Market review
Recently we have been witness to a wide range of interesting project announcements, initiatives and market changes in 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 indexes (crude production volume, reserves and resources, consumption levels, efficiency of geosurveys, 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, it can be even be argued that forecasting on globalization & 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.
Project overview
Recently there have been a lot of updates on project startups and project initiatives:
- Production & LNG transportation: in supply - shale Arctic projects (new developments & new players), Sakhalin, Middle East; Australia, Japan, Oceania – in consumption.
- 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.
- Ethane, miraculously having become a bottleneck in LNG production, in reality helped create a new product line of Ethane – Methanol – MTO – Plastics – Clean and Specialty Chemicals – New Products (technologies).
Statement Trends
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 petrochemicals usage.
In the Northern hemisphere, especially in Europe, we observe a gradual shift towards ‘green’ technologies, energy efficiency manifestos and application of biodegradable plastics.
We should not neglect the change bunker fuels requirements – their influence is the most significant in those countries. Fuel oil demand is to be significantly reduced due to IMO 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. This response is due to the new prescriptive regulations that 10 percent of the fuels will have to contain biofuels by 2020. Having a supply chain of biofuels can prove to be a successful initiative for European refiners. Players such as Neste and ENI have already significantly invested in this direction.
Refiner decisions might be:
- Short-term
- Produce HSFO with discount in price
- Sell more distillates to shippers
- ‘Wait & See’ the price for LSFO and MGO & demand for HSFO
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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-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 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.
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 US$900 million in desulphurisation capacity, refiners might opt for investing US$1-3 million 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 fuels growth pulled in by impact of EVs and autonomous vehicles as well as selective restrictions on diesel use.
Excellence
Speaking of the trend in general, we should note that benchmarking is losing its position as an instrument of developing strategy going forward 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:
- Lowering technology import dependence
- Implementation of advanced control, management & safety systems
- Digitalization that helps ensure immediate response to external challenges and safeguard from various hazards
Focus of Operational Excellence strategies is shifting due to different economic context:
-
Key areas in 2014
- Cost reduction
- Safety Performance
- Asset Optimisation
- Bottom of the Barrel
- Benchmarking
-
In 2018
- Improved Performance
- Optimising Capital Structure
- Big Data Analysis
- Machine learning, AI
- Digital refinery
A case that illustrates the successful integration of all trends into one strategy is ADNOC’s Digital and AI Vision – the vision aims to combine digital innovation and future-ready workforce to maximize value and boost the competitiveness of the Emirates.
There are 4 key strategic areas of ADNOC’s activity and the value is delivered across 6 main strategic dimensions, namely:
-
Profitability
- Growth & shareholder value – Maximize revenue generation
-
Efficiency
- Operational Efficiency – Optimize costs
-
HSE
- Sustainability & HSE – Maximize safety & minimize environmental impact
-
Performance
- Industry leader – drive the UAE modernization agenda
- Digital & AI Innovation – Empower the energy sector with technology innovation
-
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, 5-year-roadmap, operating model, using international benchmarks, business opportunities analysis, quick wins and value realization plan, governance process, etc. ADNOC, being the 12th largest oil producer in the world with 3 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.
Conclusions:
- The pace of Globalisation is slowing down.
- Energy source, refined products & petrochemicals markets tend to regionalize both in terms of quality requirements and technologies.
- New technologies and processes emerge in markets such in China, India, Gulf Coast, etc. – countries that are less exposed to geopolitics risks.
- Digitalization – an opportunity to unlock 5-10% extra value in both upstream and downstream.
Euro Petroleum Consultants is a technical oil and gas consultancy with offices in Dubai, London, Moscow, Sofia and Kuala Lumpur. Euro Petroleum Consultants also organises leading conferences and training courses worldwide. For further details please visit www.europetro.com.
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