Where does the oil refining industry can go? 10

[0707]

In Europe, refining margins are very small and in some cases negative. In principle this situation should-be attributed to:

An overproduction of oil products,

A slowdown in the economy with low market demand,

Technological advances in the automotive industry,

Appearance of electric motors,

Greater environmental awareness.

Unfair environmental requirements competition between EEC, USA, Eastern countries, Africa, Asian and Australia.

In this context where does the oil refining industry can go?

Luis

 

[IRstuff]

Is it going somewhere else? There's nothing on the immediate horizon to replace it.

TTFN
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Of course I can. I can do anything. I can do absolutely anything. I'm an expert!

 

[rb1957]

I always thought the refining business was cost-plus (people will pretty much buy whatever you produce, without much competition ... around here pretty much all pumps have the same price, it fluctates some but rarely will one brand be out of step with the others).

now maybe refined oil products can be imported for a lower price than those refined there. maybe Europe is trying to outsource it's refinery business ?

another day in paradise, or is paradise one day closer ?

 

[cranky108]

" around here pretty much all pumps have the same price" I haven't seen that. I see different prices on different sides of town. Personally I think they are trying to price gouge.

I guess if countries want to get rid of the refining business, they can at the cost of higher prices to import. And that's the falacy of enviromental regulations. There will always be some country somewhere that will be willing to make a butt load of tax revenue by taking in businesses that other countries don't want.

Countries need to wise up that some things aren't going to go away very soon, and accept that taxes may not be the solution to all there problems, or throwing money at problems also won't fix things. You need a working plan and people who can make it work (not political hacks).

 

[rb1957]

around here there may be (at most) a cent (per lt) difference between different brands and they'll all rachet down a tenth or two for a few days, then "boing" back up again ... free market? yeah, right! no price fixing 'round here (the govt says so !)

another day in paradise, or is paradise one day closer ?

 

[weldstan]

There are numerous factors involved in profitability of refining
Supply and demand
Cost of Crude
European Tax structure
Maintenance costs
Labor rates and productivity
Energy costs to produce the refined product
Tranportation costs, etc.
Currnt Economic conditions (Recession or very low growth)

US refineries have also experienced periods of low profitability due to many of the above issues.

 

[zdas04]

The majority of today's refineries were built by the "Majors" (in fact the original definition of "Major Oil & Gas Company" was "A company vertically integrated from exploration activities through marketing to final consumers". Originally that value chain was measured between lifting costs (plus overhead including exploration costs) and nozzle price at the petrol station. At any given time some segments would be very profitable and others would lose money, but the end-to-end margin was all that mattered (up until the mid 1970's). When I started in 1980, crude prices were VERY low, oil production was barely profitable, but since refinery feed stocks were so cheap and refined products relatively expensive, the refineries made boat loads of money. Today the opposite is true and wellhead prices are really high while refined products are actually VERY cheap (don't start with the idea that the pre-tax pump prices are high, in constant dollars they are lower than any time since WWII).

With the rise of the MBA in the late 1970's this model was thrown out the window. By 1985 the upstream operations side of the Major that I worked for would happily take a lower price to keep from selling to our sister downstream company (the paperwork that the sister company required of us was too onerous to continue, especially when they didn't require the same documentation from 3rd parties). We would sell to jobbers at a discount and the jobbers would sell to our sister company.

Today the vertical integration is mostly gone. Every business segment must succeed or fail on its own. At today's high crude prices the OP is quite correct that refining margins are really skinny. Add to that the fact that well over half of the world's refining capacity is more than 80 years old. They are getting tired, but the margins do not exist to build new multi-billion dollar plants. Silly government policies (like the U.S. export ban and the U.K. Frac'ing ban) are keeping crude prices very high. Other government policies (like the very high usage-tax rates in most of the world and the threat of price control) are keeping end-use prices very low. Not a lot of room in there for new capital investment. So the OP's list is mostly not the driving force:
[ul]
[li]An overproduction of oil products, Crude oil prices don't seem to indicate that this is true[/li]
[li]A slowdown in the economy with low market demand, Rate of increase in market demand has slowed in the last few years, but world demand is still increasing[/li]
[li]Technological advances in the automotive industry, A bigger factor in the U.S. than in most of the world. The U.S. road use taxes are so much lower than Europe or Japan that we don't have nearly as much price sensitivity as I've seen elsewhere. If you are driving your vehicle 40,000 km/year technology is a much bigger deal than if you are driving it 15,000 km or less[/li]
[li]Appearance of electric motors, A sideshow at best, not a factor in refinery profitability[/li]
[li]Greater environmental awareness. Environmental regulations are raising costs in refineries, which cuts into thin margins, it is certainly a major factor in the cost of new plants (getting a permit through the environmental regulators takes decades)[/li]
[li]Unfair environmental requirements competition between EEC, USA, Eastern countries, Africa, Asian and Australia. My practice is global and I have clients on every continent with a large city and I don't see much difference in environmental regulations from one place to the next. The Interwebz is everywhere. A country seen as "lagging" the world's environmental regulations tends to find the strictest rules and modify them for the current thinking which leapfrogs from the "bottom" of the pack to the "top" of the pack in one legislative session.[/li]
[/ul]

