Good times are over for crude oil refiners as margins tighten
While much of the upstream sector has struggled mightily since crude oil prices began collapsing in the summer of 2014, refiners have enjoyed a period of relative prosperity.
Falling crude prices buoyed refiners’ margins, even as upstream producers trimmed costs and strained the capacities of their suppliers.
But the easy times for refiners may be fading rapidly. Margins have already tightened as crude oil prices stabilised and refiners began to pass their savings on to customers.
In the next few years, refiners will have to cope with several long-term challenges sure to separate leaders from laggards and likely to force some poor performers from the field.
Challenges include the global supply of crude getting heavier and more sour, as well as unstable supplies from North Africa and the Middle East, with fading production from the North Sea.
These have led to volatility in pricing, forcing refiners to adjust feedstocks more frequently and drastically than in the past and making long-range planning more difficult than before.
The influx of heavier, more sour oils also puts pressure on less complex refineries that must consider investing in conversion units if they want to stay in the game.
These global trends will affect the entire refining sector, but looking at key competitiveness factors — access to market, operating conditions and the quality of the asset portfolio — some groups are better positioned than others to thrive over the next decade.
African and Latin American national oil companies and EU independents are quickly falling behind Middle East national oil firms, Asia-Pacific independents and refiners in the Commonwealth of Independent States (CIS), former Soviet republics.
Africa’s biggest weaknesses are its operating conditions and its asset portfolio. While the continent, given its low labour costs and surplus of crude, seems a good candidate for refinery operations, it has been unable to capitalise on these advantages due to a lack of engineering and construction capabilities. With only a 3% share of global capacity — and 87% of its capacity in assets with low competitiveness — Africa’s portfolio lacks the scale and complexity to compete with globally integrated companies and independents in the US and national oil companies in the Asia-Pacific region, the Middle East and the CIS, which are investing to transform their portfolios.
As the refining sector changes, there will be a shift in the flows of crude feedstock and refined products worldwide. It will affect Africa.
As demand continues to grow, the region will continue to import petrol and diesel due to its inability to build competitive capacity, even though it is a net exporter of crude.
As a result, Africa and Latin America will remain the largest net importers in the years ahead. Refiners in the Middle East, CIS and the US will become the most important net exporters.
As oil costs stabilise, refineries are in for a tough time. It is important for refiners in Africa and around the world to tackle competitiveness in a structured way. This is true for even the most favoured players, who will have to continue working hard to maintain their full potential.
That will require protecting and expanding their access to markets; optimising their access to advantaged feedstock and product yield; achieving operational excellence; improving their ability to manage capital projects and optimising their refinery portfolio.
The refining sector is poised for a cycle of “natural selection” that will separate the fittest from the rest, based on how well they used the profits from this most recent cycle to prepare for the storm on the horizon.
The agenda is quite complex, even for the most prepared industry players. But if tackled in a structured manner with a focus on the highest value opportunities, the odds for success increase dramatically. It is time to think ahead wisely and execute impeccably.