Acceleration of energy transition reflected in new base case scenario that sees total refined product demand peak in 2036, but more drastic scenarios that envision net zero emissions remain unlikely
For the first time, the IHS Markit base case scenario for refined products expects total global demand in 2050 to be lower than 2019 levels. However, other more drastic scenarios for falling demand remain unlikely under present conditions. The findings are part of a new analysis by the Refining and Marketing service at IHS Markit, (NYSE: INFO), a world leader in critical information, analytics and solutions.
Under the new IHS Markit Inflections base case scenario, global refined product demand is expected to peak in 2036. The scenario expects that, from 2021 to its 2036 peak, total refined product demand will grow by nearly 9 MMbd. Demand is then expected to decline by more than 5 MMbd to 2050 (to a total of 85.5 MMbd), placing it below 2019 baseline levels. (Total refined products include all production from refineries such as gasoline, jet fuel, diesel, fuel oils, and includes biofuels—but excludes natural gas liquids (NGLs). This is different than total liquids demand, which comprises demand for refined products plus NGLs.)
Excluding biofuels, the demand peak for refined products derived from crude oil processing occurs earlier, in 2032, hastened by an intensification of fuel economy and substitution investments linked to enhanced government and corporate greenhouse gas targets. Biofuels added to refined products is projected to grow over 2 MMbd by 2050, resulting in a near doubling of this lower-carbon fuel source.
“The energy transition has accelerated during COVID-19, and the combination of changing consumer habits and a heightened sense of urgency around climate change will result in greater political commitment and financial backing for decarbonization of the industry,” said Sandeep Sayal, vice president, oil markets and downstream refining, IHS Markit. “However, some of the more accelerated scenarios that envision net zero emissions and dramatically lower oil demand stretch the limits of what is technologically and politically feasible and remain outside of the base case.”
For example, a major acceleration of electrification and the use of green hydrogen well beyond the current trajectory would be required for a net zero emissions case, the IHS Markit research says. It would also require all regions to emerge from the pandemic with significant increases in levels of investment for low or zero carbon technologies, as well as the definition and implementation of numerous policy decisions across all sectors of the economy that have yet to be made, not least due to consumer sentiment regarding cost implications.
“The new IHS Markit base case scenario is ambitious in terms of acknowledging energy transition goals,” Sayal said. “But it reflects a pragmatic and plausible approach to the implementation and timing of those goals, one that factors in economic recovery and demand growth in the medium term before there is a peak.”
Under the scenario, IHS Markit expects all sectors to be affected by the gradual dilution of the role that the traditional refinery plays in energy production as demand for fossil fuels lessens. Road transportation will be impacted with more stringent fuel economy standards, as well as an anticipated increase in plug-in electric vehicle penetration (percent of on-road fleet) from less than 1% of the global on-road fleet today to above 44% by 2050. In the marine sector, alternatives such as hydrogen and ammonia will reduce the share of traditional marine gasoil and heavy fuel oils to below 60%. Biofuels blends will also penetrate demand sectors outside of motor fuels, reaching 15% of global jet fuel demand by 2050.
“This shift is already being reflected in supply-side investment,” said Sayal. “Refiners will have more diversified investment portfolios as product suppliers seek low-carbon solutions to meet overall demand.”
Sayal expects refiners to increasingly look to technology such as biomass and hydrogen while also exploring ways of decarbonizing throughout the entire value chain, including lower carbon crude oil grades and carbon capture at refining sites. Fewer large-scale crude processing investments are expected to be made (and most likely none in Organization for Economic Cooperation and Development countries). However, ongoing investments to meet growing need for petrochemical feedstocks are expected, such as dedicated crude-to-chemicals plants and refinery-petrochemical integrations within current large integrated sites.
IHS Markit expects that more refinery closures will be necessary in addition to the more than 2.3 MMbd distillation capacity already permanently lost during the pandemic.
“Given the reduced need for crude in the refining system going forward, IHS Markit expects more than 3 million barrels per day in additional refining capacity to be lost by 2050,” Sayal said. “There are approximately six million barrels per day of new capacity additions already committed to 2026. So, the math does not add up and something will need to give. There will be closures to come.”
About the findings:
The findings above are the product of the Refining and Product Markets Annual Strategic Workbook and are part of the research that form the crude oil, refined products, NGL and downstream outlook for the 2021 IHS Markit Energy and Climate Scenarios.
Prepared annually, the IHS Markit Energy and Climate Scenarios include three plausible and integrated long-term energy scenarios to 2050, built by country and sector using experts from across the IHS Markit economics, energy, automotive, agriculture, life sciences and maritime divisions.
Each scenario outlines a unique set of assumptions which include economic factors, geopolitical environment and focus on reducing global greenhouse emissions (GHGs) through policies and carbon pricing, COVID-19 containment, consumer behavior, among others.
The refined product outlook findings outlined above are reflected in the base case, Inflections which encompasses an accelerated energy transition that moves in different ways and at different speeds around the world. Alternate scenarios include Green Rules, examining a more super-charged reaction following the pandemic and climate-related disasters where populations demand strong government action and cooperation, and Discord which projects a more dysfunctional world in which the political turmoil of 2020 returns after a short rebound, hampering economic growth and creating investment uncertainty and inertia.
IHS Markit also prepares two net zero cases with the predetermined outcome of reaching global net zero GHG emissions by 2050 and “backcast” to the present. Each of the three scenarios and two net zero cases has different implications for primary and final energy demand, and for global GHG emissions and temperature paths going forward.
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