refining trends part iv tough choices
TRANSCRIPT
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Rening Trends:The Golden AgeOr the Eye of
The Storm?
by
Andrew [email protected]
Pedro [email protected]
Jayant [email protected]
Part IV: Tough Choices
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Booz & Company is a leading global management consultingrm, helping the worlds top businesses, governments,and organizations.
Our founder, Edwin Booz, dened the profession when heestablished the rst management consulting rm in 1914.
Toda, with more than 3,300 people in 57 ofces around theworld, we bring foresight and knowledge, deep functionalexpertise, and a practical approach to building capabilitiesand delivering real impact. We work closel with our clientsto create and deliver essential advantage.
For our management magazine strategy+business, visitwww.strateg-business.com.Visit www.booz.com to learn more about Booz & Compan.
CONTACT INFORMATION
DallasAndrew [email protected]
BeirutIbrahim [email protected]
HoustonPedro [email protected]
LondonViren DoshiSenior [email protected]
McLean, VA
Eric SpiegelSenior [email protected]
So Paulo
Arthur [email protected]
Shanghai
Nick [email protected]
Sydney
Tim JacksonManaging Director, [email protected]
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In the first half of 2008, therefining industr went fromexhilaration to desperation. Infact, so man contradictor signs
exist about the industrs futurethat it is hard to discern realitfrom mth, and even harderto chart a course. Where is theindustr reall heading? And whatshould smart plaers do? Weaddress these questions and morein this fourth installment of ourGolden Age of Refining series.
Rening is a cclical industr withhigh peaks and low troughs. Since
2002, the industr has been in whatindustr observers have called agolden age. Margins have remainedat historic highs without attractingsufcient demand and suppl-sidefeedback to end the ccle or drivemargins back down to pre-2002levels (see Exhibit 1, page 2).
Given the capital intensit of theindustr, plaers tend to makeinvestment decisions that have
time horizons of 20 ears or more.However, present circumstancesdo not easil lend themselvesto making assumptions abouttomorrows energ landscape.Man contradictor, game-changing signs lie on the horizon:
REFININGTRENDS:
THE GOLDENAGE OR THE EyEOF THE STORM?
Part IV: Tough Choices
Global demand that is growing
despite high oil prices, together
with recent evidence of demand
destruction in developed economies
New transportation technologies
that threaten to displace oil-
based vehicles entirel, but also
ultracheap internal combustion
powertrain cars that could create
vast demand in developing
economies such as India and China
Growth in rening capacit, but
delays and cancellations due to
rising construction costs
New legislation mandatingunforeseen levels of biofuel use,
but uncertain technological
advances and a rising tide of
popular dissent because of public
debate on whether crops should be
grown for food or fuel.
These signs clearl do not point to
a unied direction for the future
of the rening industr. But as we
show in this paper, we believe that
in the short-term, between 2008and 2013, overall margin levels
have alread topped out and will
move lower. Furthermore, a reces-
sion could end the golden age pre-
maturel. Finall, trade ows could
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Exhibit 1Average Rening Gross Margins
Sources: Oil and Gas Journal; Booz & Company
change, shifting margins to Asia.In the long term, through 2025,global demand for transportationfuels will continue to grow despitethe emergence of alternative vehicletechnolog; the demand will bedriven primaril b economicgrowth in Asia. Whether marginsremain high in the long term willdepend on the ups and downs ofthe economic growth of developingeconomies. This represents a shift
from the dnamics of the recentpast, when margin ccles weredetermined almost solel b thespeed at which capacit was added.
In addition, regulators will plaa signicant role in determiningwhether investment decisions madetoda ield their potential. Policieson dieselization, high-efciencvehicles, and biofuels will all havean impact on rening margins.
Exhibit 2World Ground Transportation Fuels Demand per Capita
1 Transportation fuels include gasoline and distillate fuels.
Sources: U.S. DOE; World Resources Institute; CIA World Factbook; Booz & Company
AverageU.S.
