28 March 2011 00:00 [Source: ICB]
President Stephen Pryor focuses on a long-term approach involving deep integration and feedstock flexibility
For ExxonMobil Chemical, 2010 was the best of times.
A jump in margins, high operating rates and the financial benefits of close integration with a resurgent refining operation - as well as flexibility in both feedstocks and products - led to a record year in profitability.
However, for company president Stephen Pryor, 2010 and a relatively positive outlook for 2011 must not - and will not - distract the world's third-largest producer from the long-term strategy that will see it through what he sees as the inevitable worst of times to come for the chemical sector.
"You have to take a long-term approach to this business, because this up-and-down, roller-coaster cycle - the exact shape and timing of which nobody would have exactly expected - that's always going to be a feature in the landscape," Pryor says.
"Frankly 2010 was a very successful year, uniquely, but it is just about continuing to do the things we have been doing for many years - the strategies we've been following for many years. That's the lesson - stay the course," he adds.
There's not even a hint of hubris from Pryor, despite a record-setting year. Worldwide, ExxonMobil Chemical almost doubled earnings to $4.9bn (€3.5bn) from $2.6bn in 2009. The 2010 figure includes a gain of about $2bn from improved margins, compared with additional volume earnings of only $380m.
The lion's share of total growth was in the US, where the so-called ethane advantage was in play but Pryor also points out the operational discipline inherent in the long-term approach, which allowed ExxonMobil to achieve a 93% operating rate compared with about 87% for the sector overall.
"In the first half of the year, when there was the very cold weather [on the US Gulf Coast], people were down and having trouble getting back on their feet. We were able to supply markets and benefit from that," he says.
"So part of it was the feedstock advantage, part of it was our strong operations and reliability. Both of those things we work on year in and year out," he adds.
While the US performance was stronger than many expected, "Asia actually looked like what conventional wisdom [thought] the world would look like," he says. "With all the capacity, it would really be at the bottom of [the] cycle. Asia was, in fact, in 2010 exactly what we expected, and it's still absorbing all that production," he adds.
The company's European business was somewhat more in the middle, he says.
Pryor also acknowledges the role of the economic recovery in delivering record specialty earnings. "They almost doubled from 2009 to about $1.8bn, and there we benefited from the recovery in key sectors that we supply, like automotive, industrial and other sectors that are really leading indicators of economic activity," he says.
"So when we look at the weighted-average increase worldwide in industrial activity in those key sectors, they grew about 8%. So our specialties businesses grew about 8% as well, and that contributed to record profitability," Pryor notes.
In all regions, ExxonMobil's chemical businesses - 90% of which are tied in to refineries or upstream natural gas processing - benefited from the boost in the oil industry's downstream margins. Pryor says benefit derives from a long-term policy of deep integration of the refining and chemical businesses. That policy goes far beyond the simple co-location strategies that have failed many other companies, prompting them to de-emphasize their chemical activities or exit the sector altogether.
The close weave of ExxonMobil's refining and chemical businesses has generated a combined average return on capital employed of 20% in chemicals from 2000 through 2010 - more than 2.5 times its competitor average, according to the company.
"We believe the key to real success is integration - deep integration, not nominal integration. Deep integration across feedstocks, products, costs, capital, people," Pryor says.
The model includes having the flexibility to select the feedstock that delivers the highest returns for the entire integrated complex, and being able to adjust processes and the product mix in real-time to sustain the optimal recipe.
This allows ExxonMobil to "extract value from every molecule," Pryor says. That is especially the case as the lighter feedslate in the US Gulf has tightened the supply - and also driven up the value - of co-products such as propylene (C3) and butadiene (BD), which are produced in greater volumes when heavier feeds are used.
"Even in 2010, as attractive as light feed was, there were times when it was attractive to crack gasoil. We even cracked jet [fuel] at one point, in some unique circumstances, and we made good money - it's not headline money, but good money - on the ability to do that," Pryor adds.
"We had very attractive profitability on those co-product businesses," he says. "That's all part of being very flexible, being very integrated with refining, being very feed flexible, being very nimble in responding to what will be an absolutely changing landscape."
An interesting credit for the benefits of integration goes to ExxonMobil's unified approach to staff development. As with Pryor himself, managers are rotated through both refining and chemical units, to give a perspective that discourages them from focusing solely on the success of an individual business unit.
SHALE GAS BENEFITS
Despite the high returns on the heavy-feed co-products, the US industry focus for now remains squarely on the benefits of using swelling ethane supplies from shale gas.
ExxonMobil estimates unconventional sources drove a 20% increase in US natural gas production in the past five years, which in turn increased ethane production by 25%.
Pryor sees the US cracker industry now running at about 85% on light feeds - up around eight percentage points from three or four years ago - and believes the shift still has some room to go through industry-wide investment in existing facilities.
"I think it could go a little bit further," he says. "You'll get some incremental steps that will be very attractive - and as long as it is short pay-out, as long as it is less than [a greenfield cracker]."
Longer-term, Pryor does not see credibility in industry suggestions that a US cracker will be built to cash in on the shale gas boom. ExxonMobil is a major player in shale following its acquisition of Fort Worth, Texas-headquartered XTO Energy for $41bn (including assumption of debt) in 2010. "Anyone who bets the ranch on any feed is going to regret that decision," he says.
Pryor declines to comment on whether ExxonMobil itself might have some incremental projects in mind for its US assets.
Company chairman and CEO Rex Tillerson was more forthcoming at a meeting with analysts in New York on March 9. "We will keep running full out, but we have no plans to expand capacity at this time," Tillerson declared.
Meanwhile, the company's asset growth in Asia continues, with its second Jurong Island plant in Singapore closing in on a staged start-up. The new plant includes a 1m tonne/year cracker complex and associated derivative units, including two 650,000 tonne/year polyethylene (PE) units and a 450,000 tonne/year polypropylene (PP) unit. An oxo-alcohols expansion project at the complex was completed and started up in July 2009.
"I would expect in the second half of the year we will begin a progressive start-up of the complex, and that will stretch out over a number of months. The exact schedule of how long that will take, we'll determine that as we go," Pryor says.
There is great complexity in "building this massive plant right adjacent to, and highly connected to, an operating chemical plant It's extremely tricky as you go from a construction phase into a start-up, and then operate," he says. "There are thousands and thousands of steps involved in that." Considering Pryor's view of the chemical cycle, the plant should at least be able to enjoy some of the current prosperity.
"I think that at least over the next couple of years the fundamentals look quite sound, because we have had this enormous wave of capacity which came on in the ethylene (C2) chain and paraxylene (PX)," he says.
"It's rapidly being absorbed in the ethylene chain and in paraxylene it has been absorbed," he says. "So when you look at what's coming on in the next two years, my assessment is that demand growth should exceed supply growth. That is a relatively positive outlook," he adds.
Pryor is not taking anything for granted but he does have confidence that the benefits of the long-term strategy will still be there when the cycle does turn.
"All I can say is we continue to run our businesses the way we always have, with this very steady approach that whatever the market brings, we'll be there to take advantage of it," he says.
"The key is run well, and keep doing what we do. Hopefully it will be another very good year."
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