My estimate of the driving force is regulations that put barriers in the path of supply and demand. Crude price should be around $60 USD/bbl and pre-tax pump price should be around $8 USD/gallon (€1.69/L). Neither is going to happen so we will Limp along until you see a major refinery go bankrupt, or blow up and not be fixed (I think that if anyone proposes shutting down a major refinery the government will nationalize it and run it until it burns to the ground).

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

 

[cranky108]

So we should expect a refinery explosion some time soon?

I think refinerys will morf into more profitable ventures, like plastic production, or something else before that happens (or maybe they aren't run very well).
Several years ago I saw a large number of coal cars at a refinery, and wondered why. It seems that coal is one of the building blocks of plastics.

And there are much more in the way of products that can be produced, example asphault. So maybe auto gas is just a side line for other more profitable products.

 

[weldstan]

cranky108,
An explosion in a refinery is guaranteed.

Was it coal you saw or coke being shipped from the refinery?

 

[zdas04]

I'm pretty surprised any day that doesn't have one. Hundreds of miles of pipe, thousands of valves, pressure vessels operating for decade on decade above 90% of temperature and/or pressure limit. Continuous pressure to cut costs. I was in once in Indonesia that was 75 years old and most of the pumps (steam driven) were original equipment. I was pretty happy that I didn't soil myself before the tour was over.

Refineries are amazingly complex operations that scratch every erg of value out of every molecule that comes in. The person who replaced me when I retired came from a refinery that had her and 7 other engineers responsible for a single vessel. It is a big deal vessel, but that still seemed excessive to me.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

 

[hokie66]

Interesting statement about government (the US?) nationalizing refineries rather than allow them to close. That is obviously not the case in Australia, as refinery capacity here is being steadily reduced. By mid 2015, Australia will only be refining about a third of its requirements of gasoline and diesel. That seems to me to be a national security issue, particularly because of our isolation, but our government is more concerned about other things.

 

[zdas04]

The WWII refineries were HUGE. Each of them represents a non-trivial portion of a country's total refining capacity. Closing one of them is a significant supply disruption that would ripple through an economy. There are hundreds of "small" (none of these facilities is really small, but you know what I mean) refineries that can come and go without huge disruptions and they do. It's the big ones (like BP's Texas City Refinery that should have closed after the last annual disaster, but pressure from the state and federal level convinced them to keep it open) that won't be allowed to close. Fewer than 100 of these massive facilities in the world.

It absolutely is a national security issue, but the governments are in a tough position. On the one hand they must have someone to blame their (the government's) screw ups on, and Oil & Gas is easy. On the other hand, they've been so successful in making these guys the villain of the piece (both in legislation and the captive press) that they can't appear to grant any special dispensations. So they fine BP for the last Texas City annual explosion and make speeches about forcing the industry to comply with regulations, and while meeting with BP executives on the golf course to work out how to keep the facility open. BP's old CEO (Sir John Lord Browne of Maddingly) was a world master at this game, never been anyone significantly better. His successors are hacks at it, consequently BP is in the news far more than the company or the world's governments would like. I'm not sure how this is going to play out, but I am confident that the real resolutions will not make the Evening News.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

 

[moltenmetal]

Refiner margins are definitely skinny- they make their money by doing huge volume, trading off the sunk value of 40+ yr old infrastructure. New capital investment? Meh. Only if regulations require it.

That infrastructure is very old- nothing new has been built in a long, long time here in the US and Canada. I too am surprised that we don't see more catastrophic failures.

Many locales would be happy to have others do the refining for them, so they get the benefit of the fuels without a good chunk of the environmental impact of refining them- until there's a big shock in the world that makes them concerned about price spikes due to supply disruptions.

Smaller refineries, including many here, don't have the scale to make investments in new technology worthwhile. So when new sulphur limits in a couple products kick in, the refineries are sold and packed off to a part of the world where that doesn't matter so much.