$/bbl
USGC
NorthwestEurope
AsiaPacific
$0
$5
$10
$15
$20
08 1Q2007200620052004200320022001200019991998199719961995
Supply and Demand in theShort Term
The demand perspective:Propelled b worldwide economicgrowth, demand for transportationfuels has continued to grow despitesustained high prices (see Exhibit2). In the developing world, thisdemand has been supported bthe weak dollar and b policiesof subsidizing fuel prices in placessuch as China. In the developedworld, consumers have generallbeen unwilling to signicantlchange their driving habits,despite climbing fuel prices andthe gradual introduction of smallerand alternative-fuel vehicles into aver large installed eet.
However, as shown in Exhibit 3,there is evidence that demand hasstarted to cool down, at least inthe U.S. It seems that high pricesat the pump, together with fearsabout the econom, prompted U.S.consumers to curb their appetitefor gasoline in the rst quarter of2008. In fact, our analses showthat gasoline consumption ishighl correlated with consumers
personal disposable income (PDI),which is driven b economicgrowth and ination (see Exhibit4). Increases in PDI raise gasolineconsumption overall and alsoreduce individual sensitivit toprice changes. In the last threedecades, as gasoline spending asa percentage of PDI has dropped,we have seen the absolute priceelasticit of gasoline in the U.S.reduced b an order of magnitude
(see Exhibit 5). This dnamic hasuntil ver recentl dampened theimpact on demand of historicallhigh real gasoline prices in the U.S.
Against this backdrop lies thethreat of recession orjust as
GroundTransportationFuels1
Consump
tion(gallons/capita)
94
96
98
100
102
104
106
108
2000 2001 2002 2003 2004 2005 2006 2007
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Exhibit 3Year-to-Year Percentage Change in U.S. Gasoline Demand (4-week Average)
Sources: Energy Information Administration; Booz & Company
menacingstagation. If gross
domestic product (GDP) decreasesand ination increases, then PDIwill drop, and demand for gasolinewill drop with it as consumersbecome more price sensitive. Theseverit of the demand decreasewill depend on the price of gas: Ifgasoline prices are high, the demanddecrease will be quite sharp; itwill be less sharp if gas prices are
%C
hange
Katrina Effect
Demand dropped by 1% inthe first 24 weeks of 2008
-6%
-4%
-2%
0%
2%
4%
6%
8%
01/05 05/05 09/05 01/06 05/06 09/06 01/07 05/07 05/0809/07 01/08
Exhibit 4U.S. Gasoline DemandPrice Elasticity vs.
Disposable Income
Sources: Energy Information Administration; Federal
Highway Administration; Census Bureau; Science;
University of California at Davis; Booz & Company
AbsoluteGasolinePriceElasticity
Gasoline Expenses as Percentageof Personal Disposable Income
R2= 0.90
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
2 .0 % 3 .0 % 4 .0 % 5 .0 % 6 .0 % 7 .0 % 8 .0 %
1970s
1980s
1990s
2000s
relativel low. A US$4/gallon price
could reduce gasoline demand b 3percent, depending on the state ofthe econom (see Exhibit 6, page 4).
In terms of demand, the short-termimpact of alternative fuel technolo-gies will be limited, given how longit takes to replace the vehicle eet.However, the long-term impact ofhigh-efcienc vehicles is real, asdiscussed on pages 56.
The supply perspective: Reningcapacit increased between2003 and 2007, despite publicannouncements of delas andcancellations in building, as well asmassive increases in constructioncosts. During this period, renersadded 3 million to 4 millionbarrels per da (bpd) of distillationcapacit, and more than 9 millionbpd in capacit via other processes.In fact, the pace of building has
signicantl accelerated: Capacitunder construction more thandoubled from spring 2007 tospring 2008 (see Exhibit 7, page4). Furthermore, there has been asignicant increase in capacit inthe engineering stage (i.e., being
designed) and in the planningstage. As was the case in priorccles, there is a lag betweenmargin levels and capacitadditions. Not onl does it taketime for reners to start addingcapacit when margins rise, butit also takes time for reners toreduce the pace of additions oncemargin expectations start to drop.
