Emissions from Korea's oil refinery sector increased at an annual average rate of 3% for the past 10 years. At this rate, the sector will emit 19.5 million more tons of CO2 above the IPCC's advised target for 2030 and it will have to reduce emissions at an annual average rate of 5% in order to meet the target. This report analyzes the recent climate actions taken by Korea's four largest refineries and what technology solutions there are to address the challenges: hydrogen and CCUS.
I. Introduction: Oil refining industry in crisis - from declining refining margins to stronger climate change objectives
• In 2020, the oil refining industry suffered its worst year ever due to a drop in oil demand and the subsequent decline in oil prices following the COVID-19 pandemic.
- As of 2020, the cumulative deficit of the four oil refineries is more than 5 trillion won, while the average annual refining margin is 0.4 dollars/bbl. In February 2021, the refining margin rose to $2.8, but in comparison to the break-even point of $4 to $5/bbl, it remains well below.
• As global climate change response plans are strengthened, corporate financial risks are also expected to increase.
- There has been an increase in the pressure within the industry to reduce greenhouse gas emissions. Korea has set the goal to achieve carbon neutrality by 2050, the largest asset management company, BlackRock, is strengthening its investment commitment, POSCO and LG Chem have declared carbon neutrality, and SK has joined RE100.
- Enhancing the emission trading system within the context of the 2050 carbon neutrality goal is expected to increase the oil refining industry's emission debt, and the introduction of the carbon border adjustment tax, which is currently under discussion in the EU and the U.S., is expected to erode the competitiveness of export prices.
- As large global investors demand companies to disclose emissions information and their business strategies for achieving Net-Zero, companies that fail to satisfy investors' expectations may have difficulty acquiring liquidity.
• Growing climate-related financial risks are presenting serious warnings to the oil refining industry along with worsening business conditions, and efforts by the oil refining industry to overcome obstacles and strengthen its long-term competitiveness are more important than ever.
• This report compares and analyzes the current status of the four domestic oil refiners' efforts to address climate change, and, through the examples of BP and Shell, it seeks to illustrate the need to accelerate decarbonization in the Korean oil refinery industry.
II. The Starters' Movement: BP and Shell
• BP and Shell are the 14th and 7th largest oil refiners in the world, respectively. The two companies refine 5% of the world's crude oil, which is larger than the entire refinery industry in Korea combined.
• Both companies are leaders who identified early the limitations of the oil and gas industries, which cannot avoid the pressure of climate change, and participated in and led the trend of energy conversion in the oil industry.
- Shell ranked third with its 2020 Carbon Disclosure Project (CDP) climate change response score, while BP and Shell are evaluated as having world-class climate change goals by Carbon Tracker Initiative (CTI).
• Examining the low-carbon moves of these two companies may provide many implications for Korea’s oil refining industry. However, in contrast to the Korean oil refinery industry, Shell and BP also have upstream (genetic development) portfolios; as such, this report will separate downstream operations (oil and petrochemical) and explore them in order to minimize distortion from comparisons between companies and apply realistic cases.
Greenhouse gas emissions – enormous but decreasing
• BP and Shell each had downstream sales of about $250 billion and $300 billion, respectively, which is 9 to 17 times greater than individual Korean oil refineries.
• The downstream greenhouse gas emissions of BP and Shell are 32 million tCO2 and 48 million tCO2, respectively, which are about 3 to 6 times
the emissions of individual Korean oil refineries.
• In 2017, Shell acquired Motiva refinery, which had been owned by JV, and Bukom refinery that had been shut down resumed operations. This resulted in a massive increase in Shell’s carbon emissions and intensity. Since then, the growth rate has slowed a bit over the last three years. (Figures 1, 2)
• In addition to stable emissions reductions, the carbon intensity of BP is also declining rapidly (Figures 1, 2)
Climate change goals and key activities - the most important goals and bold activities to meet them
• It is the goal of both companies to reach carbon neutrality by 2050, and they are striving to restructure their business portfolios to reduce existing businesses and expand new energy businesses, including renewable energy.
- Over the past 15 years, Shell has reduced its refinery population from 51 to 18 and plans to operate primarily those refineries with high rates of advancement that can produce high value-added products such as gasoline, kerosene, lubricants, and aromatic compounds. It is also working to reduce its dependence on fossil fuels and to increase the percentage of new energy through corporate investments in areas such as solar power, home batteries, demand response systems, and electric vehicle charging stations.
- BP plans to reduce oil and gas production by 40 percent by 2030, and has set stronger goals than before, including 50 GW of renewable energy by 2370 and building 70,000 charging stations for electric vehicles. As part of its strategy to expand its renewable energy business, it acquired 43% of Lightsource BP, Europe's largest solar developer, and Clean Energy's biomethane division.
