The most important factors in the future development of the downstream industry in the Middle East will be investments, partnerships, and economic diversification. There is a see huge amount of investments in the Middle East downstream industry today. Market consolidation, acquisitions, and partnerships will be the new rules of the game for the industry.
Middle Eastern downstream industry players have gone into other parts of the world for partnerships and they have built stakes in refining and downstream production capacities worldwide.
At the same, if the region removes the barrier of local ownership, many global downstream companies can come and invest in the region 100%, just as Saudi Arabia has started to do recently. It is reducing bureaucracy in the business environment to bring in foreign investment.
ADNOC hosts downstream industry roundtable
ADNOC recently hosted a Middle East downstream industry roundtable organised by Refining & Petrochemicals Middle East. The roundtable was attended by Hassan Al Hosani, manager, Refining Operations Department, ADNOC; Essam Al Sheibani, operations advisor, Duqm Refinery; Khalid Bin Hadi, senior executive vice president, Oil, Gas & Petrochemicals, Siemens Middle East; Holger Stolpmann, general manager, W.L. Gore & Associates GmbH Middle East; Adriano Gentilucci, commercial director – IMEA, Dow Oil, Gas and Mining; Angie Slavens, managing director, UniverSUL Consulting; Hans-Henrik Poulsen, commercial director, Arabian Peninsula, and managing director, BASF Middle East Chemicals; Murali Mandi, general manager – EMEA, Honeywell Connected Plant, Honeywell Process Solutions; Abhay Bhargava, business head – MEA, Industrial Practice, Frost & Sullivan; Vinod Raghothamarao, director consulting, Energy Wide Perspectives, IHS Markit; and Martin Menachery, editor, Refining & Petrochemicals Middle East.
The roundtable discussed the themes of ‘The Technological Advances in Watershed Projects in the Past Ten Decades’, ‘The Prevailing Downstream Challenges and Opportunities’, and ‘The Roadmap for a Profitable Downstream Industry in the Next Decade’, in three separate sessions.
Digital transformation of the downstream industry puts the focus on customer-centricity and will only be achieved by identifying the most critical customer touch points and exploring the opportunity to improve them through digitalisation and by the changing the organisational structure and attitude to support it. The digital transformation of a downstream plant embraces production, supply chain, manufacturing and distribution. Efforts to focus only on a part would usually result in sub-optimal solutions. Menachery set the tone of the roundtable discussion with a question to Bin Hadi on the progress made by the refining and petrochemicals industry in the Middle East in digital transformation in the past ten years.
“We have seen industry revolution in the entire spectrum of business – energy, construction, transportation, etc. Downstream industry in the Middle East has made real investments and good progress in the last ten years by developing, implementing and executing game-changing projects, building capabilities around automation and electrification, and also by implementing innovations. It means that the industry has built a strong infrastructure. There is a potential to build further on this infrastructure by applying Industry 4.0 principles, which will transform the approach, make use of the huge amount of data that we are sitting on, and build a lean, efficient and globally competitive industry in the Middle East. We must not forget the complexity of a downstream plant. The complexity is increasing day by day. The digital data management is one of the ways to manage this complexity,” Bin Hadi observed.
Duqm Refinery is a greenfield project in Duqm, 550 kilometres south of Muscat, Oman. Once operational, the refinery will process 230,000bpd of crude oil and occupy 900 hectares in the Duqm industrial zone, with an expected investment of up to $15bn over the next decade. The Duqm Refinery project is the result of a strategic 50:50 partnership between Oman Oil Company and Kuwait Petroleum International, which are respectively owned by the Omani and Kuwaiti governments.
Speaking from his experience with the new generation of employees at Duqm Refinery project in Oman, Al Sheibani commented:“Now we are recruiting people for the new refinery. All of them are millennials. They are highly IT and electronics oriented. They are highly digital. They want things on apps. It is a challenge. Before I build the plant, I need to build the operations management system for how we are going to run the refinery for the millennials to work on. I have to build the digital plant so that people understand it better.”
Mandi was quick to open a question on knowledge management, and asked: “One of the key advantages of digitalisation is knowledge management. Coming back to millennials, they are not going to stay with a company for 35 years. They are going to be continuously searching for better opportunities. How digitalisation can be used for the knowledge management perspective in the Middle East?”
