Advances in crude to chemicals
In mature markets like the US, refineries are revisiting their business models, asset base and technology options. This is due to regional and global changes in both fuels specifications and demand. It is anticipated that fuels demand will continue to soften and that petrochemical demand growth will remain strong throughout the world.
Stan Carp & Keith Couch
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US refiners must now determine how to remain competitive and grow in the face of these changing market dynamics. They must start embracing the future today, in order to pave the way to continued profitable growth. Future-forward refiners will rethink their business models and will transform existing assets into a Refinery of the Future.
The Refinery of the Future will have the flexibility to meet rapidly changing market needs, will be integrated into petrochemicals to unlock new value, and will also contain the connected technology required to optimise performance every day. Today, US refineries have access to a host of new technologies that create an alternative path to profitability. They can unlock new value from the heavy end of crude, as well as manage molecules efficiently to produce immediately marketable products or their own intermediates for petrochemicals.
This paper presents a potential stepwise integration strategy that unlocks $30/barrel of additional value from crude. The strategy utilises the latest bottom-of-barrel, maximum conversion hydrocracking and aromatics technologies. Integrating these technologies enables an existing refiner to profitably diversify into petrochemicals and create their own Refinery of the Future.
Changing Market Dynamics
Fuels demand in the US is expected to peak near 2020, and by 2035 gasoline demand is anticipated to be 16% lower than in 2018.
Similarly, diesel demand will be down 6 percent. See Figure 1. This decline is due to anticipated changes in fuel specifications (such as 95 RON), continued advancements in automobile technology and changes in demographic behaviours. Automobile technology advancements include internal combustion engines, electric/autonomous vehicles and shared/connected vehicles.
Globally, fuels demand continues to grow slowly with compound annual growths rates (CAGR) from 2018 to 2028 of <1% for both gasoline and diesel. See Figure 2. Large scale, modern refineries will be built in regions where demand for fuel exists, and they will shift the global supply and demand balance. These changing dynamics will put downward pressure on gasoline and diesel cracks in oversupplied markets, and will drive down margins for refiners unable to adjust their product slate.
In addition to demand changes, tightening global fuel specifications are expanding beyond traditional vehicle fuels such as gasoline and diesel. The International Maritime Organization’s revision of MARPOL Annex VI is the first major specification change for maritime fuels since 2008. By reducing sulphur content from 3.5% to 0.5% in bunker fuel, the specification will significantly reduce the demand of high sulphur heavy fuel oil (HSFO). In addition, the specification potentially sets the stage for further sulphur reductions and changing demand in the future. In 2035, US fuel oil demand is expected to be 25% lower than 2018. See Figure 3. This revision is changing the product slate, requiring refineries to upgrade heavy fuel oil into higher value products.
With uncertainty in product demand and global trade dynamics, many refineries are under increasing pressure from shareholders, boards, institutional investors and their executive management to chart their path forward for growth and continued competitiveness. Those refiners with the ability to increase margin without changing crude run capacity will be successful.
Some refiners will stay their course and serve local markets. Some will grow by expanding exports to growing markets like Latin America and Africa, an opportunity bolstered by less stringent fuel specifications and limited refining investments. However, single new complexes in these regions can have a significant impact on trade flows. Take for instance, the Dangote refinery in Nigeria, expected to come online in 2020. This single refinery has a capacity of 650,000 barrels per day and it could eliminate nearly half of the current refined products that are imported into Africa.
Many others in the industry are turning to petrochemical integration, an adjacent market with strong growth potential and high margins. The global demand growth rates for fuels are very low in comparison to petrochemicals, where global demand is growing nearly 1.5 times GDP with CAGRs of 3-4% (2018 to 2028). Increasing middle class consumer demand for more packaging, plastics and synthetic fabrics in developing regions is driving this demand growth. For example, demand for para- xylene, the base chemical for polyethylene terephthalate (PET) that is used for plastic bottles and clothing, is expected to grow with a CAGR of 3.5% from 2018 to 2028. Similarly propylene, the base chemical used for polypropylene (PP), is poised for significant global demand growth with a CAGR of 3.5% from 2018 to 2028. See Figure 2. Unlike ethylene, in which the majority of the feed ends up as a single use plastic, only 35% and 30% of para-xylene and propylene, respectively, is used for single use plastics. See Table 1. So these petrochemical feedstocks are far more insulated from any shocks to the plastics market that may result from single use bans or further environmental regulations.
In addition to growing petrochemical demand, new production technology is enabling massive economies of scale that lower the cost of petrochemical production, changing the landscape of tomorrows export market. World-scale refineries employing these new technologies are being built in regions with growing fuels demand and are targeting 50-70wt% petrochemicals while making on-specification fuels. Refineries are extending into petrochemicals to improve their project internal rate of return (IRR), as net cash margins for petrochemicals tend to be higher than those for fuels given the value of the product stream. See Figure 4.
These new, world-scale integrated plants are a foretaste of what will be required to remain competitive in the future. They will be considerably more resilient to contracting gasoline and diesel crack spreads and will continue to stay in business while others may not.
Refiners have the opportunity to position themselves for long term profitable growth, but this will require strategic investment decisions and moves further downstream. Fortunately, US refiners have a key competitive advantage given their high utilization rates, access to feedstocks, low energy costs and developed infrastructure. However, US refiners will need to shift from their traditional fuel- centric business models, and solve the challenges of market channel access to Asia where demand for petrochemicals is the highest.
China is the predominant consumer of para-xylene in Asia, and it is driving the demand growth for para-xylene in that region. See Figure 2. China is investing heavily in large-scale para-xylene capacity to drive towards self-sufficiency, but it will be nowhere close to being independent in the next decade. Not all naphtha is suitable for the production of aromatics. Heavy naphtha is required, but it is in limited supply. Lack of available merchant heavy naphtha is the reason that existing Asian (non-Chinese) para-xylene capacity expansion is limited, and it is also the reason that the Chinese para-xylene consumers are “back-integrating” into refining. Back-integration overcomes the heavy naphtha constraint, by allowing VGO and distillate to become heavy naphtha via Hydrocracking.
Even though there is significant investment in para-xylene capacity, China will still be importing close to 14,000 kMTA of para-xylene in 2028. See Figure 5. This presents an opportunity for US refiners wishing to diversify into petrochemicals. Is it possible to produce para-xylene at a low enough cost to cover shipping to China and still make a profit?
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