Shale gas has been the big game changer here in North America. The effects are still rippling through the O&G and chemicals system. Many thought new chemicals investments in North America had gone the way of the dodo, but shale gas changed all that.

 

[zdas04]

Shale oil is the whole driving force behind Keystone XL. Mix 40 API shale with 15 API oil sands oil and you have a reasonable approximation of WTI that the gulf coast refineries are designed for without huge capital investment. Politicians and enviro-wackos just don't get this. Without Keystone XL and without export being legal then we have to build a few trillion dollars worth of new refining capacity in someone's back yard. With Keystone XL, I think that it will be possible to make do with the old kit.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

 

[glass99]

Outsiders view here: I read about how US is exporting refined gasoline to the point where its actually moving the needle on total national manufacturing output. This seems to the view of The Economist and similar business outlets, and it sounds great. But what you guys seem to be saying is they are just cranking more through WWII refineries to the point that they are about to burst. Is it driven by cheap gas powering the refineries, or by the export restriction on US oil?

 

[zdas04]

Refineries are amazingly complex entities. They are designed for a reasonably narrow range of crude input. In a pre-1975 world, producers of Baaken Shale Oil would have looked the world over for a refinery with excess capacity that was designed for crude like they have. It might be a perfect fit for an underutilized facility on East Kalimantan, Indonesia. Rational producers would load it on boats and process it there, and let the refined products serve Asian markets. At the same time Brazilian crude might be a good fit for spare capacity in Texas City (or California, etc). That kind of global juggling act works. It works very well even in the cases where Alaska crude needed to go to Japan for refining and the gasoline and diesel needed to be shipped back to the states for retail sales. You are optimizing the most expensive asset (which is definitely not transportation).

In steps politicians to "protect" consumers by putting huge roadblocks in the way of this global chess game. U.S. crude must be refined in the U.S. (but by god you can't build that stinky refinery in my Congressional district) and refined products must be consumed in the U.S. The result is refineries operating outside of their design conditions (at the cost of efficiency and quality of refined product). Until/unless the short-sighted government idiots step out of the way the best we are going to be able to do is blend and limp. And blow up the occasional 40, 50, or 60 year old facility.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

 

[glass99]

zdas: agreed that the export restrictions on oil are hypocritical and irrational in a post Cold War world, but why are the margins on refining so slim? Is it because we prevent export of refined gasoline but allow import?

 

[0707]

Because governments don’t want to lower their taxes, the refinery margins are low, and fuel oil prices keep going on high, in the pump stations. The governments never lose money with the oil industry, if the crude oil price increases the governments increase the price per liter, but they maintain the same taxes, so that they never lose money.

 

[zdas04]

I wish I could buy into the government conspiracy thing, but the refineries sit between two commodities whose prices float independently. It is the only segment of any industry that I can find that has that horrible reality.

Crude prices float on fear and superstition from day traders (bomb an oil pipeline in Columbia and the crude price jumps $5/bbl, start a war in Iraq and the price jumps $20/bbl, Chavez dies in Venezuela and world crude prices drop $10/bbl). Supply and demand don't really have that big an impact on crude (some, of course, but not dominant).

On the other side, commodity petrol and diesel prices have a damped relationship to demand (the dampening effect is the very high road-use taxes around the world). In anticipation of summer holiday weekend, the prices increase in the face of increasing demand. Normal times, if people perceive prices are too high then they individually cut back on driving a bit and put downward pressure on prices.

Today crude is at historic high prices while motor fuel is at 1970's prices (when crude was selling for $12/bbl [$72/bbl in 2014 prices].

This morning some pundit predicted that shale oil supply was going to put downward pressure on crude prices. He may be right. It has occasionally happened that actual supply and demand factors have influenced prices more than day traders, but it has been a while. I'll believe it when I see it. In the 1950's when the bulk of the world's motor fuel came from vertically integrated majors, you could almost call the whole value chain supply-and-demand driven, but today with every segment under individual profitability pressure the refineries stand out as having really skinny margins (while the margins from the wellhead to the gas pump in total are acceptable, not as good as Micro$oft, but acceptable).

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

 

[glass99]

zdas: so if its about the temporary price delta between fuel and crude, will refineries be profitable again if crude gets cheaper? If so, I will buy some refinery stock immediately. The obvious alternate explanation is that there is simply too much refinery capacity out there.

btw: thanks for your excellent insight into oil and gas economics and history. I really feel a bit wiser having read your posts.