01 March 1996 00:00 [Source: APC]
With US and European refiners struggling in a mature market and huge market growth in other world areas, it is necessary to adapt to survive. Phillips Petroleum looks at the future facing the market.
THE CHALLENGES being faced by today's refiners are not all that different from those overcome in the past 20 years - low profit margins, increasing environmental controls and rising octane demand. However, the changes are now coming at a much more rapid pace.
Consider the amount of time it took to phase out lead from gasoline in the US, yet in 1994 refiners had just over a year from the release of the final regulations to make reformulated gasoline (RFG) available to the public. Most analysts believe that the rate of change faced by refiners will continue to increase. As refiners in the US and Europe struggle in mature markets, areas such as the Asia-Pacific are seeing large pockets of market growth, causing refiners to look more and more to technology licensors to help adapt to the ever changing world around them.
Increasing environmental regulations are perhaps the most high-profile change affecting refiners. From reformulated fuels to more controls on emissions released into the air and water, regulations are having a greater impact than ever before.
With oxygenated gasoline, RFG, anti-dumping regulations and low sulphur diesel fuels, the motor fuel pool in the US has undergone more changes over the past few years than ever before. Though some feel the rate of change in the US may be slowing, the 1990s have been frenetic for refiners installing oxygenate units, desulphurising and alkylation units.
'Many of our processes have seen a growing interest based on current and pending environmental regulations,' says Robert Dunn, associate director of oxygenate licensing for Phillips Petroleum. 'In particular, our alkylation technology is experiencing a revival driven by the regulations. We are seeing interest from new grassroots facilities and expansions and modifications of existing units. Phillips' benzene removal and selective hydrogenation, which is marketed under the trade name Hydrosom, has also been receiving increased interest,' he says.
'Given the industry's recent environmental expenditure, combined with the US Congress' current mood, we anticipate a less demanding regulatory environment over the next few years,' predicts Calvin Cobb, president of Houston-based Wright Killen. 'However, operating within a clean fuels marketplace remains a major challenge to the re-optimising refinery-to-market connections.' Now the rest of the world appears to be looking to the US as an example for its increasing environmental regulation.
'Other countries are going to follow the trend to cleaner motor fuels,' says George Unzelman, president of HyOx, and senior refining advisor for Fuel Reformation.
'Most countries will include some sort of fuel reformulation, for both gasoline and diesel, in any plans to clean up transportation fuels,' he says.
The European Union (EU) is in the process of completing its Auto/Oil Study Programme that will result in recommendations to the EU for regional fuel strategies. Several individual countries have lowered the maximum benzene and sulphur content of fuels, and others may do so. Even a carbon tax may be imposed.
Finland, Sweden and Germany have all introduced tax incentives to promote the production and use of cleaner transportation fuels, according to Jarmo Honkammaa, marketing manager for Finland-based Neste. Many individual European countries are growing increasingly impatient with the slow progress in improving air quality and are demanding quicker changes in motor fuel quality,' he says. 'The result may very well be that the EU has to limit at least the benzene content of gasoline before the year 2000.'
'All the Auto-Oil partners are working closely together to find the most cost-effective solutions for the benefit of government, industry, consumer and ultimately the society they serve,' says Francis Palmer, gasoline group co-chairman of the European Programme of Emissions Fuels and Engine technologies. 'The Auto-Oil programme has provided government and industry with an excellent blueprint for the way future collaboration should be conducted.' The final Auto-Oil report is expected to be published within the next few months.
An international effort to remove lead from transportation fuels is also underway. By the year 2000, most countries in the Asia-Pacific will allow no lead in transportation fuels, says Nancy Yamguchi, vice president/ energy studies director for the Seattle Research and Training Centre. Many countries are also 'aggressively attacking diesel sulphur', says Yamaguchi. 'We expect that gasoline and diesel quality will improve steadily throughout the 1990s and beyond.
'Lead removal in Europe is also underway,' says Honkammaa. 'By the year 2000 west European gasoline is projected to be unleaded, while eastern Europe is progressing more slowly. About 50% of the gasoline is expected to be unleaded by 2000.'
One major trend in refining processing driven by increasing environmental regulations is an increase in the demand for lighter products, such as gasoline, kerosene and diesel fuel. At the same time, the demand for heavier residual fuel oil is relatively stagnant, says Charles McSpadden, vice president of the Houston-based consultancy, Bonner & Moore Associates.
'Controls on greenhouse gas emissions and acid rain are forcing many of the heavy fuel oils out of the power generation field,' says McSpadden. 'Regulations drive the change and then the economics follow as demand for heavy products falls,' he says. In many markets, residual fuel oils are now valued at less than the raw crude from which it is processed.
Increased demand for lighter products is also being pushed by economic growth in many regions around the world and a marked increase in the number of vehicles, which is causing gasoline demand to grow more quickly than before.
