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
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.
Opportunities are present
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
Future projects must aim to score high in
least 10 out of 12 of the key factors, as
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
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
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
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
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
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.
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.