Of course, we do not expectthat all announced capacitwill actuall be added. On thebasis of capacit announcementsand our understanding of thedifferent plaers, we estimatedistillation capacit will expandb approximatel 6 million bpd
between 2008 and 2012.
Biofuels are also altering the short-term industr outlook b addingsuppl, thanks in part to the shortlead times needed to add biofuelcapacit, and also to a regulatoremphasis on alternative energ.
Exhibit 5
U.S. Gasoline Cost as a HistoricalPercentage of PDI
1 Population greater than 16 years old.
Sources: Energy Information Administration; International
Energy Agency; Booz & Company
Consumption(AnnualBarrels/Capita)1
0
2
4
6
8
10
12
14
16
18
0%
2%
4%
6%
8%
10%
12%
14%GasolineExpendituresasPercen
tageofPDI
Demand
Relative Cost
Price to reach
1979 levels
~$4.00
$4.50/gallon
19
19
19
19
19
19
19
20
20
07
1959
1965
1971
1977
1983
1989
1995
2001
2007
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Exhibit 7Evolution of Renery Capacity Addition
Sources: Oil & Gas Journal; Booz & Company
Exhibit 6U.S. Gasoline Demand vs. Price and Disposable Income
Source: Booz & Company
PerCapitaDeman
dChange(%)
US$/gallon
7Average Price
2% (recenthistorical rate)
Potential2008 Average
0%
-3% (0% per capita economicgrowth, 5% inflation)
Change in Personal
Disposable Income
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
2.00 2.50 3.00 3.50 4.00 4.50 5.00
The U.S. energ bill enacted in2008 has some aggressive targetsfor biofuel production, mandating1 million bpd b 2012, and 2.3million bpd b 2022. This newmandate represents an increaseof 600,000 to 700,000 bpd ofbiofuels b 2012, equivalent toas much as 7 percent of the totalexpected U.S. transportation fuel
demand in that ear, and morethan the total gasoline demandgrowth between 2007 and 2012.
The European Union also has amandate for biofuels, calling forthem to make up 5.75 percent ofthe transportation fuels pool b2010 and 10 percent b 2020.However, the E.U. is currentl re-
viewing the environmental impactof biofuels, and that mandate machange if the are found to havenegative effects on the environment.
Of course, there is a limit (tpicall10 percent) on how much ethanolcan be blended into the gasolinepool without the need for modica-tions to existing vehicles. However,with just a small penetration ofvehicles accepting E85 (a blend of85 percent ethanol and 15 percentgasoline), the U.S. could meet itsbiofuel target b 2012. The E.U. isavoiding the need for E85 b settinga target as a percentage of totaltransportation fuels suppl that isbelow the 10 percent threshold.
Putting all this informationtogether, what just a few monthsago looked like an imminent, albeitmodest, global suppl crunch hasnow turned into a situation ofoversuppl. Furthermore, it hasopened up the possibilit that theU.S. will become long in gasoline(i.e., a net exporter, rather than a
Distillation
Cracking
Coking
Hydrotreating
New Refinery(measured in
distillation capacity
As of Spring 2006 As of Spring 2007 As of Spring 2008
Total (in million bpd)
3.0 under construction
5.8 engineering
7.9 planning
16.7 total
Total (in million bpd)
1.2 under construction
4.6 engineering
7.3 planning
13.1 total
Total (in million bpd)
1.3 under construction
3.3 engineering
6.2 planning
10.8 total
0 5 10 0 5 10 0 5 10
0.9
1.2
2.2
2.4
4.1
1.0
0.8
2.5
1.7
7.2
1.4
0.9
2.7
2.0
9.6
Capacity (million bpd) Capacity (million bpd) Capacity (million bpd)
Construction Engineering Planning
Project Stage
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net importer). This is particularllikel if demand is reduced b aneconomic slowdown or a recession(see Exhibit 8).
