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Nov-2019

Respond to changing markets with revamps

In volatile product markets, revamps are among the most compelling investment opportunities for refiners.

PAUL REK and JOHN BARIC
Shell Catalysts & Technologies

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Article Summary

1n recent years, we have seen a strong trend towards revamps rather than grassroots capital projects, in part because revamps can often achieve better, quicker payback with less risk.

They are also a key tool for ensuring that assets continue to be relevant to the prevailing market conditions. For example, if market demand for middle distillates is outstripping the initial forecasts, the owner can use a revamp to increase capacity or, if some product streams are achieving an unanticipated margin, to modify for a different product slate.

To fully explore the value that one can capture from a revamp, and some of the thinking that must go into it, this article comprises three parts. In part 1, we establish some of the reasons why a revamp project can outperform investment in a grassroots unit.

In part 2, we discuss the importance of evaluating the various options open to a refiner. There is usually a variety of different projects with which they could achieve their objectives, and we explain why they must evaluate each of these through a range of operational and strategic lenses.

In part 3, we provide a series of short case studies that show a number of the world’s leading refiners using revamps to modify their configurations to better match the current market dynamics.

We come at this from a very distinct angle as we represent the Shell Group, which owns and operates refineries and petrochemical plants, and also Shell Catalysts & Technologies. One of the key activities of the latter organisation is to provide integrated and customised revamp solutions that encompass process technology and reactor internals in designs that are optimised for the catalyst system. As such, we have an insight into the opportunities that are available for refiners, and a strong track record in delivering revamp projects for Shell and non-Shell companies.

Part 1: The case for revamps over grassroots units

Large programmes requiring substantial capital expenditure are increasingly difficult to justify to shareholders.

In most parts of the world today, a proposal for a grassroots refinery, for example, is extremely unlikely to get off the ground. At a cost of $10-$20 billion, depending on the scope and the size of the refinery, and with gross refinery margins being viewed as poor to average at best, such a project is likely to be out of reach for most investors. In fact, in many cases, the project cost escalates further with the need to integrate with petrochemicals production.

Refiners can often achieve better payback with less risk by improving or upgrading their existing assets. Depending on the refiner’s business drivers, there are typically numerous revamping and upgrading opportunities that can help them to capture more margin from their existing assets. Such opportunities can include converting simple distillate hydrotreaters into dewaxing units for winter diesel production, and adapting distillate hydrocracking units to enable the conversion of very heavy gasoil components into diesel to expand hydrocracking capacity. The business case for such projects, which can have a wide range in cost ($10–500 million), is usually far more compelling.

Crucially, the return on investment also tends to be better. The cost per tonne of the capacity installed during a revamp is about 20–50% of that for a grassroots facility. This is because existing equipment is reused as much as possible during a revamp.

In addition, there is the gestation period to consider; a revamp will deliver returns far quicker than a grassroots project.

Consequently, smaller, incremental investments can be particularly suitable in today’s market and revamps are key elements of many of our customers’ investment strategies. They carry a smaller investment risk, generate credibility with investors and, as many of our case studies in part 3 demonstrate, provide the ability to respond flexibly to differing situations as market conditions change.

One should always be aware, however, that revamping an existing process unit is substantially more complex than building a new one. The project’s planners have to ensure that they do not disrupt the continuing operation of the existing facility. They have to design within the existing unit’s precise boundary conditions, such as the size and duty of the existing reactors, and plan the tie-ins during project execution carefully. But such issues can usually be mitigated when there is a high quality collaboration between the owner and the strategic licensor.

Part 2: Evaluating your potential responses
A refiner’s investment journey will often begin with a clear aspiration of where they want to get to. However, many are often unclear about what they need to do to get there. For instance, there is a wide range of options for them to consider when evaluating what project they should select, what kit they should install, and what configuration changes they should make. Moreover, the economics of each option may ultimately prove to differ enormously, depending on how the mid- to long-term market dynamics play out.

So what steps should a refiner take to make a robust investment? Let us take a simple example in which a refiner has determined that it must respond to market changes by increasing middle distillates capacity. It could build a new unit, revamp an existing unit, upgrade to a higher activity desulphurisation catalyst, or improve the refinery’s hydrocarbon management in another way. But which option would be the best fit for that specific refinery?

Screening those options requires detailed technical and economic evaluations. Capital cost estimates are made using an extensive projects database. Operating costs are estimated using operating experience and best-in-class benchmarks. A scenario based approach is applied so that the selected option is robust under a wide range of economic circumstances. This is then taken for development into a firm investment proposal, one that aligns with the client’s long term vision and overarching strategic objectives.

If a business were to launch a capital project without such an in-depth evaluation of what each option involves, substantial value could be at risk. A seemingly value-adding project could potentially turn into a poor investment decision, especially if integration opportunities are overlooked during the early phases. A key consideration is whether all the existing units will be able to cope with the streams coming from new assets. For instance, can an existing gasoil hydrotreater deal with some light coker gasoil or is a new unit required?

Likewise, additional hydrogen is likely to be required, but how much and from where will it come? Can you expand the hydrogen plant or implement hydrogen recovery, or should you contract a hydrogen supplier? There are usually many different options, but the economics can vary substantially.

Similarly, although most revamps do not significantly increase the demand on utilities, it is important to confirm that the existing utilities system has sufficient capacity. For example, there have been cases in which owners have discovered at a very late stage that the existing boilers could not cope with the extra demand. Consequently, the owners had to either dial down their operations or add an additional boiler at considerable expense.


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