HP March 2022 eBook—Energy Transition - 24

Business Trends
RBOB
4.20
3.60
0.00
0.60
1.20
1.80
2.40
3.00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FIG. 1. RBOB and crack spreads, January 2006-September 2020.
Source: U.S. EIA.
ply glut eventually caused the crude oil price collapse of 2014.
Conversely, demand did not experience a similar shock, which
kept product prices from collapsing as aggressively as crude oil
prices. As a result, crack spreads increased through 2015. Over
the course of a year, refined product prices reset to the lower oil
price regime, which caused crack spreads to return to their normalized
level of around $0.40/gal, where they remained from
2017 through 2019.
As noted previously, the 2020 year-to-date crack spread average
is approximately 35% below historical levels when measured
in constant dollar terms. The initial decline was triggered by a
rapid deterioration in refined product consumption, driven by
government lockdowns as a result to the COVID-19 pandemic.
Refined product consumption has only weakly recovered as
government restrictions persist, combined with (at least temporarily)
changed travel preferences among the general population.
As a result, crack spreads have witnessed continuous pressure
throughout the year, with the most vulnerable refineries
experiencing negative margins.
However, the news is not all bad for refiners. Capacity reductions
will accelerate the pace with which the market normalizes.
As of December 2020, the author's company's analysts
estimate that 2 MMbpd of refining capacity is out of the market
vs. the beginning of 2019. Therefore, the market should reach a
healthy balance of consumption and production this year. Assuming
this to be the case, analysts are forecasting an upward
trend in refining margins through 2025.
Anticipated trends in the refining industry. Looking at
global reliability spending patterns, the refining market will
improve but will still face challenges. Regulatory pressures
will keep growing, placing a lid on potential future margin expansion,
and slowing upstream production growth will buoy
feedstock prices and compress margins. In the U.S., natural gas
prices are edging higher, which may reduce one of the U.S. refining
sector's largest structural advantages-the cost of energy.
These pressures may be offset by announcements by companies
like BP and Shell that say they are exiting refining, but this is not
anticipated to have an impact for several years.
Crack spread, RBOB-Brent
Crack spread, 1-yr average
1.40
1.20
0.00
0.20
0.40
0.60
0.80
1.00
Operational improvements are coming. In the face of adverse
market forces, companies are pushing harder than they
have in decades to make operational improvements, while simultaneously
cutting costs. At the same time, virtually every major
oil and gas company is investing heavily in strategic improvements,
especially digital transformation. The author's company
estimates that the energy industry-including exploration and
production, midstream operations and downstream facilities-
plans to spend $20 B over the next 5 yr on these projects alone.
While several challenges exist in achieving operating improvement,
especially in digital infrastructure, there is substantial potential
for this improvement and cost optimization.
The pace of change is accelerating. For the first time in
modern history, oil and gas majors began to diverge dramatically
in their forecast of energy markets in 2020. Environmental, social
and governance (ESG) pressures have been a dominant topic for
the past few years. Within the refining industry, ESG pressures
continue to mount. A difficult economic environment in 2020
forced virtually every refiner to make massive cuts in spending
and sparked questions as to the stability of some of the facilities.
In an industry with a tradition of very slow changes, the future
leaders will most likely achieve that position due to the pace at
which they evolve and focus, in part, on improved reliability.
Takeaways. The author's company estimates that global refiners
spend more than $50 B/yr on reliability-focused activities,
primarily on routine maintenance efforts and turnaround programs.
It is also estimated that between 10% and 30% of this
investment is wasted, meaning it does not improve reliability.
In some instances, this spending may have a detrimental impact
on performance, weighing even further against profitability. In
this sense, suboptimal approaches to reliability costs refiners
around the world between $5 B/yr-$15 B/yr.
To optimize reliability, spending and reliable performance
to minimize risks and maximize profits, a refinery can do four
things. These include:
1. Develop consistent, quantitative systems for evaluating
system performance
2. Integrate reliability data from a range of sources and
assets into single-system models to ensure critical
inputs and influences are identified
3. Ensure personnel are adopting their work processes
and utilizing these systems effectively to leverage
their capabilities
4. Push past traditional decision processes or practices
to uncover new opportunities and solutions.
While these suggestions sound simple, they have proven challenging
for many refiners. Across the board, those that are doing
all four of these appear to have both a lower risk profile and a
higher profitability result, validating the premise that reliability
is one of the leading indicators of profitable operations.
JEFF KRIMMEL is Director of Market and Data Analysis at Pinnacle. He has
extensive analytical experience in the commercial and market intelligence
domains. Before joining Pinnacle, Dr. Krimmel was the Director of Pricing and
Market Research at Key Energy Services. He has also held various data-driven
positions in pricing and profitability, strategic marketing and new product
research and development at Baker Hughes. He earned his PhD in mechanical
engineering from Caltech, where he used computational approaches to study the
use of shockwaves in biomedical applications.
Hydrocarbon Processing | MAY 2021 | HydrocarbonProcessing.com
http://www.HydrocarbonProcessing.com
HP March 2022 eBook—Energy Transition

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