Answering Mandi, Slavens said: “Knowledge management is something that everybody has struggled with in the past. How do you take what is in the brains of experienced people and get it in to the minds of younger employees? With the developments in technology, we can actually do a good job on this front. Digitalisation is the best tool to make the transition of knowledge from highly experienced operators to the new millennials.”
“We will develop world class chemical facilities that will drive the downstream sector in the future. We need to be more competitive. It is a huge shift from the past and digitalisation will be the key driver in this shift. Digitalisation will dramatically change the downstream sector,” explained Bin Hadi
“Digitalisation will generate revenues and it will generate new jobs. There are lot of reports in the market which say that digitalisation is a risk. We sit with a huge amount of data, and the question is how we transform the data into smart data and what do we do with it and how can we forecast. We need technologies like digitalisation to achieve this result,” Bin Hadi elaborated further.
Talent development is a real concern
There is a serious concern about the talent available in the region to manage the mega projects – undergoing and announced – as well as to run plants, once commissioned.
Al Sheibani was not optimistic about the talent available in the region for the upcoming mega projects, and observed: “We are building huge refineries. Are we ready for that with human talent? Are we preparing our people to manage these projects and work in the plants, once commissioned? People in the region are not ready for this. At the same time, lot of expatriates are going back home. There are fewer talented people in the region now.”
“How many people are needed to run the Al-Zour Refinery in Kuwait and the Duqm Refinery in Oman? All these major developments are coming up at the same time. The region is pulling up all the international labour force just to work in the upcoming projects and plants here. All these refineries are located in remote places, which do not attract international experts to come to the region,” added Al Sheibani.
Raghothamarao agreed with Al Sheibani, and commented: “It is a very valid point. All refining projects are coming up together and there is a resource scarcity. It is difficult to find the right talent to run all these projects and lot of prime talent has moved away from the region.”
“The most appropriate step would be to train the incoming new workforce properly even though we will not get the same level of expertise from them compared to the highly experienced work force, which was here earlier. We need to train them with speed so that at least a decade from now, we will have some experts,” suggested Al Sheibani.
Al Hosani gave the best solution to bring in international talent to the region, and said: “The places surrounding the key projects and plants in our countries need to be really attractive for expatriates to work and live. We are making Ruwais city very attractive for people to work and live. We are developing huge infrastructure in Ruwais with major investment.”
Strategic partnerships are the key
Discussing the key innovations in the Middle East refining and petrochemicals industry during the past decade, Bin Hadi stated: “Today, we see a shift from upstream to downstream. The Middle East has realised that the downstream brings profits. They have also started to believe that strategic partners will drive this growth. We should not forget that we are a young and growing nation. We see lot of investment in education, people development, technologies and innovations. Again, all these go hand in hand. The next step is to define strategic partnerships, who will invest jointly with us.”
Al Hosani added value to this discussion by bringing in a recent key investment by ADNOC in India, and pointed out: “A recent example of strategic partnerships is the recently announced co-investment of 50% with Saudi Aramco in the $44bn refinery in Ratnagiri, India, with a processing capacity of 1.2 million barrels of crude oil per day. If the UAE wants to do this by ourselves, it may be very challenging. But when the UAE and Saudi Arabia come together, it is much easier.”
“We build it in India because of the economies of scale. India has a huge market for the refined products. We can make a 1.2 million barrels per day refinery in Abu Dhabi. But, then what is the future in terms of the refined products? Collaborations of this kind make businesses successful,” added Al Hosani.
“I think the keyword here is partnership. In the Gulf, we have the budget and we also have the raw materials. But, we do not have the technology. First, I will have a partnership with people who have done it before. If you have the knowhow, you bring it to us and then we work here in collaboration. We can give many successful examples for this here. In the Middle East we cannot do it; we need the partnerships,” Al Sheibani explained.
Gentilucci joined the discussion by pointing out the importance of private entrepreneurship, and said: “I believe that partnerships are very important. The Middle East should open up more in order to encourage private entrepreneurship.”
Bhargava took the opportunity to showcase the technology expertise that the partners brought in, and commented: “One of the benefits that you avail out of partnering is it gives you access to technology. It allows you to keep your operational costs under control. When you bring in someone, they are coming in with their technology expertise.”
Stolpmann brought in the commercial angle of partnerships, and observed: “When you look at partners you want to bring in from the international stage, technology companies will only come if they have a proper commitment by the local partners that in the long run there is a chance for them to make good money. The UAE recently started allowing companies open their shop with 100% ownership, which is a very positive development for the downstream industry.”