• Both companies are aggressively investing in carbon capture, utilization, and storage (CCUS).
- Both companies are in the process of piloting or finalizing CCUS projects.
- Shell is currently working on four projects involving renewable energy and water electrolyser to produce green hydrogen, and BP is also working on a project to install a 50MW water electrolysis system in a German refinery with the aim of producing green hydrogen by 2024.
III. The Current State of Four Korean Oil Refineries’ Response
1. Overview of the four oil refineries
• In order of sales, SK Innovation ▶ GS Caltex ▶ S-Oil ▶ Hyundai Oilbank. Except for Hyundai Oilbank, the three companies make up their business portfolios in the following order: oil refining ▶ petrochemical ▶ lubricant.
• SK Innovation's subsidiaries in charge of crude oil, petrochemicals, and lubricants are SK Energy, SK Geo Centric, SK Incheon Petrochem, and SK Lubricants, and this report analyzed only these four subsidiaries.
• The scope of this analysis includes Hyundai Chemical, Hyundai OCI, the subsidiaries of Hyundai Oilbank, as well as Hyundai Cosmo Petrochemical, and Hyundai Shell Base Oil, which are jointly controlled entities.
2. Assessing each company's ability to respond to climate change
1) Greenhouse gas emissions
• (Current Status) As of 2019, SK Innovation had the highest greenhouse gas emissions of 12,215,000tCO2, and GS Caltex had the lowest of 8,047,000tCO2.
- It is important to note that emissions are not proportional to production. While GS Caltex was second in production, its emissions were the lowest.
• (Past trend) In the past five years (2015-2019), SK Innovation and GS Caltex have reduced emissions, while Hyundai Oilbank and S-Oil have increased emissions steeply.
- In particular, Hyundai Oilbank's subsidiary Hyundai Chemical started commercial operations in 2017 and added emissions of 13-20% per year, resulting in a 1.7-fold increase in total emissions in four years, the steepest rate of any of the four firms.
• In addition, Hyundai Chemical is set to operate the Heavy Feed Petrochemical Complex (HPC) that produces ethylene this year, while S-Oil plans to operate the Thermal Crude to Chemicals (T2C2) process of converting crude oil into chemicals in the first half of 2021 and Steam Cracker & Downstream (SC&D) from 2024 → with the expansion of large-scale petrochemical facilities, it is very likely for emissions of both companies to increase in the future.
2) Greenhouse gas intensity
• Greenhouse gas intensity, a measure of emissions divided by production, is an indicator for evaluating a company’s carbon competitiveness.
※ Previously, the greenhouse gas intensity of BP and Shell was calculated by dividing emissions by refinery production, while the greenhouse gas intensity of domestic refiners was calculated by dividing emissions by refinery throughput (most domestic refineries do not disclose refinery throughput).
• (Current Status) GS Caltex recorded the lowest greenhouse gas intensity (29,000tCO2/million barrels), while Hyundai Oilbank recorded the highest intensity (47,000tCO2/million barrels), which is 1.7 times higher than GS Caltex.
- This means that Hyundai Oilbank emits 1.7 times more greenhouse gases than GS Caltex when producing the same amount of product.
• (Past trend) Of the four companies, GS Caltex has always maintained the lowest intensity, and its intensity has been improving at the fastest rate. On the other hand, Hyundai Oilbankalways had the highest greenhouse gas intensity, and its increasing intensity has created a growing gap with other companies over the past five years (Figure 7).
- In the case of Hyundai Oilbank, it is evident that its emission intensity rapidly increased after Hyundai Chemical was added to the company's portfolio in 2017.
• Like emissions, GHG intensity for GS Caltex and SK Innovation showed improvement, but for Hyundai Oilbank and S-Oil, it showed a declining trend.
- S-Oil saw its greenhouse gas intensity rise sharply in 2018 due to the commercial operation of the complex petrochemical facility (RUC/ODC).
3) Goals for responding to climate change
• In 2020, the four oil refiners announced management policies and specific goals for dealing with climate change.
• SK Innovation announced the Green Balance 2030 in January 2020, declared that it would reduce emissions by 7.8% by 2025, and promised to set a corresponding target for renewable energy procurement in light of its inability to join RE100.
- It is the only domestic refinery that discloses climate change plans and performance through TCFD (Task Force on Climate-Related Financial Disclosure) and CDP, and has set 102,045원/tCO2 as the internal price of greenhouse gas, which is reflected when optimizing financial investment, cost-benefit analysis, and management strategies.