Hydrocarbon Processing - April 2022 - 11

Business Trends
turbulent macroeconomic backdrop, the returns to optimized
reliability programs are greater than ever. In this report, the
author's company analyzed several data sets to better understand
the challenges chemical producers face regarding reliability.
The following four key conclusions can be made from
the investigation:
1. Global chemical companies spend nearly $250 B/yr
on reliability, with the Asia-Pacific region and
North America accounting for two-thirds of the total.
Specifically, it is estimated that these companies spend
around $236 B/yr on reliability initiatives, which
include inspections, repairs, maintenance, upgrades,
expansions, overhauls and replacements, along with all
the necessary materials, supplies and labor.
2. The financial performance of many large chemical
companies deteriorated in 2019 and 2020, as
revenues and profits both fell from their 2018
highs. The annual reports of 18 large global chemicals
companies were studied to better understand their
reliability performance. The first step of the analysis
was to study these companies' income statements.
For many of these companies, revenue, operating profit
and operating margin all fell in 2019 and again in 2020.
These declines are not all the result of the COVID-19
pandemic. Oil prices fell by 10% year-over-year (y-o-y)
in 2019, which pushed down the prices of industrial
chemicals broadly. The pandemic accelerated the slide
downward. The result was two consecutive years of
challenged financial results.
3. In response to deteriorating financial performance,
chemical companies cut back on capital
expenditures, which impaired asset productivity.
It was noted that many large chemical companies
experienced falling revenues and profitability in 2019
and 2020. One important consequence was that these
companies had less capital available to reinvest in the
business. As a result, capital expenditures fell, which
led to the stagnation, and even slight shrinkage, of the
productive asset base. Interestingly, even when the
analysis was normalized for the smaller asset base,
these companies still generated fewer profit dollars
in 2019 and 2020 than they did in 2018. Deferring
capital expenditures was an understandable response to
shrinking revenues and profits, but existing assets were
undoubtedly strained. These bills are now coming due,
with reliability spending likely to increase in the next
several years to make up for the gap of the past 2 yr.
4. As the macroeconomy continues to recover,
chemical companies are scrambling to capture the
plethora of newly available market opportunities.
According to the IMF, the global economy contracted
by 3.2% in 2020. In 2021, the market winds changed.
Global economic growth increased by 5.9% and
is forecast to increase by 4.4% this year. Chemical
suppliers are already feeling this uplift. In the U.S.,
the U.S. Bureau of Labor Statistics has shown that
industrial chemicals pricing was up 30% y-o-y in 2021.
Several of the world's largest chemicals companies have
publicly declared their intention of expanding existing
80
70
60
50
40
30
20
10
0%
.5%
1%
1.5%
2%
2.5%
Reliability spend/revenue 2018-2020
FIG. 3. Reliability spending intensity across 18 of the largest chemical
companies, 2018-2020.
plant capacity to meet rapidly growing customer
demand. The quick swing from pandemic-fueled
demand destruction to recovery and growth in many
commodity markets has left chemical manufacturers
scrambling to add capacity for high-value products.
Reliability is the common thread. Reliability is the common
thread that runs through this story. Eliminating wasted
spending is the first order of business. A wide range of spending
patterns exist, with large chemical companies dedicating
anywhere from < 1% to > 3% of revenue to reliability expenditures.
The wide range in spending intensity suggests an
opportunity around cost avoidance. Some inspection, maintenance
and overhaul activities simply do not generate a positive
return. Cutting these expenditures provides quick relief
to profitability.
However, the largest gains can be found when reliability
programs are modernized as part of the industry's ongoing
digital transformation. Today's reliability data strategies are
too often shortsighted, subjective and siloed. Too much data
is collected in some places, while too little is collected in others.
More comprehensive, data-driven reliability programs
can help expose the causes of many unexpected failures and
identify ways to mitigate the resulting unplanned downtime.
These programs can be fully implemented in much less time
than it takes to startup new construction. While the capacity
gains from new construction are undeniably large, incremental
capacity gains in existing plants can be captured more
quickly, and typically ride on a fixed-cost base the company
already bears. In these cases, profitably grows aggressively.
JEFF KRIMMEL is the Chief Strategy Officer 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 | APRIL 2022 11
3%
3.5%
Average revenue 2018-2020, billion US$
Hydrocarbon Processing - April 2022

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