Such a shift will lead to changes inregional suppl/demand balances,affecting global trade ows and
rening margins (see Exhibit 9).In particular, on top of NorthAmericas reducing its need forgasoline, Europe will get shorter indiesel, and Asia will continue to bethirst for fuels in general.
More and more gasoline fromEurope, and possibl from theU.S., will ow into Asia. Demandin Asia will be able to absorb thissuppl, but margins in Europe
and, especiall, the U.S. will beaffected. In the case of Europe,exporting over longer distancesto Asia will mean lower gasolinenetbacks relative to exporting tothe U.S. In the case of the UnitedStates, this change could mean
gasoline would be priced at exportparit rather than at import parit,reducing gasoline crack spreads bapproximatel $4 to $6 per barrel.
Given the wa rener economicswork, a reduction of relativegasoline prices would, for the same
crude price, reduce the differentialbetween light and heav products,thereb reducing rening margins.Reners will have a choice: ship,shift operating mode to producemore diesel, or reduce runs.
In the short term, then, it appearsthat the rening industr in theU.S. and in the E.U. is read fora shake-up, even if the industrcontinues to do ne in Asia.
Supply and Demand in theLong Term
The demand perspective: Thelong-term picture is plaguedwith uncertaint as several
game-changing, and sometimescontradictor, drivers come intopla. For starters, small changesin economic growth in emergingmarkets could signicantlchange future demand. In fact, anadditional 1 percent annual growthin the GDP of the BRIC countries(Brazil, Russia, India, and China)would add 3 million bpd ofdemand for ground transportationfuels b 2025.
Exhibit 8Short-Term Supply/Demand Balance
1 Transportation fuels include gasoline and distillate fuels2 Supply is domestic supply; rest of the demand is fullled with imports
Sources: Energy Information Administration; International Energy Agency; Booz & Company
Exhibit 9Changes in Regional Supply/Demand Balance (2007 to 2012)
Source: Booz & Company
Diesel
Short(-)/Long(+)
(millionbpd)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0
Europe
Africa
NorthAmerica
AsiaPacific
Latin America
FormerSoviet Union
Middle East
Gasoline Short (-)/Long (+) (million bpd)
Global Gasoline and Distillate U.S. Gasoline(Domestic Supply Only2)
Demand (Reference Case)
42
44
46
48
50
52
2012201120102009200820072006
GroundTransportation
Fuels1(millionbpd
)
Demand (Low Case)
Supply
Supply with Biofuels
Signicant
capacity previously
announced, now
likely to be
delayed or not
used in full
7
8
9
10
2012201120102009200820072006
GroundTransportation
Fuels1(
millionbpd
)
Shift to net
exporter in low
demand case
Demand (Reference Case)
Demand (Low Case)
Local Supply
Local Supply with Biofuels
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Similarl, the advent and adop-tion of ultracheap vehicles (such asTatas recentl announced $2,500car) ma bolster conventionalfuel demand b unprecedentedamounts (see Exhibit 10). Thisma result in a marketplace withvastl increased demand for trans-portation fuels as vehicle owner-ship suddenl becomes affordableand attractive to millions of peoplein developing economies.
Another potential scenario,however, represents the absoluteopposite. Entirel new autotechnologies such as plug-inhbrids ma threaten absolutedemand destruction for groundtransportation fuels, marking theend of the hdrocarbon era as weknow it and ushering in the eraof electried transportation (seeExhibit 11). The speed at which
this shift could happen dependson the pace of advancements inbatter weight-to-power ratios andreductions in batter costs, bothof which have been occurring at 5to 10 percent per ear. Consumersvehicle purchase decisions
will be determined b how the
different technologies compare
in performance and cost. The
latter will be affected, positivel
or negativel, b government
incentives, depending on how
various governments choose tostructure those incentives.
In addition, an new vehicle
technolog will take several ears
to penetrate and eventuall replace
the eet. For example, even after
ears of being commerciall
available, hbrids still account for
less than 3 percent of total new
vehicles. It also takes about 15 to
20 ears to replace the vehicle eet,
signicantl delaing the impact of
new technologies.
