, led to a sudden upheaval of the existing economic and social order (equilibrium), sometimes referred to as ‘the normal’. Previously, strategic thinking was based on the expectation that after some time, as a result of adjustments, a new order, ‘a new normal’, would emerge, giving rise to a new state of equilibrium for which one could prepare strategically. Now we need to take into account that the technological acceleration and the pace of social change brought by the fourth industrial revolution as well as excessive exploitation of the natural environment may lead to further unseen developments (black swans), both positive (e.g. new technologies) and negative (e.g. consequences of climatic warming). Such events may take place so frequently that there will not be enough time for things to reach a new normal. Moreover, after each such shock the world may head towards another new order, another new normal, which simply cannot be reached.
We will live in a world of increasingly frequent, unpredictable and revolutionary changes for which we will not be able to prepare in the same way in which we prepared for an anticipated decline in demand, increase in prices or fiercer competition. Instead, we will have to learn to quickly respond to more and more frequent, unpredictable and perplexing changes. In this new reality, the most important challenge for businesses will be to switch the strategic thinking from preparation for an anticipated change to rapid response to unexpected developments. This will be supported by progressing digitisation, especially in areas related to agile management, as it facilitates quick impact assessments based on companies’ digital twins. In practice, the rapid response capacity will depend on maintaining appropriate reserves in many areas.
However, the consequences of the COVID-19 pandemic and successive black swans will not change the fundamental development challenge stemming from the rising consumption of energy and material goods with a rapidly growing population. The challenge lies in changing the relationship between humans and nature. In 1900, there were 1.6 billion people in the world, in 1950 – 2.5 billion, and now (2020) the world’s population is 7.5 billion. It is no longer possible to manage natural resources as we used to do, especially that the population is growing exponentially. We are at a point in history where the logic of short-term profit maximisation and exploitation of natural resources can no longer be pursued. Therefore, energy transition assumes working towards synergies between humans and nature instead of ruthless exploitation.
The world is undergoing fundamental changes making a structural impact on the energy sector1
1 For more information, see https://ffbk.orlen.com/files/Raport/Orlen_zeszyt_12_EN_FINAL.pdf
Energy transition:inevitability and opportunity for growth
For the past few years, we have been witness to a slowdown in the growth rate of demand for crude oil due to the ongoing electrification of passenger transport, improved efficiency of internal combustion engines, and a growing share of biocomponents, alternative fuels and alternative modes of transport. This is occurring alongside forecasts of declining demand for crude oil and liquid fuels and the world approaching ‘peak oil’. OECD countries have already reached a peak in oil demand, and according to some scenarios global demand for crude oil and liquid fuels will never recover to the pre-2019 levels. The prospects of a shrinking market, social, regulatory and financial pressures on rapid decarbonisation of transport and the size of oil resources already discovered are not conducive to investment in oil production or the refining industry as businesses fear stranded assets. What discourages investment in the oil and gas sector are increasingly frequent steep price declines caused by the occurrence of sustained periods of oversupply, be that due to new technologies (unconventional and deep-sea mining) or reduced demand in the wake of such events as the COVID-19 pandemic. As a result, many international oil and gas companies are limiting investment in exploration and production assets or abandoning it altogether.
On the other hand, new renewable energy sources are becoming fully competitive in terms of prices (e.g. wind power) or increasingly competitive because of the growing scale and technological progress (e.g. solar PV systems). The potential of renewable energy sources is fostered by the rising popularity of prosumer Energy. A great advantage of electricity production based on non-depletable energy resources is the stability and predictability of generation costs (depreciation of Energy, storage and transmission facilities).
The main factor enabling the energy transformation is the consistent decline in the costs of generating energy from renewable sources
Investment in renewable energy sources is driven by the growing environmental awareness of the general public, reflected in new, ambitious climate objectives set in new agreements (Paris Agreement, New Green Deal, RED II in the EU, restrictions on the production of disposable packaging) aimed at driving progress towards energy transition. Currently, the countries that have made a commitment to achieve net zero carbon footprint by 2050–2060 (China, the European Union, Canada, Japan, South Korea), including the US, which is likely to make a similar declaration, account for 65% of global emissions. The list of oil and gas companies making this commitment is also growing. Finally, we are witnessing change in customer expectations, including preference for digital distribution channels and tailored product offering with information on carbon footprint.