Raghothamarao joined the talks by pointing out the importance of Asia in the partnerships, and stated: “If you look at the future, almost all the refineries here are trying to make it an export hub for certain products. The entire spectrum shows that the refineries in the Middle East are looking for partnership with Asia, especially India and China. The way forward, the companies here need to capitalise on these partnerships and also work on new technologies.”
“According to our predictions, the oil price will be $65-70 per barrel by 2019. A three-fold approach is needed to succeed in this scenario – getting into operational excellence, investing in technology, and developing human talent. Almost all refineries in the region are complex. The Middle East downstream outlook looks vibrant; but, there might be a paradigm shift in the way these companies operate. As we are speaking today, there has been an announcement by ADNOC and Saudi Aramco building a refinery in India. We can have many similar, or smaller types of partnerships happening in the future, especially with Asian economies,” added Raghothamarao.
“They realised that they need to be where the consumers are based, not only for the markets, but also for the economies of scale. There is a saturation in the number of refineries in the Middle East; so, the market is moving towards Asian economies,” Raghothamarao explained.
Seeking further information on the ADNOC-Saudi Aramco refinery project in India, Mandi asked Raghothamarao: “You talked about the positive side of starting a huge refinery project in India. Is there any negative side to it?”
Raghothamarao was cautious in his approach, and replied: “The negative side is that there is a lack of optimism that the project will go ahead on time. If there is a delay, the dynamics might change in terms of technology and what the market demands. Whether the project will be completed on time is the major issue.”
“There are reports that some farmers in Ratnagiri are not willing to give up their land for the refinery. The place where this project is supposed to come up is very famous for Alphonso mangoes. The farmers are saying that they are better doing farming of mangoes than getting a job in the refinery. It is a mind-set. This campaign may be motivated. There are precedents in India when mega projects have to move out of the country because of agitations.”
Research and development – the future
Stolpmann was not satisfied with the R&D endeavours of the GCC downstream industry, and commented: “I would like to see more R&D investment in the region. I think it will do very good for the region if there is more R&D investment and more educational endeavours here.”
Slavens gave a totally different perspective on the region’s R&D endeavours, and said: “May be we were little bit hard on the region in terms of R&D. Some of the largest facilities in the world have been built here so that there was a reason not to take so much risk on new technologies from R&D because we are building the largest facilities in the world and we do not want it to be first-of-its-kind of technology.”
“The chemical and petrochemical industry in the UK has nearly 140,000 people working in the sector, which is slightly more than what is here in the entire GCC. We have around 130,000 people working in the downstream industry. So, size-wise the UK and the GCC are more, or less equal in chemical and petrochemical industry,” observed Stolpmann.
“While the UK spends around $6bn in R&D annually, less than $600mn is spent on R&D in the GCC. Is the region not interested in leveraging the outcome of good R&D developments? In the future, there will be no technologies being developed in the region in chemicals and petrochemicals sector if there is no focus on R&D. I would prefer to have a much higher local R&D investment,” added Stolpmann.
Asked about the operational technology status of the Middle East downstream industry, Stolpmann said: “With Sadara, which is a Dow-Saudi Aramco joint venture, for the very first time in this part of the world, we see very complicated chemicals being manufactured, like isocyanates, the precursors of polycarbonates. Producing these kinds of chemicals means that there is lot of demand for innovation in this part of the world.”
“If you look at Borouge, which is an ADNOC-Borealis joint venture, it is a world-class petrochemical complex, which produces PE and PP. Partnering with companies like Dow and Borealis, we are bringing in the state-of-the-art technology to this part of the world. This means the Middle East is a top-class refining and petrochemical region in the world,” added Stolpmann.
“What I think is needed for the chemical industry here is to attract further downstream industries into the region. For example, polycarbonates are used in car glass head lights, aircrafts, mobile phones, computer screens, etc. These are top class chemical products. I think it is a regional responsibility to bring in the technology convertors for producing these kinds of products in the region,” observed Stolpmann.
Bin Hadi remarked: “Today, we are not focusing on random technologies. We are focusing on technologies that will add value and unlock the potential of the downstream sector.”
Health, safety and environment
When asked about the status of the Middle East downstream industry on health, safety and environment (HSE) front, Al Hosani gave a very positive picture, and said: “As elsewhere in the oil and gas industry, for the Middle East region too HSE is at the centre of operation. We cannot run a plant without focus on HSE. We currently have very good HSE practices.”
