Refining view in 2008 not for the queasy

Aug. 3, 2003
The global refining-marketing industry of 5 years hence will look a great deal different than it does today. It�s not a sight for the faint-hearted, as competition will grow even more fierce amid major structural changes in the industry.

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:

-- Shifting geographic demand patters, highlighted by the increasing importance of markets outside the US and Europe.

-- Increasing environmental awareness that will create more focus on alternate fuel and natural gas technologies (the latter being gas-to-liquids and LNG advances providing new competition for refined products).

-- Growing specialization of competitive niches as consolidation forces more companies, especially the integrated ones, to high-grade their asset portfolios. This could mean fewer, larger refiners.

-- Proliferating penetration of retail markets by nontraditional participants and formats, i.e., hypermarkets, grocery chains, and convenience food retailers.

-- Accelerating globalization and greater transparency of petroleum markets. Noteworthy here are more widespread use of trading instruments and reduced shipping costs amid a persistent tanker glut.

-- Continuing surplus of refining capacity worldwide, with substantial excess capacity persisting in Asia and Europe.

-- Tightening strictures for fuel specifications, especially sulfur limits, with spec implemenation timetables varying across regions.

-- Worsening ability to attract new talent to the industry, because of refining's low-growth outlook and negative environmental image.

World of 2008

IBM sees a dramatically altered landscape for refiner-marketers in the world of 2008.

The consultant foresees:

-- 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 allow more reasonable timetables in recognition of security-of-supply concerns.

-- A limited penetration by alternate-fuel technologies, reined by high capital investment costs and the continued relatively low cost of oil.

-- A major transformation of the industry through greater implementation of information technology to improve decision-making. Greater efficiencies and improved productivity will help offset the talent "brain drain." At the retail level, 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. Another factor will be the continued strong influence of state oil companies in the region proving a bulwark against 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 (some, not all) pure-play refiners in certain 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 finding it tougher 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.

Winners and losers

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 companies and the bottom quartile.

"Downstream companies that make the right strategic decisions can create superior shareholder value even in a structurally unattractive industry."

And the ones that don't? Just remember the part about consolidation.

(Author's e-mail: [email protected])

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