Downstream oil and gas – Survival of the cleanest 

The nature of energy demand is changing globally. We can see that already in our everyday lives, as more people we know switch to electric vehicles. Less visible are the changes happening behind the scenes in energy-intensive industries. Think power. Cement. Construction. Or downstream oil and gas, the part of the oil and gas industry that converts crude oil to products and provides it to customers.  

As the world hurtles toward a net-zero carbon future, such industries are looking to switch from hydrocarbon-based fuels to cleaner ones. This transition has been underway for years. But COVID—which brought with it declining demand for oil and changing consumer and stakeholder sentiments—has accelerated the switch. So has the emergence of cleaner energy alternatives, such as blue and green hydrogen.  

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Companies also need to take steps to decarbonize their operations and manufacturing practices to retain shareholder value. While the downstream sector is no stranger to navigating up- and down-cycles, today’s disruption is different. Unprecedented. Downstream executives know this. Most of the leaders we speak with are all asking the same question: “How do we change to survive?” 

In short, refiners will likely respond to the energy transition in two ways. The first is by transitioning to net-zero operations, which will have a marked effect on Scope 1 and 2 emissions. This shift calls for refiners to measure and manage emissions from their manufacturing processes and to use wind and solar to electrify their most energy-intensive processes, since the majority of emissions come from energy use. 

The second shift involves transitioning to the manufacture of cleaner energy products, which would reduce Scope 3 emissions. As downstream players make changes to their product slates, they can start with high-demand biofuels, which require limited changes to their existing assets and processes. As the energy transition accelerates, value pools will continue to shift across the downstream value chain, driven largely by customer preferences and differential spending potential on clean energy. Refiners would be wise to follow the money. Renewable diesel and sustainable aviation fuel (SAF), for example, can provide approximately twice the margins that motor oil and jet fuel generate, respectively.¹ This margin differential is driven both by policy and customer preferences depending on regional dynamics. First movers that are able to develop large capacity will likely benefit from high demand and high margins in the medium term.  

As customers’ demand for cleaner products grows, refiners will need to cater to their needs. That means serving different and emerging markets with a wider product mix. For example, integrated refiners can consider targeting a new customer base by integrating upward to chemicals. Delivering a wider product slate will, in turn, require refiners to invest in asset transitions and decarbonization technologies. It will also require them to strengthen their commercial and fuel supply chain management capabilities. That’s because as the refinery slate changes, the feedstock requirements will widen to more suppliers and products. The risk of supply chain fragmentation is very real. 

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The path forward

We believe downstream companies can successfully navigate the energy transition by taking action across three time horizons:  

• Accelerate the transition: In the immediate and near term, refiners should focus on unlocking higher profits from the changing value pools in the product mix. Those that are first to capture renewable fuels capacity, for example, will likely benefit from the higher margins that can be gained as demand continues to outstrip supply. But that scenario won’t last forever. As the demand-supply of renewable fuels balances and cleaner sources of energy scale, margins will normalize over time. But the short-term profit potential is large. Even better, these transitions to renewable fuels are relatively easy to execute. They require only minor refinery process modifications and minimal technology changes to serve the transport sectors.  
• Clean the core: The higher margins captured during the first phase of their decarbonization journey can then be channeled into funding the Scope 1 and 2 emissions mitigation efforts.  Scope 1 and 2 emissions mitigation requires costly investments in things such as measuring and monitoring sensors and data analytics, carbon capture technology, carbon offsets, electrification of energy, and energy efficiency measures. We expect “clean the core” activities to accelerate over the medium term as value from the renewable diesel market is directed to Scope 1 and 2 measures. Over time, addressing Scope 1 and 2 emissions will also unlock pools of value, which may be currently unknown.   
• Extend the frontier: As the energy transition matures, new and cleaner energy fuels will emerge and scale. While refiners can change their product mixes and move to net zero-manufacturing, they need to always keep an eye on what tomorrow might bring. Extending the frontier will enable them to play more effectively in the new energy market. Actions during this phase of the journey might include building circular plastics, blue/green hydrogen, or carbon sequestration capabilities. There are many options available to them. However, the development and viability of these frontiers will be dependent on localized markets and regulations. At the end of the day, the portfolio mix will be driven by markets, profitability and end-state vision.  

The rate and pace of change for refiners to achieve long-term portfolio shifts will be driven by three key factors:

1. Investments: What is the size of investments we can consider?
2. Speed of change: What is the pace we can achieve? How much time do we have?
3. Ambition: What is our appetite for the changes we need to institute annually?

Answers to these questions will depend on several external factors, including customer shifts, technology evolution, market regulations, supply chain and feedstock maturity and the refiner’s overall financial viability and returns.   

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Change is within reach

Multiple pathways are emerging for refiners as the energy transition takes shape. While their actions and areas of focus and integration may differ, we believe the most successful journeys will be those that are: 

• Focused on value as profit pools shift  
• Customer-centric to cater to changes in consumer patterns 
• Flexible and agile to effectively change direction as conditions warrant  
• Transparent and data driven 

These aspects will require most refiners to rethink their operating models and digital strategies, two topics that we will dive into in the next blog of this series. 

Disclaimer: The views and opinions expressed in this document are meant to stimulate thought and discussion. As each business has unique requirements and objectives, these ideas should not be viewed as professional advice with respect to the business.

¹Source: Accenture analysis