Since it seems clear that numerous
questions regarding the long term
remain unanswered, we have
assembled four demand scenarios
(see Exhibit 12):
Robust economic growth
with continuous eet efcienc
improvements
Robust economic growth with
high penetration of alternativevehicle technologies
Moderate economic growth
with continuous eet efcienc
improvements
Moderate economic growth with
high penetration of alternative
vehicle technologies.
In all cases, we have taken a
consumer-back approach to sizing
total demand for liquid ground
transportation fuels. In otherwords, we have purposel left
biofuels out of the demand-side
scenarios, and we will consider
them as part of the suppl side of
the equation.
The likelihood that a given demand
scenario will materialize depends
on future fuel prices. At one
extreme, high prices would likel
deter global economic growth
while favoring a high penetration
of alternative technologies. At theother extreme, low prices would
favor global economic growth and
reduce the attractiveness of alter-
native vehicles. Then, of course,
the price of oil will be affected b
crude oil availabilit; limited avail-
abilit will support high prices.
Our demand forecast, presented
in Exhibit 13, highlights the
emergence of two centers of
demand moving in opposite
directions. On the one hand are
the developed economies where
growth in demand is slow, and
will eventuall be negative as new
technologies become entrenched.
On the other hand are developing
economies, particularl in Asia,
that will drive signicant demand
growth even after new technologies
become available. This is not onl
Exhibit 10Impact of Ultracheap Cars on Demand
(by 2015)
1 Transportation fuels include gasoline and distillate fuels.
Source: Booz & Company
GroundTransportati
onFuels
(millionbpd
)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
China Russia India Brazil
2.25.6
0.92.3
0.61.6 0.61.5
Total potential of 411million bpd; or more than
20% of 2007 globaltransportation fuel
demand in just thesefour countries
Exhibit 11Vehicle Technology EvolutionExpected Timeline
Sources: International Energy Agency; Booz & Company
M
iles/Gallon
100
0
90
80
70
60
50
40
30
20
10
Fuel Cells
Plug-InHybrids
Diesel
Hybrids
E100Gasoline
DieselGasoline
Hybrids
Current Technologies
2000 2005 2010 2015 2020 2025 2030 203
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because of their high economicgrowth rates but also because
an percentage of GDP growth in
those countries has a larger relative
impact in fuel consumption than it
would in developed economies.
The developing worlds economic
growth means that global demand
for transportation fuels is poised
to continue growing. For the
most part, that will be true evenif alternative vehicle technologies
achieve a high penetration rate. In
fact, onl in the case of long-term
moderate economic growth and
high penetration of alternative
vehicles does the total global
demand stop growing before 2040.
To be sure, demand will peak
much sooner in developed
economies. This is particularl thecase for gasoline (with ethanol)
consumption in the U.S., which
will likel peak within the next 15
to 20 ears. Diesel will probabl
continue growing for another
decade or so after that. This trend
toward diesel is a global one, with
the global gasoline/diesel mix
poised to move from 50/50 in
2007 to 45/55 in 2030.
Exhibit 12Long-Term Demand Scenarios
Note: All cases include the impact of ultracheap cars in a similar way
Source: Booz & Company
Scenario Economy
Alternative Technologies
Hybrids Plug-In Hybrids
Continuous limitedpenetration
Continuous limitedpenetration
From 1% of new vehicles in2008 all the way to 25% ofnew vehicles by 2032
From 0.1% of new vehiclesin 2012 all the way to 25% ofnew vehicles by 2042
Continuous limitedpenetration
Continuous limitedpenetration
From 1% of new vehicles in2008 all the way to 25% ofnew vehicles by 2032
From 0.1% of new vehiclesin 2012 all the way to 25% ofnew vehicles by 2042
Strong real GDP growth acrossthe world:U.S. 2.4% p.a.
Europe 1.9% p.a. China and India at 8.0% p.a.
fading down to 3% p.a. Other: 1-4% p.a.
