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Analyst: 2020 could signal ‘pivot point’ in energy transition

December 14, 2020 By    

Much discussion and analysis this year have centered on COVID-19’s impact on oil and gas markets.

When the pandemic shuttered businesses and led governments to mandate stay-at-home orders early on, petroleum product demand dropped, especially in the transportation sector. While initial LPG supply concerns have lessened throughout the pandemic – the industry had ample propane inventory to start the winter heating season – we continue to hear about the changes and the transformation taking place at U.S. refineries.

In the latest look at refinery data, U.S. petroleum refining capacity fell to its lowest level since May 2016, according to the U.S. Energy Information Administration (EIA).

Chart: U.S. Energy Information Administration

Chart: U.S. Energy Information Administration

As of Sept. 1, the United States had 18.4 million barrels per calendar day (bpcd) of petroleum refining capacity, also known as operable atmospheric crude oil distillation capacity. U.S. refining capacity had reached a record high of nearly 19.0 million bpcd earlier this year, but several refineries have closed since then, the EIA reports.

Operable refinery capacity is the amount of capacity that is in operation or could be brought into production within 90 days. Earlier this year, operable refinery capacity declined by 335,000 bpcd from April to May after the Philadelphia Energy Solutions refinery in Pennsylvania closed, the EIA explains. Operable capacity fell another 19,000 bpcd in June when Marathon’s refinery in Dickinson, North Dakota, closed to be converted to a renewable diesel plant.

The further decline in operable capacity as of Sept. 1 reflected three recent refinery closures in Wyoming, California and New Mexico, EIA also notes:

  • HollyFrontier shut all units as of the end of August at its 48,000-bpcd refinery in Cheyenne, Wyoming. It stopped petroleum refining operations, but plans to resume operations in 2022 as a renewable diesel processing plant.
  • Marathon announced plans in August to indefinitely shutter two facilities: the 161,000-bpcd refinery in Martinez, California, and the 27,000-bpcd refinery in Gallup, New Mexico. Marathon attributed the closures to reduced petroleum demand in 2020. In October, the company announced that it is evaluating plans to convert the Martinez refinery to a renewable diesel facility.

Also in August, Phillips 66 outlined plans to reconfigure its San Francisco Refinery in Rodeo, California, and produce 680 million gallons annually of renewable fuels, including diesel, gasoline and jet fuel. Beginning in early 2024, the plant will no longer produce fuels from crude oil, but instead will make fuels from used cooking oil, fats, greases and soybean oils.

“Phillips 66 is taking a significant step to support demand for renewable fuels and help California meet its low-carbon objectives,” says Greg Garland, chairman and CEO.

Phillips 66 also announced plans to shut down the Rodeo Carbon Plant and Santa Maria refining facility in Arroyo Grande, California, in 2023.

Chart: U.S. Energy Information Administration

Chart: U.S. Energy Information Administration

Fortunately for the propane industry, LPG derived from refineries makes up a small segment of the overall U.S. supply picture – at roughly 15 percent – as propane produced from natural gas processing has increased steadily since 2010.

What’s happening with the nation’s refineries is consistent with IHS Markit’s latest assessment on energy and oil.

On a global basis, noncarbon energy’s share of energy demand changed little from 1990 to 2019 – staying within a narrow band of 8.3 to 9.8 percent. (IHS Markit defines “noncarbon energy” as wind, solar, geothermal, hydro and nuclear power.) Demand for fossil fuels, including propane, increased 63 percent during that period. This kept fossil fuels at a steady 80 to 82 percent share of total global primary energy demand.

The firm says 2020 is proving to be the year when the combination of COVID-19 impacts on fossil fuel demand, growing investment in renewables and increased concerns over climate change begin to shift that balance. IHS Markit expects noncarbon energy’s share of global demand will reach or exceed 10 percent this year, a mark not previously seen, and reach 13 to 16 percent by 2030.

“2020 is shaping up to be a ‘pivot point’ in the energy transition – the moment when noncarbon energy’s share of global demand increases compared to fossil fuels,” according to a new analysis by Jim Burkhard, vice president and head of oil markets and energy and mobility at IHS Markit.

Interestingly, refineries configured to produce renewable diesel can also produce renewable propane as a byproduct, propane industry leaders say. Renewable propane has been a popular topic in the industry this year. Having a renewable component puts already-clean, conventional propane at the table in the all-important renewable energy discussion with policymakers.

These developments won’t have an immediate impact on busy propane retailers focused currently on serving customers this winter. But it’s also important to know that the energy landscape is changing as priorities change, and the industry must be ready to respond – perhaps sooner rather than later.

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