Covid Pandemic: Challenges And Opportunities For Base Oil Refining And Operations
COVID-19 pandemic has affected all the sectors of the economy worldwide and being an integral part of all economies, Oil and gas industry cannot remain unaffected. The article here analyses the impact of COVID on base oil refining and lubricants and possible solutions to tackle the challenges posed.
Challenges Ahead
COVID has thrown many challenges to the base oil refining and related industries. Some of the challenges for refining and lubricants/base oils are as follows:
Impact on the capacity of refineries- whether and for how long will they reduce their capacity
Current and future refinery projects may become uncertain
Whether economics or politics or both will determine which refinery shuts down and which one starts up
High stock levels may cause base oil prices to remain lower for longer, exacerbating the normal base oil lag as crude and refined products recover.
2021 could be a very poor margin year-particularly if demand recovery is lagging.
According to recent reports,the demand of oil had dropped significantly in the second quarter of 2020 as compared to the second quarter of 2019. This has led to sharp reduction in global refinery throughput. The recovery in demand can be expected only in 2021.But even with a strong recovery in 2021,demand will still be around 2 million B.D. which is below 2019 levels. As a result of this decline in demand , base oil production may fall commensurately, even as refining capacity grows across the world. Subsequent decline in production may lead to to lower capacity utilisation of the existing refineries. IHS Markit projects year on year crude run decline of 17.0 MMb/d in 2Q2020, leading to 5 year low utilisation levels till 2021.
Another impact can be seen in the decline of base oil prices across the world. Crude and refined product prices have declined by 60-70% from January to April 2020,however spot base oil prices fell only 15-35% over the same period but this figure may reach to 60-70% in near future.
Additionally, refining margins on high- yield products like aviation turbine fuel, motor spirit and high-speed diesel have plummeted and are expected to remain weak over the near term. However, oil marketing companies would fare better than stand-alone refiners because of higher marketing margins for some products.
The next challenge Oil companies are going to face is loss and damage to their inventory. Hence proper inventory management including sound storage and handling practices will become even more crucial now.
COVID will have similar impact on Lubricant Industry as well since it is closely related to refinery business. Lubricants demand is expected to decline by upto 20% for 2020 with much sharper decline in Q2 and Q3. Transport segment lubricants will see more pronounced decline, while the effect on the non-transport segment is likely to be less severe but longer-lasting.
In addition to above, it will also have an impact on current and future refinery projects which may become uncertain so they need to be rationalised accordingly.
Way Ahead
Some of the probable solutions for refiners amid these challenges can be as follows.
Product mix diversity: Refineries who have ventured into producing petrochemicals like waxes and specialities etc for example ,will be less prone to the losses due to decline in demand of oil.
Reliability and operational availability: Refineries with better reliability , lesser downtime and good maintenance practices will be able to minimise their cost of production as well as their operating expense inefficiencies.
Better integration with Fuels refinery: The better the integration of refineries with fuel refineries,the better it will be for them.
Regional location of refineries: Refineries in certain regions having geopolitical tensions alongwith COVID pandemic may face more grave challenges in carrying out operations in a profitable manner.
Let’s hope the industry is well prepared to face the “new normal”.
