One of the key trends in 2015 was a strong downstream sector performance. Most of the integrated oil companies saw very strong downstream earnings on the back of robust refining margins driven by weaker oil prices. Some refinery margins—such as the Brent and Mars cracking margins—were up over $9 a barrel early in 2015 (Source: International Energy Agency Oil Market Report, April 2015, © 2016 OECD/IEA). Such strong margins really boosted the downstream profits for many companies, but we’re unlikely to see a repeat performance this year.
Why not? There are a number of reasons why refining margins might be under pressure in 2016: A relatively warm winter in the Northern Hemisphere has affected middle distillate demand, such as heating oil and diesel, adding to product surpluses; and the industrial slowdown in the USA and China is exacerbating this. Also slower demand growth generally is likely to lead to lower refinery throughputs and if you add on a higher maintenance schedule (after many refineries globally have been run flat out to capture oil price benefits and use up surpluses) then 2016 run rates look weaker.
With upstream business under such pressure from weak oil prices, many companies are taking lessons from their long term downstream restructuring and cost cutting as well as continuing to rationalize the downstream business. Companies can look to improve downstream performance using ongoing advances in technology and digital to run plants even more cost effectively and efficiently.
For example, technologies—such as cloud platforms and mobility, coupled with better connections to plants—are allowing companies to operate at speed and with more flexibility and agility—in some cases, even running plants as a system rather than as an individual operation. These technologies are switching the focus of performance in the plant to data capture, time series management or better analytics for plant diagnostics.
Maintenance is another key area of plant management. Many companies are seeking to transform their application maintenance costs under existing budgets. With no new funding available, areas such as offshoring services, wider standardization and improving productivity through better management of employee experience, knowledge and performance management, are all driving improvements.
In practice, such changes are very hard to implement. Companies find it challenging to optimize processes and procedures without increasing time and costs, and battle to change embedded behaviors. Those who do persevere, can find pockets of hidden value creation which can make all the difference to their bottom line.