Refining: Let the Good Times Roll

A paper by Walter Pfeiffer presented at CERAWeek 2005

Accenture believes that fundamental structural changes are bringing to an end the era of low growth and low margins for refiners. Increasing reliance on heavy, sour crudes to meet demand in an increasingly strict regulatory environment will transform the traditional landscape and will give high-performers the opportunity to pull decisively away from the pack.

Over the last 20 years conventional wisdom has been that refining is capital intensive and low margin. The industry has been trapped in a period of limited demand growth, overcapacity and low profitability, coupled with repeated boom-and-bust cycles. It has become viewed as more of a necessity, rather than an attractive business in which to invest and grow. In the West, it has been over a decade since a new refinery was built, and since then refiners have been focusing on cost management and operational stability, as well as serving key local markets. Any investments which have been made have been forced by increasingly stringent regulatory demands (low sulfur fuels, the removal of some additives and lead, and so on) which also have resulted in refinery divestments or closures.

Accenture believes we are entering a new benign era for refining, delivering improved margins and providing the basis for steady, pragmatic investment. Drivers for this change will include:

• Broad-based demand growth, with the major share coming from non-OECD countries.
  
  
  • Significant local supply-demand imbalances in refined product demand.
  • Demand-switching in key regions between refined products.
    
    
• Globalization of the refined products market as a result.
  
  
• Improved utilization rates in the next few years as growing demand is met through existing capacity.

In addition, as demand continues to rise, incremental supplies will increasingly come from heavy/sour crudes, allowing complex upgrading refineries to fully capitalize on their capabilities.

The benign era will see healthy margins for refiners, while new conditions should ensure that excessive new capacity is not commissioned, thereby avoiding a return to the boom and bust cycles of the past.

While the benign era will deliver good margins for all refineries, it is ultimately an opportunity for the leading refiners to use the changing structure of the industry and improved margins to fund further improvements and pull decisively away from the pack.

The best refiners will be those which can deliver excellence in five areas:

1. Customer-led supply chain optimization, using information technology but led by the business.
   
   
2. Aggressive portfolio management, balancing assets against business strategy within the competitive landscape.
   
   
3. Nimble, market-based manufacturing strategy, giving rise to five distinct types of refineries.
   
   
4. Operational excellence, recognizing that improvement is a continuous process.
   
   
5. Workforce motivation and management, using focused investments in facilities and people to drive substantial improvements in their operations and competitive position.

Walter Pfeiffer is a Partner in the Energy Downstream practice.