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 advantages will naturally rise to the top. Does the industry have a long-term future? Absolutely.
Change is a constant
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 industrys center 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 regions issues of overcapacity, aging assets and capital constraints, and companies in the US analyze the effects of the shale boom, enterprises in China and the Middle East operating companies 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 organizations 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, but 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 worlds 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, as shown in Fig. 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 refiners control, such as the location of a new or revamp project. Moreover, two of these are mandatory: safety and environment.
Fig. 1. The 12-factor performance concept.
Future projects must aim to score high in at
least 10 out of 12 of the key factors, as shown
1. Size. 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 toward larger-scale refineries as owners seek to leverage economies of scale to enhance profitability. In the US, 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.
2. Configuration. Refineries are increasingly focusing on their ability to process heavier and higher-sulfur-content crude oils into the products that the market wants. Flexibility to respond to changing market conditions is also keyjust ask the US refiners that have faced huge fluctuations in the diesel-to-gasoline price differential in recent years. Possessing a process configuration that enables a refiner to swing between the gasoline and distillate modes can facilitate taking advantage of seasonal product demand shifts.
3. Market. Does the project have a ready market for its proposed product slate? We are seeing refiners establishing joint ventures (JVs) with national oil companies 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 projects 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 onstream? Has the owner maximized the ratio of high- 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 projects ability to secure a long-term crude supply can be pivotal, as approximately 80% of a refinerys costs are for the feedstock. Moreover, contingency should be built in so that there are multiple options. This can be achieved through JV 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 coordinate the various interfaces and ensure accountability. This can help to secure on-budget and on-schedule implementation, as well as preferable financial terms.
7. Location. Location has emerged as one of the key determinants of a refinerys profitability. A strategically placed refinery that enjoys feedstock sourcing advantages and proximity to growing markets can be a highly attractive proposition for investors.
Location can also affect cost competitiveness. The closer a refinery is to its crude supply and the markets that it serves, the lower the total feedstock and transport costs are likely to be.
In addition, integration with a petrochemical facility is also helping many refineries to enhance profitability. For instance, the hydrocracker residue can be sent to the steam cracker to make ethylene, and reformate can be upgraded to valuable aromatic products such as paraxylene and benzene, thereby enhancing the economics at both sites. Some analysts have viewed refinerypetrochemical integration less favorably because of the volatility of petrochemical prices. However, despite this, combining petrochemical manufacturing with refining can give a good overall return.
8. JV team composition. Some of the best-performing JVs involve partners that each bring something special to the table. Shells proposed JV with PetroChina and Qatar Petroleum is potentially a prime example of this. Qatar Petroleum will bring the ventures crude oil and condensate. PetroChina will provide the marketChinas expanding economyas well as Chinese project execution expertise and capital cost advantages. Shell, meanwhile, can bring world-leading technologies; quality; health, safety and environment systems and standards; and proven experience in delivering large-scale projects.
9. Operating costs. This year saw a sharp downturn in industry refining margins, so lowering operating costs can be vital to competitiveness. Operating costs are, to a large degree, built in at the front-end engineering design stage through decisions concerning the amount of process integration and the equipments energy efficiency. However, low operating costs can sometimes be incompatible with low capital expenditure.
10. Capital expenditure. Although the challenges of the debt markets heighten the need for low capital expenditure, this should always be balanced against ongoing operating costs. It typically costs more to run a less capital-intensive plant. That said, intelligently designed projects can sometimes find opportunities to unlock simultaneous reductions in operating and capital costs. For instance, a new concept to minimize duplication and maximize integration in the refinery scheme cuts the capital expenditure at the Rayong refinery in Thailand by 5% and also reduced its energy consumption by 26%.
11. Safety. High performance in this area is not optional. Given the nature of the risks involved, ensuring an assets safety and integrity is paramount to all refinery projects. Making sure that a facility is well designed, safely operated, and properly inspected and maintained is always a prerequisite, and requires robust, proven design and engineering practices and technical standards for design and construction.
12. Environment. Advanced technologies have helped to curb refinery emissions over the past 20 years, but regulations will continue to tighten. World Bank standards are becoming the norm for projects worldwide, regardless of the local requirements. As with safety, compliance with environmental mandates is obligatory. A refinery that fails to meet its emissions targets can lose its license to operate, which is why financiers scrutinize a projects emissions-control plans.
Outlook for refiners
The 12-factor performance concept described here can help refiners to chart a course toward a profitable future. As excellence is a dynamic criterion, the relative importance of these areas will wax and wane in response to market turbulence. One notion that will remain constant, though, is the importance of working together. In my experience, the sectors highest-performing enterprises seek out and draw on external expertise throughout all project phases, from scouting and front-end engineering and development through to operations. New perspectives, it seems, are required for interesting times. HP
||Süleyman Özmen, Vice President, Refining and Chemical Licensing for Shell Global Solutions International BV. Few people exhibit as much passion for the refining industry or have as much downstream experience as Mr. Özmen. In recent years, he has become known for his Three Pentagon Model, which provides refiners with a road map for their investment plans. Mr. Özmen also packs in over 38 years of sector experience, along with numerous qualifications, patents and technical papers. During his career, he has worked through the major challenges faced by the industry, such as the unleaded gasoline mandate, the introduction of oxygenates (such as MTBE, ETBE and ethanol) to gasoline, and the trend for ultra-low-sulfur diesel (ULSD). Following roles with IFP (three years), BP Amoco (eight years) and UOP (20 years), he joined Shell in 2006 to lead its new worldwide hydroprocessing licensing organization. Such was its success that his portfolio was later extended to include all of Shells licensed refinery and petrochemical technologies. In 2009, he was appointed vice president. Mr. Özmens qualifications include a BSc degree in physical chemistry from the University of Paris, a chemical engineering degree from ENSPM, France, and an Executive MBA from the University of Chicago.|