“We are in good shape and this is very clear from the number of recent accidents and injuries, which is well under control. If you look at the major accidents in the downstream industry in last 10 years, you will always see the human factor there. The major focus of our HSE activities in the last 10 years was on how we can control the human element in accidents and injuries.”
“Coming to the environment, compared to 20 years back, in every project that we do today, we go for zero flaring whenever we produce. In sulphur recovery, we go for the highest percentage of 99.9-plus. Even though this involves very high cost, we make this investment because of society and the environment. When it comes to the products in the refineries, we go for 10ppm green diesel. We are meeting Euro specifications. Our refineries are equipped with the latest technologies, in order to ensure that apart from profitability, we take care of HSE,” added Al Hosani.
Al Sheibani pointed out: “If you see the number of incidents that happened in the Middle East region, you will see that these incidents are not related to the employees of ADNOC, or Orpic, or Duqm Refinery. These are mainly from people who come for short term as contractors. Their safety perspective is not that high compared to people who work in a refinery day by day.”
Explaining the importance given by BASF on HSE in its operations, Poulsen observed: “In BASF, when we bring out products on roads, we do not want to be involved in accidents. In the region, we have clear instruction to all our drivers to have their seat belts on. It is a matter of our work culture. We also have clear safety precautions in the region on how we store our chemical products on moving trucks.”
“We have so many rules and regulations on HSE. And, there are lots of trainings and awareness campaigns happening. But it is the mind-set and work culture, which actually matter. It is not about being safe inside a plant. We need to be safe always,” opined Bin Hadi.
IMO sulphur cap to reduce greenhouse gas emissions
In an effort to reduce greenhouse gas emissions, International Maritime Organisation (IMO) will be implementing regulation to reduce the sulphur cap on marine fuels from the existing 3.5% to 0.5% with effect from 1 January 2020.
Commenting on the impact of the IMO sulphur cap on the refining industry, Slavens said: “When you are talking about the IMO sulphur cap on marine fuels, you are talking about more sulphur – may be 15% more sulphur from the refineries by removing the sulphur from those fuels. Most of the region’s refineries have already done their specifications to the Euro levels; but, IMO regulation will have more than an impact if the refineries here choose to implement the regulation. But, easily it can be addressed through hydrotreating capacity, or oxygen enrichment.”
Asked about the role of refining-petrochemical integration in the Middle East downstream sector, Al Sheibani explained the benefits of integration with the example of Saudi Arabia: “In terms of value creation, most of the plants in the region have started to integrate. They are connecting refineries with petrochemical plants. Saudi Arabia has a large range of products. That is because of integration.”
“Refining-petrochemical integration is the best thing that has happened in the last decade in the downstream industry,” remarked Mandi.
“It is very important that various systems that the downstream companies are using – integrated DCS, tank information management systems, ERP systems, etc. – could be integrated. If we just go back ten years, most of the systems were run in isolated fashion. Companies in the Middle East have realised the value of integration. The last area I would like to say – and I have seen this with Saudi Aramco, ADNOC and KOC – is convergence of IT and OT (operational technology). I see many companies in the Middle East doing it for the last few years,” added Mandi.
Poulsen brought in the element of sustainability in plant operations to the topic of integration, and opined: “Plants need to be integrated so that nothing produced from a plant becomes waste.”
Economies of scale
Al Hosani brought in the subject of return on investments to the roundtable discussions, and said: “How much you invest and how much you will get back from that investment are important elements. This is something which we are considering when we make the business case for any project. So, we can do a full value chain project in one place; but then, what is the economies of scale of that project?”
“Take Borouge as an example. Borouge produces plastics – polypropylene (PP) and polyethylene (PE). We export these products. But the surprising fact is that for the UAE’s demand of PP and PE, we import these from China. So, something that we produce in the UAE and export, we are actually buying from China because it is cheaper there. So, economies of scale is really important in downstream business,” added Al Hosani.
Al Sheibani commented: “The challenge for the region is that companies like ADNOC, or SABIC are producing the downstream products at the subsidised rates. For them to become internationally competitive is really challenging because there are other producers producing far cheaper than these companies. To be competitive, we need to think in innovative ways. How to lower our cost of production to be really competitive with the rest of the world? We need to produce in large volumes at lower costs.”
