The question of refining margins in the upcoming period has been pre-occupying the minds of senior executives of oil companies and refinery operators ever since the price of crude started to decline. In current conditions refining capacity worldwide is not likely to grow substantially again soon.
The climate has been quite challenging for the downstream industry for a decade or more, and it seems like more issues are coming on the horizon. These include slower economic growth in regions of main producers and consumers due to the recession and economic slowdown in China; policies for sustainable growth as opposed to rapid increase; and global refining overcapacity that will limit and restrain margins – additions to refining capacity will amplify the problem.
The consequences of low crude price is impacting many major investment projects, with some economies more vulnerable than others due to their dependency on oil exports. Companies with integrated refining and petrochemical assets have benefitted from increased margins due to the present level of petrochemical products.
Many refiners are reported to ‘have enjoyed the unexpectedly high processing margins – BP and Total managed to partially offset losses in upstream due to higher refining margins and also in petrochemicals Shell exceeded the expected profit level in Q1, 2016. Other companies such as ConocoPhillips have suffered due to their policy a few years ago to sell off many of their refining assets.
Companies with the ability to integrate their refining assets with production of petrochemicals are better placed to achieve higher margins.
The selection of investment projects to increase margins often includes residue upgrading i.e. the processing of vacuum and other heavy residues to higher value products. In addition, companies must select projects which best meets their specific requirements. There are some important questions to be addressed such as market needs and opportunities for gasoline and/or diesel, power generation, coke production and petroleum gas utilisation.
Other key points to consider include use of unconverted materials, budget constraints and best ways to integrate within existing refinery via revamping and modernisation.
Companies will also need access to financing and will need to give assurances to lenders that the selected projects are viable and all risks are well understood and managed during project implementation.
Many companies have already developed long-term action plans for the low oil price situation and set their goals towards maintaining investment programmers and implementing scheduled projects. The way forward implies focusing on issues such as increased integration between refining and petrochemicals; technology innovations; operational efficiency; higher focus on conversion; and improved HSE.
In order to sustain and increase margins refiners will need to increase output quantity and quality of higher value products with deeper conversion through residue upgrading. The selected configuration and technology will need in-depth study to evaluate budget constraints and which scheme best fits the local and export market. Companies will also need to select the optimal project implementation strategy, take into account the complexity of the project and past experiences. Undoubtedly, each selected configuration will be specific for each location. And lastly, it will be important to understand the present status of the technology developments so as to reduce risks on future operations.
There is a real opportunity for refiners in such regions as Middle East and Russia and CIS to reduce operating costs by implementing a programme focused on operational excellence. Topics such as energy reduction, improved reliability and availability, and optimisation of human resources are areas that can lead to important savings and improved margins. Now is the time for refiners to carefully evaluate future investment strategies to best meet the challenges of tomorrow.
