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Oct-2005

Improving profits in olefins complexes

The initial phases of a profitability programme show what can be achieved in a collaborative effort with the right tools and methodologies

John Philpot, KBC Advanced Technologies Inc

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Article Summary

Petrochemical producers are under continuous pressure to reduce costs and improve margins. TVK in Hungary has identified more than $30 per ton of ethylene profit increase from a range of operational and business process improvements, with little capital expenditure.

Petrochemicals are never an easy industry in which to make money. Many of the characteristics of the industry sound attractive, with growth in excess of GDP supported by continuous product and application development. But the reality is that intense global competition and limited room for product differentiation result in a largely cost-driven commodity business. Long-term returns on capital for most have been unacceptable, with notoriously cyclical margins due to poor investment and production strategies. Shareholders have become increasingly intolerant of long-term financial underperformance, and in some cases have declined to support reinvestment or have withdrawn from the sector.

In response, the industry has been extensively restructured, and all companies are improving efficiency and costs across the supply chain. In a cost-driven business, however, most of these benefits are passed through to customers via price competition. Each company must seek its own route to competitive advantage. In some locations, notably in the gas-rich countries of the Middle East, advantage comes from feedstock costs. In China, strongly growing demand and sustained imports give some measure of advantage from logistics costs and the need for continuous capacity addition. But in Europe, the US and most of Asia, operational excellence is the only real route to enhanced competitiveness, and companies must improve further and faster than the competition to move down the cost curve and increase margins.

Over the past year, margins across the industry have improved after an extended downturn, and a peak in the profit cycle had been widely expected during late 2005 or 2006 (Figure 1). Recent de-stocking and price weakness has led to mixed signals regarding timing and duration of the upturn, but it is inevitable that margins will be squeezed during the majority of the next few years. Companies must therefore seek every opportunity for profit improvement.

TVK expansions
TVK is a medium-scale olefins and polyolefins producer located at Tiszaujvaros in eastern Hungary, controlled by the Hungarian oil and gas company MOL. Capacities are 620ktpa ethylene and 800ktpa polyolefins after expansion early in 2005. Feedstocks are naphtha, gas oil and some LPG from MOL, plus recycled ethane and hydrogenated raffinate-2 and C5 streams. There are ethylene pipeline connections to Kalush in the Ukraine and to the nearby Hungarian PVC producer BorsodChem. It has been operating since January 2004 as MOL Petrochemicals Division, which combines TVK and Slovnaft petrochemicals into a leading regional player. As another measure of scale, in 2004 TVK sales revenue was €715 million and EBITDA €78 million.

There is good local and regional demand growth in petrochemical and polymer markets, but also strong competition from producers within the region, as well as from Western Europe and the Middle East. Labour costs are still low in relation to Western Europe, but this advantage will diminish as wage rates rise in the wake of EU accession, so the reduction of formerly high manning levels must continue. It is also recognised that feedstock supply needs to be optimised within the MOL group. Overall, historic margins and EBIT (earnings) needed improvement, and TVK decided to pursue this via the major expansions noted in Figure 2, plus the adoption of best practices and cost reduction in all areas. This latter objective was progressed jointly with KBC via the proprietary Profit Improvement Program (PIP).

Profit improvement
More than 150 petrochemical and refinery sites worldwide have implemented PIP for cost reduction. In petrochemicals, a two-phase PIP approach is normally followed:
—    Phase 1 is a competitive assessment review (CAR) that benchmarks key aspects of site operations against leaders, competitors and best practice. All process units and the key support services are covered, and gap analyses determine how much improvement could realistically be achieved if proper steps (both with and without capital expenditure) were taken to remove constraints and approach best practice. Improvement options are quantified in areas including feedstock choice, product mix and disposition, operating parameters, capacity, yield, energy, maintenance, organisation and planning.

Technical and operational targets are defined, likely viable projects identified, and joint KBC/client work programmes developed to achieve the improvements. This essentially builds the business case for further work in each area. The CAR is a relatively brief project, typically requiring six to eight weeks for a single site. It concludes with strategy review meetings to assess the results, consider the costs, benefits and priorities in each possible improvement area, and to determine the best way forward.

—    Phase 2 depends upon the results of the CAR and the strategy review. In many cases, the client will decide to proceed with full coverage of all main areas, which offers the biggest opportunity for fundamental competitive improvement. Phase 2 therefore typically covers:
—    Process Seeking to optimise operating conditions, maximise yields of higher-value products, improve integration with the refinery if applicable, and reduce costs
—    Planning Developing or upgrading planning systems and LPs
—    Energy Optimising steam and power systems, and reducing process energy use
—    Asset management Reducing routine and turnaround maintenance costs and improving plant reliability (and hence increasing effective capacity).

In some cases, other client initiatives or the absence of a compelling business case in certain areas mean that only some of these modules are initially progressed in Phase 2. In most areas, detailed modelling of the existing operations (process configuration and conditions, energy and utility systems and so on) is a key component of the approach. It provides a detailed understanding of current operations and constraints, as well as a tool for assessing the effects and benefits of changes. KBC’s proprietary models are used as appropriate, such as Petro-SIM across the petrochemical complex, and, where relevant, into any adjacent or integrated refinery: E-Solver for olefins plants; ProSteam for utility systems; and SuperTarget for the detailed Pinch Analysis of process energy opportunities.


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