Hydrocarbon Processing - February 2022 - 10

Business Trends
decline in revenue from $487 B in 2017 to $413 B in 2020. Over
this same period, operating income and operating margin have
both fallen continuously.
The dynamic nature of the chemicals
market has brought a heightened
focus on the need to optimize reliability
and asset performance.
FIG. 1 shows the evolution of important metrics from the income
statements of the companies tracked. Having a deep interest
in industrial reliability, the author's company wanted to study
asset productivity. If asset bases are shrinking proportionally to
declining revenues and profits, operators may be slightly scaling
down existing operations. However, if revenues and profits are
falling more quickly than asset bases are shrinking, then we are
most likely seeing deterioration in asset productivity.
Value of machinery and equipment assets has fallen
in the chemicals industry. Continuing with the analysis, the
author's company studied the balance sheets of the 18 largest
chemical companies, specifically looking at the value of their
machinery and equipment (M&E) assets, which is a subset
of the property, plant and equipment (PP&E) line item. The
analysis focused on machinery and equipment since these are
the productive assets most directly involved in the processing of
chemicals. The property subset is important, but interest in industrial
reliability steers the focus toward machinery and equipment
specifically. FIG. 2 shows the size of the productive asset
base for the companies studied from 2016-2020. Their productive
asset base has shrunk from its peak, and the most productive
assets-the machinery and equipment-make up a smaller
share of the remaining asset base than they did previously.
The economic value of the asset base of this portfolio of
companies contracted by 4% points from 2018-2020. One imM&E/PP&E
158.3
62.8%
137.8
63.3%
148.5
61.8%
152.3
151.6
M&E
(Billion US$)
portant mechanism that can drive this contraction is a conservative
capital expenditure program. If these companies invest
below the level of existing depreciation, the value of the asset
base will shrink. Another mechanism that could
drive this outcome would be asset impairments,
where value is marked down if any of these assets
support production that is no longer economical.
We have seen from FIG. 1 that revenue and operating
income has been trending down in recent
years for some of the world's largest chemical companies.
FIG. 2 showed that while the productive asset
base for these companies has shrunk, operating
income has declined more rapidly. For every piece
of machinery and equipment these companies
own, they are generating fewer profit dollars today than they did
in the past 2 yr-4 yr. The urgency to improve asset uptime and
performance is very real in this sector of the global economy.
Reliability spending varies dramatically between chemical
manufacturers. A comparison of reliability spending
intensity across 18 chemical industry giants is shown in FIG. 3.
The most important observation from FIG. 3 is the wide range of
reliability spending intensities across the industry's largest players.
From 2018-2020, two companies devoted less than 1% of
revenue to reliability spending. One company spent more than
2.5% of revenue on reliability, while one company spent more
than 3% of revenue in this area.
FIG. 3 also shows a wide range of revenues, even though all
these companies have multibillion-dollar revenue streams. Interestingly,
the wide range of spending intensity exists even with
companies in the same revenue range. Eight companies have average
annual revenues between $10 B and $20 B. Of these eight
companies, the smallest reliability spending intensity is at 0.8%
of revenue, while the largest reliability spending intensity is more
than three times larger at 2.7% of revenue. The point is that there
is a wide range of reliability spending, even when the range of
revenues are constrained.
Within this portfolio of large chemical manufacturers, there
was no correlation between the size of the revenue stream and the
intensity of reliability spending. The largest company in the portfolio
generates about ten times the revenue of the smallest company,
but the largest company directs slightly less of its revenue
toward reliability spending than the smallest company. Spending
intensity is most often uncorrelated with the size of the operator.
FIG. 3 provides circumstantial evidence that the average reli57.5%
57.4%
2016
2017
2018
2019
2020
FIG.
2. Productive asset base (M&E and PP&E) for the companies
studied from 2016-2020.
10 APRIL 2022 | HydrocarbonProcessing.com
ability program has not been optimized. If these 18 companies
were collectively spending near optimal levels on reliability,
there would likely be an economy of scale effect. The largest
companies would spend less than their smaller peers, as the
fixed cost of an optimized reliability infrastructure is spread over
many operating facilities. Instead, reliability is too often practiced
in a parochial sense, where each facility defines its own reliability
protocols. In these cases, performance is sensitive to the
personal philosophies and experiences of onsite reliability leaders,
which is reflected in a wide range of spending intensities for
companies of all sizes.
Insights. Industrial reliability has always been a critical performance
driver for chemical manufacturers. Today, against a
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