The age of turbulence: charting a course for refiners to a profitable future
Relentless turbulence has profoundly affected the global refining landscape in recent years. Moreover, the turmoil is likely to continue unabated in the medium to long term. So what is the outlook for refiners, and what can they do to maintain or enhance their competitiveness in this most dynamic of industries?
Shell Global Solutions International BV
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Having spent over 38 years in the petrochemical and refining industry developing and licensing technologies, I have witnessed profound changes in the business landscape. Perhaps because of that, people often ask for my views on the outlook for refiners. Will the volatility continue? Yes, I say. Will things get any easier? Not really, although those that exploit competitive advantage will naturally rise to the top. Does the industry have a long-term future? Absolutely.
Of course, the eddies that create the turbulence are well known; they include tighter specifications, rising energy costs, tougher environmental regulations and variable crude quality. Another hugely significant issue is the shifting pattern of product demand; the industry’s centre of gravity appears destined to move away from the developed nations.
This is because the world order is changing. The economic progress of nations such as India and China, along with increased downstream activity in the Middle East, is serving to transform the global refining landscape. So while businesses in Europe grapple with the region’s issues of overcapacity, ageing assets and capital constraints, and companies in the USA analyse the effects of the shale boom, enterprises in China and the Middle East are busily installing new capacity. China is reportedly investing over $40 billion in building refineries, not only at home but also in Africa, Asia Pacific, Central America, Europe and the Middle East.
With various high-profile closures, mergers and acquisitions, the list of companies that have been unable to navigate the turbulence or that have chosen to follow a different path is growing. Is it possible for refining organisations to both survive and thrive in this environment? Most definitely, but there is no single solution, silver bullet or panacea that anyone could prescribe that will enable this. Not only are the challenges facing refiners in the different regions starkly different, the challenges also vary enormously according to their asset and investment portfolios, and business objectives.
By the same token, there are opportunities to be exploited. For every refiner investing in new assets, there are new markets to be tapped. For every refiner that realigns its strategy and sheds assets, there is a new owner willing to take the opportunity to find alternative ways to leverage value. Valero is a good example of this. It is the world’s largest independent refiner, despite being a relatively new entrant to the sector, and has a strong track record of squeezing extra value out of the assets that it acquires.
So what will it take to win in this sector? I believe that, in the future, successful projects will require the owner to achieve a high performance level in at least 10 out of 12 key factors, which I detail below and in Figure 1.
This is not easy, not least because some requirements, such as low operating costs and low capital expenditure, can be conflicting, but also because some are beyond a refiner’s control, for instance, the location of a new or revamp project. Moreover, two of these are mandatory: safety and environment.
Typically, larger refineries are more efficient because they benefit from economies of scale. In addition, the economic case for costly investment in conversion equipment or emissions control may be better. There has been a clear trend towards larger-scale refineries as owners seek to leverage economies of scale to enhance profitability. In the USA, for instance, although the number of refineries is less than half of that in the mid-1980s, the average size of the facilities has increased by a factor of four.
Refineries are increasingly focusing on their ability to process heavier and higher-sulphur-content crude oils into the products that the market wants. Flexibility to respond to changing market conditions is also key; just ask the US refiners that have faced huge fluctuations in the diesel-to-gasoline price differential in recent years. Having a process configuration that enables a refiner to swing between the gasoline mode and the distillate mode means that it can take advantage of seasonal product demand shifts.
Does the project have a ready market for its proposed product slate? We are seeing refiners establishing joint ventures with national oil companies in order to unlock new market opportunities (see No. 8). Or, a company may have its own retail business, integrated petrochemical facility or lubricant base oil plant. Alternatively, some facilities sell product blending components, rather than finished products. Whatever the outlet, demand security can make a huge difference to a project’s bankability.
4. Product mix
The product mix must be scoped according to market trends. Will the products still be in demand when the assets come on stream? Has the owner maximised the ratio of high-value to low-value products or hedged against price variations? Are there any emerging regulatory trends that could have an impact on the product slate?
5. Access to crude
A project’s ability to secure a long-term crude supply can be pivotal, as approximately 80% of a refinery’s costs are for the feedstock. Moreover, contingency should be built in so that there are multiple options. This can be achieved through joint-venture partners or by signing long-term deals. In the future, we may also see independent refiners signing oil supply deals with banks, as this can help to reduce the risks of price volatility and the working capital.
6. Well-designed project delivery scheme
There is one school of thought that says for each $1 billion of capital expenditure, a 25-strong team is required to manage the project. Increasingly, initiatives are being driven by project management consultants and strategic licensors who have been hired to co-ordinate the various interfaces and ensure accountability. This can help to secure on-budget and on-schedule implementation, as well as preferable financial terms.
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