75% of Robust GrowthGDP CAGR
Continuous fleet efficiencyimprovement
High penetration ofalternative vehicletechnologies
Continuous fleet efficiencyimprovement
High penetration ofalternative vehicletechnologies
RobustGrowth
ModerateGrowth
Exhibit 13Ground Transportation Fuels Demand Outlook
1 Transportation fuels include gasoline and distillate fuels.
Sources: Oil & Gas Journal; Booz & Company
RobustGrowth
Overall Demand Scenarios
Regional Breakdown
GroundTransportationFuels1(millionbpd)
2005
2010
2015
2020
2025
2030
2035
2040
ModerateGrowth
Continuous fleet efficiencyimprovement
High penetration ofalternative technologies
Different Breakdowns for Robust Growth, High Penetration of Alternative Vehicles
0
10
20
30
40
50
60
70
80
2005
2010
2015
2020
2025
2030
2035
2040
AfricaMiddleEast
South & CentralAmerica
Asia Pacific
Europe & Eurasia
North America
0
10
20
30
40
50
60
70
80
2005
2010
2015
2020
2025
2030
2035
2040
Global Product Breakdown
Diesel-Like
Gasoline-Like
30
40
50
60
70
80
GroundTransportationFuels1(millionbpd)
GroundTransportationFuels1(millionbpd)
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The supply perspective: In additionto demand-side uncertainties, thereare signicant unknowns on thesuppl side. Chief among them isthe emphasis on alternative sourcesof transportation fuels. Biofuelshave garnered a good deal ofinterest in man different forums.However, a number of parties areraising questions about whethergovernment targets for biofuelscan be achieved: Various interestgroups are concerned about thefuels environmental impact, andthe United Nations and the newsmedia have raised worries aboutbiofuels effect on food prices. Spe-cicall at issue are the economicsof emerging technologies and the
ultimate environmental impact ofbiofuels cultivation and use (i.e.,the amount of water consumedand carbon dioxide generated ateach step of the process). Thisincreased scrutin could slowbiofuels penetration of the main-stream, substantiall limiting theiradoption while issues concerningtheir deploment are worked outb the government and the public.
For our analses, we are assumingboth E.U. and U.S. biofuelmandates will be met.
When pairing our demand forecastwith our expectations for additionsto rener capacit, creep, andbiofuels production, we nd thatin the case of moderate economicgrowth, the world will need 3million bpd in distillation capacityb 2025 beond what is alread inthe pipeline (see Exhibit 14). Andif the global econom experiencesstrong growth, there will be a needfor 16 million bpd of additionaldistillation capacit.
However, there is a signicant
regional imbalance, with two areasworth pointing out. On one end,the Middle East is adding morecapacit than is required for localdemand. On the other end, Asiawill fall short.
The actions of the Middle Eastshould not come as a surprise.In fact, oil-rich Middle Eastcountries have made it clear that
these investments are part of theiroverall economic and domesticindustrial plans.
Ver different circumstances willdevelop in Asia, with the regionscapacit becoming signicantlshorter thanks to the sheer size ofthe expected growth in demand. Ina wa, this situation is not uniqueto the rening industr in Asia, asthe region overall struggles withadding the infrastructure requiredto continue supporting itseconomic growth.
We are experiencing a dramaticshift within an inherentl cclicalindustr. We believe the peaks
and valles of the industr will bedetermined b the combined effectof two drivers. The rst one isthe speed at which capacit (bothbiofuel and rening capacit) isadded. The second one is the upsand downs of economic growthin developing economies. Thisis different from the past, whenccles were determined mainlb overbuilds of rening capacit
Exhibit 14Additional Required Distillation Capacity by 20251
1 Assumes E.U. and U.S. biofuels mandates are met.2 Based on typical renery yields
Source: Booz & Company
02468
10
0
5
10
15
20
Moderate Growth Scenario
Robust Growth Scenario
Africa Asia NorthAmerica
Europe FSU Midd leEast
LatinAmerica
Total
1.8
6.9
(0.6)(2.4) (0.3)
(2.5) (0.1)
2.9
2.9
13.51.6
(1.2)
0.6
(2.3)
0.8 15.8
Regional Breakdown
(Additional Capacity Required to Supply Local Demand)
RefiningC
apacity(millionbpd)
Global Requirements vs. Expected Capacity
Expected withCurrent Plans
Required
RefiningCapacity1
(millionbpd)
New Capacity
Creep
1730
~13
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Booz & Company 9
against a backdrop of consistent
and predictable demand growth.
