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Competitive driving force for integration

Case study for refinery-petrochemical integration. Product portfolio diversification in integrated complexes will increase the production of higher value products

Sanjeev Kapur and Shankar Vaidyanathan
Fluor Corporation
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Article Summary
The invaluable lessons currently being learnt in the energy business along with changing economic conditions, competitive drivers and a capital-intensive construction and services marketplace will force refiners and petrochemical manufactures to look at integration as a business necessity. Historically, the demand growth of basic building 
blocks, and therefore the required feedstock, for chemicals had been at nearly double the rate of growth compared to conventional transport-ation fuels. The basic petrochemical feedstock was nearly 9.0% of the global fossil fuel consumption in 2007 and is expected to grow to nearly 18% in the next 20 years.

The continuously evolving regulatory requirements, dieselisation of the North American automobile market, availability of alternative energy sources and significant funding of the alternative energy research initiatives, fuel oil specification changes and concerns for greenhouse gas emissions are starting to focus refiners’ attention. These trends are slowly shifting the overall emphasis of the hydrocarbon industry from a fuels/energy market economy to petrochemicals and derivatives production. In light of this, the proposed integrated operations are investigating options to make at least 15–20 wt% of refinery product yield as base petrochemicals. The traditional boundaries that have historically existed between refining and petrochemical facilities are no longer relevant. Maintaining those artificial boundaries is starting to hurt profitability by depriving investors of the flexibility to realise the economic potential of their capital investment in refining assets. The majority of world-scale refining projects being planned by major oil companies are being implemented with an optimum extent of petrochemical integration to monetise and maximise the synergies.

Integration provides market positioning opportunities. Backward integration secures feedstock for petrochemical manufacturers and forward integration secures market share and stable product uptake for refiners. The integration also provides stability over the value chain with product diversification by combining the best features of the cyclical petrochemicals market with the non-cyclical fuels market. Integration provides opportunities for savings in investment and operating costs. The operating costs are reduced through opportunities for energy conservation, waste minimisation, transportation of raw materials and so on. The investment cost savings are also realised through sharing utilities, infrastructure, logistics, minimising storage and more.

Challenges and drivers
International Energy Agency (IEA) data show that available worldwide refining production grew by about 40% between 1973 and 2006. However, most of the growth had been focused on transport fuels. Over the same period, petrochemical feedstock yield share of refining products grew only by about 3% on absolute basis. About 16% of the refinery product yield is in heavy fuel oil and another 12% in other products. The majority of these products are low value and impact the overall profitability.

National oil companies (NOCs) control a majority of the crude oil supply resources. Mid-Eastern NOCs are upgrading their business models from net crude oil producers to fuels and chemicals producers, since energy export is their primary engine for GDP growth while the available resource supply is finite. The major independent oil companies (IOCs) are in a perpetual race to replenish their crude reserve ratio to preserve stakeholder value so upstream projects attract management attention. The world demand for petroleum fuels has slowed down since mid-2008. Amidst the falling fuel demand and credit crunch, major new downstream projects involving large capital investments are under pressure due to less-than-investment grade return-on-average-capital-employed (ROACE.) The reason is simple: these new world-scale refinery projects were configured during the upswing in fuels consumption and were not planned with the complexity and flexibility to ride out market swings. European major IOCs tend to be more integrated facilities, so the projects where they have taken stake should be configured for higher petrochemicals production.
Contributing to this trend is the major consumer: the US. The Annual Energy Outlook 2009 by the Energy Information Administration (EIA) predicts long-term rising real oil prices. The total US demand for liquid fuels grew by only 1.0 million bpsd between 2007 and 2030 in the EIA reference case. The growing gasoline glut is pushing refiners to slow down, cut throughputs and extend scheduled turnarounds to maintain profit margins. Roughly 15% of the US refining capacity is in smaller cracking refineries of less than 120 000 bpsd with a Nelson complexity factor less than 10. Many of these companies have significantly leveraged balance sheets and face the threat of consolidation or shutdowns.

Dieselisation is a major initiative under way in North America to capitalise on the premium for diesel crack margin over gasoline. This incentive has led major downstream projects in the US and the Middle East to configure new refineries with big cokers and new world-class hydrocrackers. The US government is steering towards alternative non-fossil energy resources. In addition to recent rules on ethanol blending in gasoline and Corporate Average Fuel Economy (CAFE) standards, future potential regulatory changes include carbon cap-and-trade or a carbon tax.

The climate change discussion is causing several segments to argue for a revenue-neutral gasoline tax to subsidise hybrid cars and infrastructure projects. Overall, US refiners are entering a period of relative regulatory uncertainty and are responding by going into survival mode. The petrochemical industry is facing similar challenges due to supply/demand imbalances and the competitive cost of production.

The limited supply of sweet light crude requires utilisation of all available crude resources. The greater price discounts for heavy, sour crude oil provide an additional incentive for refiners to convert/upgrade existing refineries or add new capacity designed to process heavier, sour crude. Regional imbalances exist in the gasoline and diesel market supply and demand patterns. Imbalances are also projected for LPG and naphtha, which are excellent feedstock for petrochemicals production.

Since feedstock costs are such a significant component of the overall cost of production, the petrochemical industry constantly strives to acquire the lowest cost feedstock. The imbalances in the availability of traditional feeds will continue to squeeze petrochemical margins. Feedstock availability, pricing and constant shift in product demand patterns have been the key drivers in shaping the refining and petrochemical industries. For fuel refineries, the crude costs can be 70% or higher of the total cost of production. Similarly, the feedstock costs can be as high as 75% of the total cost of production for a mixed-feed ethylene steam cracker. Therefore, a lower cost of raw materials results in better profitability and competitive positioning for petrochemicals manufacturers.

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