“The true issue is the scale of local demand. The trick here is to figure out the demand clusters where the products can be fed into. For example, in India, Gujarat became a huge success economically because they built infrastructure that allow them to get the feedstock, or the end products to the demand zones. For the Middle East, the challenge is the local demand that is not enough to sustain our production. So, for being successful, there is a minimum requirement of local demand. If you do not have that, the economies of scale will not work out positively,” observed Bhargava.
Gentilucci expressed his disagreement with Bhargava, and revealed: “Switzerland is a country with a population of six million. They have a huge economy and huge industrial network. They have only a small internal market. They export high-value downstream products for which they do not have a market for.”
Slavens ended the discussion on economies of scale by point out where the future of oil is, and said: “The focus of the oil and gas industry used to be primarily energy production for transportation fuels; but, now we are looking at the future. With more space for electric cars and renewable energy, the focus is shifting more on to downstream products. That is where the future of oil is going to be.”
Saudi Aramco-SABIC crude-oil-to-chemicals project
When asked about the game changing crude-oil-to-chemicals project under implementation jointly by Saudi Aramco and SABIC, Mandi remarked: “The Saudi Aramco-SABIC crude-oil-to-chemicals project is a strategic development. It is a massive investment and uses first-of-its-kind technology. It will contribute to Saudi Arabia’s GDP in a major way.”
“I expect the kingdom to become a power-house in the downstream value chain because they will have both the feed as well as the downstream products,” Mandi added.
Al Sheibani said: “Crude-oil-to-chemicals technology will change the whole downstream game. Now, only one company is licensed to crude-oil-to-chemicals technology – Chevron CLG. They will gain a market position once this technology is proven through the Saudi Aramco-SABIC project; it is not yet a proven technology. It is not going to be a cheap technology; it is going to be an expensive one.”
“However, once proven, it might evolve into something very attractive for other countries to follow the path of Saudi Arabia. It might be taken up by countries like India. Kuwaitis have a very strong strategy for energy sector investments. They are going to spend half trillion dollars on energy business by 2040. They might show interest in going ahead with a similar project if the Saudi Aramco-SABIC project proves successful,” Al Sheibani predicted.
“A challenge here is that everyone is going for their own crude. Once these kinds of projects are developed, it will be difficult in the future to find crude in the market. It will become very expensive,” opined Al Sheibani.
Future direction for downstream industry
“The next ten years ahead of us will be very challenging and very competitive. Our key priorities will be operational excellence, digitalisation and profitability. We need to be highly profitable to stay in the market and we need to adopt a lot of elements in the operational excellence area,” observed Al Sheibani.
“When we talk about partnerships in the downstream industry, we are looking for strategic, committed long term partners who will unlock potential and will use smart technologies that can also drive the objectives of the downstream industry, which will increase the overall efficiency. The partnerships will generate jobs,” Bin Hadi commented.
“Across the Middle East, there is a need to be profitable and to compete with the rest of the world. The one thing that still needs to be considered is the utilisation of technology that can save money and bring up efficiency. That is something that technology providers and other service companies have to do,” remarked Stolpmann.
“First of all, we need a strategy to remain profitable. Secondly, consumption is mainly coming from Asia, especially China and India. New refining capacities and petrochemical units are coming up in the Middle East. The business model here is partnership. The third initiative is digitalisation, which is very important for the bright future of the downstream industry. It is very clear that in the future we need to concentrate on profitability, secure markets, good partnerships and digitalisation,” stated Al Hosani.
Menachery invited Raghothamarao to make the closing remarks for the roundtable. Raghothamarao said: “We understand the demand is the key for the success of the Middle East downstream industry. First and foremost, the industry has to understand where the demand zones are and based on that create strategic investment plans. There are initiatives to be taken on CSR and sustainability issues in the future. HSE is taken seriously in this region. I hope that we continue on the momentum on the HSE front.”
“Operational excellence, enhancing productivity, improving efficiency, and state of the art technology are the right elements for the success of the downstream industry. Even though there were comments saying that the region is not investing enough in R&D, we have digital transformation as the way forward for the Middle East downstream industry. Asia is becoming a key market for the refining and petrochemical industry. Profitability matters – that is the key that determines what our next plant, or project is,” added Raghothamarao.
“Talent development is another area where the region has to go a long way. Companies need to take strategic initiatives to groom the millennial talent even though automation will take some of the key work load in modern plants. As the highly experienced operators retire, we need to understand how the millennials are able to handle their jobs more effectively,” concluded Raghothamarao.