The global refining-marketing industry of 5 years hence will look a great deal different than it does today.
That's the premise of a new report by IBM Business Consulting Service.
The report examined the current market drivers and extrapolated what will be needed for refiner-marketers to succeed in 2008. It's not a sight for the faint-hearted, as competition will grow even more fierce amid major structural changes in the industry.
Drivers
The leading drivers for refiner-marketers today include the growing importance of markets outside the US and Europe; increasing environmental awareness that will create more focus on alternate fuel and natural gas technologies; growing specialization of competitive niches as consolidation forces more companies to high-grade asset portfolios—meaning fewer, larger refiners; proliferating penetration of retail markets by nontraditional participants and formats; accelerating globalization and greater transparency of petroleum markets; a continuing surplus of refining capacity worldwide; tightening strictures for fuel specifications, especially sulfur limits; and worsening ability to attract new talent to the industry.
World of 2008
IBM sees a dramatically altered landscape for refiner-marketers in the world of 2008:
- An industry having undergone further consolidation but more along horizontal lines. This means reduced refining coverage (refining capacity vs. marketing sales), especially in the mature European and US markets; smaller integrated firms exiting the business in favor of a pure upstream orientation; and spinoffs of retail operations.
- A less expensive and problematic transition to ultralow-sulfur levels than expected, as governments ease timetables in recognition of security-of-supply concerns.
- A limited penetration by alternate-fuel technologies, reined by their high capital investment costs and the continued relatively low cost of oil.
- A major industry transformation through greater use of information technology to improve decision-making. Enhanced efficiencies and improved productivity will help offset the talent "brain drain." Using an "e-business on demand" infrastructure will enable leading petroleum retailers to leverage their brands through the offering of allied services at their outlets, thus improving margins on fuels, dry goods, and local services.
- Asia continuing to be saddled with excess refining capacity, especially with the emphasis in China and India on developing their own refining capabilities and the continued strong influence of state oil firms hindering any major restructuring.
- European refiners remaining the supplier of marginal barrels into the Atlantic Basin. In this instance, there is little incentive to consolidate and restructure, as generally attractive margins keep smaller refiners from shutting down capacity.
- Merchant refiners taking a bigger role, especially in the US. This results from continued divestitures of refining assets by the majors, the new dominance by nontraditional marketers, and improved returns for pure-play refiners in some geographic niches.
- Structual changes in ownership and business models, such as multi-investor consortia owning merchant refining hubs and state oil companies taking a bigger stake in refining assets (but returning the products home).
- Nontraditional operators taking the lead in fuel retailing.
- Integrated firms struggling to achieve adequate returns on capital invested in retail sites.
- Growing importance to refiners of wholesale and commercial customers, as the retail portfolio mix shifts away from company-operated sites.
- Increasing dependence of independent marketers and large, nontraditional retailers on merchant refiners to ensure low-cost supply.
In this world of 5 years hence, IBM sees winners and losers, not just low expectations for everyone. It cites a dramatic spread in recent returns on investment—more than 10 percentage points—between the top quartile of refiners and the bottom quartile.
"Downstream companies that make the right strategic decisions can create superior shareholder value even in a structurally unattractive industry," IBM said.
And the ones that don't? Just remember the part about consolidation.
(Online Aug. 3; author's e-mail: [email protected])