.png){kind=spacer}
The energy transition pertains to both the demand and supply side. It should be clearly stated that the most difficult task is to decarbonise energy used for private consumption. Energy is not consumed directly. The change of primary energy sources in consumption involves costly replacement of energy receivers (heating furnaces, gas cookers, cars and vehicles with combustion engines) with new, electricity-powered and more cost-effective ones. The new innovative solutions proposed by industry must find buyers. And if the transition is to be successful, these must be mass buyers, including those with low incomes. The efforts to switch private consumption to green energy will be supported by new business models (use instead of own, product as a service) which make it possible to finance the total cost of energy in households from current expenditure, without having to make costly capital investments to replace equipment and appliances. These models also help close the loop in materials management systems and, by meeting consumer needs while ensuring lower consumption of materials per capita, contribute to reducing greenhouse gas emissions.
Energy plays a leading role in energy transition. The share of electricity in global demand for energy is steadily growing. Electrification is also helped by the progress in digitisation since all things digital are powered by electricity. If all energy receivers were electrical, which is what in fact the European Union aims to achieve, decarbonisation of energy used by end consumers would effectively consist in decarbonisation of Energy. Decarbonisation in the Energy industry is not only progressing faster than in households (private consumption), but it is also quicker in embracing technological game changers that will transform the sector. The likely game changers are efficient batteries with a high energy density and stationary energy storage facilities based on hydrogen technologies, which will make it possible to phase out natural gas, currently used as a back-up fuel in zero-emission Energy. Calling natural gas a transitional fuel is an expression of faith in the power of the human mind and in new technologies, which may emerge quite soon, but their development will take another 20 to 30 years. There are many indications that those technologies will present a breakthrough in generation, storage and distribution of electricity.
The International Energy Agency expects that demand for green energy in 2018–2040 will be increasing at a blistering rate of nearly 7% annually. The second important source of zero-emission energy is nuclear energy. Demand for nuclear energy in 2018–2040 is set to grow at approximately 2% per year, much faster than demand for natural gas.
Renewable energy sources will prevail in the global energy mix in the coming years
However, a complete transition from molecules to electrons is impossible with the current state of knowledge and technology. Having no access to electricity carriers (storage systems) with sufficient energy density, we may not phase out usable energy generation based on burning fossil fuels completely, and the process entails carbon dioxide emissions. Two significant areas where obtaining energy from combustion will be necessary are the Energy industry, as mentioned above, where burning natural gas will be indispensable for a period of time, and transport, in particular heavy duty vehicle transport, which will continue to use liquid fuels produced from crude oil for many years to come.
The petrochemical industry will remain an important buyer of crude oil. The world needs materials and research shows that petrochemical materials have a considerable advantage over alternative materials, in terms of both their utility value and their impact on climate and the environment. For example, the climate and carbon footprint of packaging obtained from petrochemical raw materials in the full circle is comparable to the footprint left by alternative packaging, but its weight is four times lower and this is what makes plastic packaging less harmful. But on one condition, namely that it is not discarded once used, but put back in circulation.The outlook for the circular economy, which starts from designing objects and equipment that are durable, upgradeable and easily repairable and can finally be disassembled into recyclable components, in combination with business models of a product as a service, as well as material as a service, places the petrochemical sector on a high place in the ranking of rapidly growing industries. Another advantage of petrochemicals in circular economy is energy consumption savings due to a significant reduction in the weight of products, machinery, equipment and structures that use petrochemical materials, compared to alternative materials. This leads to lower energy consumption and lower emissions compared with alternative materials2.
2 For more information, see https://ffbk.orlen.com/files/Raport/Orlen_zeszyt_12_EN_FINAL.pdf
Energy transition will take place at different rates in different regions of the world, depending on access to new technologies, consumer preferences and the ability to fulfil those preferences (i.e. wealth and transfers), and on the quality of climate and environmental regulations, which depends on ambitions, predictability, implementation and international coordination. The energy transition cannot be implemented single-handedly, in isolation.
The changes in Europe are creating new areas of value, and the pace of change in our region will be favourable to PKN ORLEN. For example, between 2019 and 2030 demand for liquid fuels in Europe will decrease from 15 mbd to 11 mbd, that is by 30%. Based on our calculations, in Central Europe3 demand for fuels in the same period will not change – it will remain at about 1 mbd. Installed gas-fired Energy capacity in Europe will be growing at a slow pace until 2030, while in Central Europe this increase will be significant, ranging from 40% to 50%. Also installed renewable Energy capacity in Central Europe will increase much more (100%) than in Europe (20%).
3 Central Europe comprises the following countries: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.