Recently, we have been witness to a wide range of interesting project announcements, initiatives and market changes in the downstream industry. To begin with, there was an engaging ‘motor run’ in oil prices – since 2014 the market has seen a sharp fall in crude prices – peaking at $110/barrel to bottom out at around $30/barrel. Since then, we have seen a gradual recovery to reach $70+/barrel level – all with no certainty about the future stability of prices.
In today’s society, key analysts making predictions based on traditional market indices (crude production volume, reserves and resources, consumption levels, efficiency of geo surveys, oil rig performance, etc.) can be undone by a single post in social media by influential political figures, or major companies.
Extrapolating from the analysis of market premises, even it can be argued that forecasting on globalisation and open-air market approach is gradually losing its relevance. Therefore, there is an actual demand for an upgraded and up-to-date database of premises to justify feasibility and the potential of certain projects.
Recently, there have been a lot of updates on project start-ups and project initiatives: (i) Production and LNG (liquefied natural gas) transportation [Shale Arctic projects (new developments and new players), Sakhalin, Middle East – in supply; Australia, Japan, Oceania – in consumption]. (ii) The major trend in LNG production increase pushes suppliers to the direction of separation of ethane and helium, better olefin extraction in fossil energy sources. (iii) Ethane, miraculously having become a bottleneck in LNG production, in reality helped create a new product line of ethane – methanol – MTO (methanol-to-olefins) – plastics – clean and specialty chemicals – new products (technologies).
Annual refined product growth from 2020 to 2030 is expected to peak at 0.6%; on the other hand, market forces will accelerate petrochemical demand due to population and middle class growth, but this will be partly mitigated by the increasing environmental pressure on reducing petrochemical usage.
In the Northern hemisphere, especially in Europe, we observe a gradual shift towards ‘green’ technologies, energy efficiency manifestos and application of biodegradable plastics.
IMO bunker fuel regulation
We should not neglect the change in bunker fuel requirements – their influence is the most significant in those countries. Fuel oil demand is to be significantly reduced due to IMO (International Maritime Organization) regulations as shippers consider alternative fuels (like methanol, LNG, etc.) to meet sulphur restrictions. As a case, Europe, for example, is responding to these challenges, whereby some refineries earmarked for closure have converted to bio-refineries, producing biofuels such as HVO (hydrotreated vegetable oil). This response is due to the new prescriptive regulations that 10% of the fuels will have to contain biofuels by 2020. Having a supply chain of biofuels can prove to be a successful initiative for the European refiners. Players such as Neste and Eni have already significantly invested in this direction.
Refiner decisions might be: (i) Short-term – produce HSFO (high-sulphur fuel oil) with discount in price; sell more distillates to shippers; ‘wait and see’ the price for LSFO (low-sulphur fuel oil) and MGO (marine gas oil) and demand for HSFO. (ii) Long-term – HSFO destruction; Investment in residue hydro processing will be critical for refiners to gain from this transition.
Refiners looking to cut down on high-sulphur fuel oil output must decide whether they will target the expected post 2020 low-sulphur fuel oil market, or try to get out of fuel oil all together, focusing on middle distillate and light ends output. Timing is, perhaps, the most crucial element for decision making. Refiners with upgrading facilities already in place by 2020 will be able to capitalise on this wide spread.
But those with projects coming online in the mid and late 2020s will be exposed to the immediate drop in high-sulphur fuel oil values and then only stand to benefit from a small premium for any low-sulphur product. The lead-time for a delayed coking unit is around five years. For residual cracking units, it is around the same.
SDA (Solvent Deasphalting) lead times are shorter – around three years. For those unwilling to invest in new units, smaller scale changes are available like debottlenecking, increasing throughput on existing conversion units such as hydrocrackers and VDUs (vacuum distillation unit).
Another important out-of-the-box initiative from the IMO regulation would be the partnership between refining and shipping industries. The refining industry could look to invest in the scrubbers used in the ships to meet the IMO regulation, whereby the refineries would circumvent investing in desulphurisation capacity, or refinery upgrading.