To meet this change in demand, more refiners worldwide are looking to add conversion processes such as catalytic cracking, coking and hydrocracking, to produce less fuel oil and more lighter products, says McSpadden.
Hydrocracking is considered a good option for refiners looking to increase light product yields, since it adds hydrogen, says McSpadden.
Unfortunately, its higher cost may make it uneconomical for some. 'Many refiners find it easier to go to cat-cracking with hydrotreating. But which course a refiner takes depends on the economies of each individual configuration.
'Coking is not expected to become a "favoured route" for most refiners,' says McSpadden. 'There are just not many people talking about it.' While North America is considered the most advanced in the use of conversion processes, other areas of the world are gaining.
South America, which is in the middle of privatising its energy industry, is building many grassroots refineries and targeting product for export to the US. Since the crude going into a refinery is relatively heavy, several projects involving cat-cracking and hydrocracking have been announced.
The situation in the Far East is much the same. With Japan's increasingly stringent regulations forcing more 'environmentally benign' ways to generate power, fuel oil demand is stagnant. In addition, demand for gasoline, jet fuel and diesel is growing.
'Most of the product coming from refineries in the Middle East is targeted for exports,' says McSpadden. The area is building 'fairly upgraded refineries' to satisfy the demand for lighter products.
East European countries are still behind the curve on this issue, says McSpadden. 'Right now their economies are not in good enough shape to worry too much about environmental issues. But I see them entering the same realm once the economies turn around. It will take a few more years to get to that point.'
Many of the refineries in eastern Europe are hydroskimming crude and upgrading naphtha to the higher-octane gasoline products. 'Eastern Europe is virgin territory for catalytic cracking technology,' says McSpadden.
'In the US, octane numbers are expected to stay right around current levels, barring any attempt to increase fuel economy significantly in cars,' says HyOx's Unzelman. However, in parts of the world octane is increasing - and the source of the octane may be changing. 'The worldwide effort to remove lead from transportation fuels will force refiners to find new avenues to increase octane numbers. Increased processing, through alkylation and selective hydrogenation, and oxygenates provide the best avenues for most areas,' says Unzelman.
'As part of the increase in environmental regulations, the phaseout of lead from motor fuels has increased interest in a number of our processes,' notes Gary Patton, senior licensing specialist with Phillips Petroleum. 'Our Steam Active Reforming (Star) process, along with alkylation and Hydrosom processes, have all had a great deal of interest worldwide.
'The biggest change I expect to see in octane is a trade-off from current octane sources to more hydrocarbon octane or the addition of more oxygenates,'says Unzelman. Canada is also facing the prospect of finding otherways to add octane to gasoline. The Canadian government has introduced legislation to ban the use of MMT (methylcyclopentadienyl manganese tricarbonyl), which has the support of the country's automotive manufacuturers and is expected to become law. 'If the legislation goes through, refiners that are currently using MMT, which I believe most of them are, will be forced to find another way to add at least one octane number to their products,' says Unzelman (see page 7).
Eastern Europe is experiencing a reduction in regular gasoline grades as new cars favour the use of premium gasoline, says Neste's Honkammaa. 'These changes significantly increase the pool octane requirement in eastern Europe,' he says.
'This contrasts with the very modest increase expected in western Europe and comes about because the lead content of leaded grades is higher on average in eastern Europe than in western Europe, and the current degree of unleaded penetration is lower.'
Profitability for refiners has always been a concern, but as continued capital investment is needed worldwide, it becomes an even greater issue.
US refiners are expected to maintain margins of over $2/bbl through the end of the year, predicts McSpadden. 'The key to US margins is the low gasoline inventory this year as the summer driving season kicks-in. However, if the economy takes a downturn, as many indicators suggest, some of that projected demand many not materialise.'
Short-term US refiners can expect margins of 'just over $3/bbl through July,' says McSpadden. 'That is roughly level seen during the same period last year.'
However, with challenging profit margins US refiners can expect the creation of value in their downstream asset to become a significant issue of concern during the next decade, predicts Wright Killen's Cobb.
'Wright Killen's analysis of the financial performance of refining companies indicates that growth in shareholder value is directly proportional to growth in cash flow,' he says.
'Thus refiners will be faced with the challenge of increasing cash flow in a mature and highly competitive market place.'
To meet this challenge refiners are expected to minimise capital expenditure and minimise crude costs IJY tightening their management of crude inventory and products downstream. Cobb says: 'A more sophisticated form of decision-support system will aid in that endeavour.'
'Refiners' ability to focus on improving cash flow should be aided by the fact that the bulk of capital required to comply with the Clean Air Act amendments was expended during the past three years,' says Cobb.
'We expect refining companies to be increasingly selective by limiting capital expenditure to projects that promise the highest return on investment.'
In other regions the picture is less positive, says McSpadden. 'Other world markets tend to "float" off each other much more than the US - there is more buying and selling between regions and not just crude processing,' he says. So if one area has negative margins, it is more likely to affect other regions.
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