However, as demand growth is
now underpinned b developing
economies, it is therefore highl
dependent on their more volatile
economic growth.
Implications
The rening industr is on course
to experience a severe dislocation
as the regional suppl/demand
balances change, affecting global
trading ows and therefore
rening margins. As never before,
the whole industr depends on
demand growth in Asia.
Furthermore, although the outlookfor global demand is positive for
the next 20 ears, there is the
possibilit that rening margins
will drop and never recover; the
potential for demand destruction
and alternative supplies is real. The
future scenario depends on how
different reners and regulators
worldwide react.
Reners will have to consider:
Pulling the plug or delainginvestments on expansion
projects in developed economies
Expanding into Asia if the
want to grow
Adjusting rener conguration
to favor diesel, or at least gain
more exibilit
Finding a material wa to pla
in biofuels
Improving operational excellence
at the plant level to maximize thevalue of their existing assets.
Canceling or delaing investments
in capacit addition in developed
economies is advisable, at least
until the biofuel suppl situation
becomes clearer. In these countries,it is wise to carr forward onlinvestments related to improvingthe competitive advantage ofspecic reneries. Furthermore,there could be an opportunitto drive consolidation in matureeconomies. Some plaers ma wishto reserve some of the signicantcash ows of recent times to leadthe consolidation wave that couldbe required when the industr hitsbottom again. U.S. plaers willbe forced to consider this if themarket moves from short to long,driving margins down and openingopportunities for acquisitions.
On the other hand, as Asia and
emerging economies will plaa large role in the increasingdemand for transportation fuels(and energ more generall) in thefuture, there exists a clear need forreners to have a rml estab-lished presence in these regionsto increase the likelihood of solidreturns. Currentl, local plaers arethe ones capturing most opportu-nities in Asia, to the degree thatlocal price regimes allow them to
be captured. Reners based in thedeveloped world should redoubletheir efforts to participate.
In addition, regardless of thegeograph, when investments aremade in rener capacit, it will bewise to favor diesel over gasolineproduction. At the ver least,reners should aim for increasingoperational exibilit.
Reners must also consider expand-ing their energ portfolio to includebiofuels, as this could give themthe opportunit to benet from theincreased emphasis on this area.In addition, several of the skillsrequired to succeed in biofuels, such
as process engineering, transporta-
tion, optimization, and marketing,
are core downstream competencies.
With these strategic points in
mind, however, it is all too eas to
overlook the fundamental opera-
tional elements that are still thebackbone of a successful rening
sstem, regardless of external cir-
cumstances. There should remain
a deliberate focus on improving
efcienc and reliabilit, taking
the time and effort required to
examine processes to ensure that
the are as lean as possible in order
to maximize prot and minimize
unnecessar expenditures.
On the polic side, regulators facesome interesting dilemmas:
Faced with the threat of
increasing diesel price premiums,
will Europe push back emphasis
on dieselization?
Faced with increasing concerns
about biofuels environmental
friendliness and increasing food
prices, should U.S. and E.U.
regulators reverse course?
Faced with the rest of the worldbeing long in rening capacit, will
China continue to favor the import
of crude over nal products?
Given the impact of regulator
changes in the rener industr, it
is important for reners to monitor
the signposts of impending change,
remain strategicall exible,
diversif portfolios, and be aware
that esterdas planning ma not
suit the world that sits before us.Though the golden age is under
threat, signicant opportunities
still beckon for those willing to
look at the world differentl than
in the past.
-
7/29/2019 Refining Trends Part IV Tough Choices
12/12
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