This would allow the refiners to continue producing HSFO and the shipping industry could continue using the same. Instead of investing around $900mn in desulphurisation capacity, refiners might opt for investing $1-3mn each in the scrubber unit for the partnering shippers’ vessels.
Transition period from 2020 to 2025 will witness turbulence with the potential volatility in terms of margins for refiners. Around 70% of global energy demand growth is driven by non-OECD, i.e. India and China. In those countries, there is a struggle for energy consumption increase not only in absolute terms but also as an attempt to make amenities available and more affordable like in the ‘Old World’ as well as bring the quality of life closer to global standards.
This trend is also multiplying the demand growth for petrochemicals – petrochemicals demand to grow by ~100% by 2040 – which in line is followed by active R&D in manufacturing technologies, and in general, energy consumption. Transport fuel growth is pulled in by impact of electric vehicles and autonomous vehicles as well as selective restrictions on diesel use.
Speaking of the trend in general, we should note that, going forward, benchmarking will lose its position as an instrument of developing strategy because such comparisons have been done multiple times. Nowadays, analysis between regions is more challenging due to different supply/demand models and, at the same time, the gap between best-in-class and average plants is being reduced.
Uncertainty in conditions makes projects with maximum flexibility the most attractive. Flexibility might be achieved through different routes: (i) lowering technology import dependence; (ii) implementation of advanced control, management and safety systems; (iii) digitalisation that helps ensure immediate response to external challenges and safeguard from various hazards.
Focus of operational excellence strategies is shifting due to different economic contexts: Key areas in 2014 – cost reduction; safety performance; asset optimisation; bottom of the barrel; benchmarking. Key areas in 2018 – improved performance; optimising capital structure; big data analysis; machine learning, artificial intelligence; digital refinery.
A case that illustrates the successful integration of all trends into one strategy is ADNOC’s digital and artificial intelligence vision – the vision aims to combine digital innovation and future-ready workforce to maximise value and boost the competitiveness of the United Arab Emirates (UAE).
There are four key strategic areas of ADNOC’s activity and the value is delivered across five main strategic dimensions, namely: (i) Profitability – growth and shareholder value (maximise revenue generation); (ii) Efficiency – operational efficiency (optimise costs); (iii) HSE – sustainability and HSE (maximise safety and minimise environmental impact); (iv) Performance – industry leader (drive the UAE modernisation agenda), digital and artificial intelligence innovation (empower the energy sector with technology innovation); (v) People – workforce of the future (enable a future-ready workforce).
In 2019, ADNOC launched its inaugural global ‘Workforce of the Future’ survey to examine future workforce and employment trends in the oil and gas industry, particularly as the industry looks to attract talent and advance corporate ‘Oil & Gas 4.0’ mission to help meet the world’s increasing demand for energy and higher-value products.
The complex measures include different instruments like landscape assessment, five-year-roadmap, operating model, using international benchmarks, business opportunities analysis, quick wins and value realisation plan, governance process, etc. ADNOC being the 12th largest oil producer in the world with three million barrels per day, it is hard for a corporation to sustain the level of efficiency and implement cultural changes across the hierarchy. Nevertheless, the company’s journey through efficiency levels proved its rationale and was perceived by industry players as an example of successful delivery of the corporate mission to its employees with visible effect on performance.
The pace of globalisation is slowing down. Energy source, refined products and petrochemical markets tend to regionalise both in terms of quality requirements and technologies. New technologies and processes emerge in markets such in China, India, Gulf Coast, etc. – countries and places that are less exposed to geopolitical risks. Digitalisation is an opportunity to unlock 5-10% extra value in both upstream and downstream.
Ekaterina Kalinenko is project director and Konstantin Stezhko is advisor at Euro Petroleum Consultants (EPC), which is a leading independent consulting company in the oil, gas and petrochemical sectors, as well as a producer of specialised annual international conferences and training seminars, focusing on market trends, technological advances and business strategies for the petroleum industry.
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