Understanding business drivers in O&G: Refining enjoys some good times
Part 2: Some parts of the refining segment have emerged as beneficiaries of these confusing market conditions. So how are refiners taking advantage of this prosperity–while it lasts?
Not all that long ago, refining was stuck in a rut shared with the airline industry: refineries had to make gasoline and airlines had to move people, but neither seemed to be able to make any profit in the process. Both industries have come out of that funk, at least in some areas and to some extent, and if there is anybody that is enjoying this time of confusing markets in the oil and gas industry, it’s refiners.
The refining industry, at least as we know it in North America, grew as the big integrated producers grew. Companies built refineries to process the crude oil from their wells and later on from imported crudes. There were exceptions here and there, but companies established integrated supply chains. These plants set the pattern for process manufacturing in general, and technologies developed here moved to all areas of chemical manufacturing.
A look at the refining industry today provides a much different picture than 20 or 30 years ago. A major portion of overall production comes from independent refiners, defined as companies that do not own upstream production facilities and as a result must buy crude oil feedstocks from other suppliers on open markets. Such companies were virtually unheard of as recently as the 1970s, but they emerged as new company names such as Tesoro and Valero came on the scene. Other companies have followed suit, and even some of the major integrated producers, such as Marathon and Philips 66, have turned their refining divisions into independent companies.
It’s a tough business
Nicole Decker, energy sector strategist at UBS Wealth Management, said this is not an easy way to make money. “Refining is a notoriously low margin business, and it’s very cyclical,” she noted. “That’s the reason why many of the large companies want to shed refining assets. They aren’t the highest return assets in the portfolio. Upstream operations generate much higher rates of return.”
And shed assets, they have. Randy Miller, vertical marketing director for gas for Honeywell Process Solutions, has seen this change up close. “I’m based in southern California, and I would say that more than half the refineries here have changed hands over the past 15 years through asset sale or acquisition,” he said. “Valero and Tesoro have moved in, while Shell and ExxonMobil have each sold one of their assets. Tesoro and Valero are both refining-only companies so that is their core competency, as opposed to Shell or ExxonMobil where refining is only part of their portfolio.”
So why does a company make a deliberate choice to enter a difficult business? The thought of a company taking over an underperformer is nothing new, and usually the assumption is that the new owner believes it can do a better job. With refining in particular, independent refiners believe that when refining operations are separated from all the other distractions involved in an integrated company, there is potential that can finally be realized.
“Marathon and Valero have focused on refining, and they’ve bought various refineries from other players that want to get out of it,” said Lee Swindler, oil and gas program manager for Maverick Technologies. “Both companies have pulled them together to make viable sets of assets. I think they have accepted and embraced the role that, ‘I’m in a commodity business, this is the mission of my company, I’m not a specialty high-margin player, so I’ve got to be the best refining company I can be.’ Others have said they want to get out of refining so they can focus on other higher-margin activities where they can add more value.”
Big fish in a small pond
For the most part, when companies sell refineries, employees are included in the deal. Generally the headcount stays unchanged as companies, large and small, have long since reduced employee populations to the lowest levels practical. The move from a large, diversified producer to a smaller company has its benefits and drawbacks. Of course, small in this context is relative. Tesoro has six refinery sites and Valero lists 14 plants in 13 locations, so these are major companies in their own right. In any case, the critical point is that they both make their money from refining without upstream assets.
People making the move with the facility to the new owner often experience a sense of relief that they are now working for a company with refining as a the main business rather than just another item in the portfolio. Independent refiners have to do their best, day in and day out to keep operating, a reality critical to people working in the plant.
“From an investment perspective, the new owner commonly revisits shelved projects and initiates new projects,” said Honeywell’s Miller. “Overall that’s good for anyone working at the plant because there is often an increased suite of active projects and people want to be involved in improvements and expansions. From a vendor’s perspective, we see an uptick in investment as the facilities are modernized. When times are good and profitability is good, it’s extremely important to operate at the highest possible efficiency with no downtime. A refining-only company has to be on its game all the time, and those companies have that mindset.”
New ownership does not change the underlying cyclical nature of refining, and losing the upstream parts of the business takes away a cushion when times are bad, but most of the time, periods that put a serious squeeze on refiners are relatively short.
Where is the next barrel coming from?
One question that all refiners are asking right now relates to sources of supply: Where will our crude oil feedstock come from over the next months and years? That question, probably more than any other, is foremost as companies look to the future. Even as little as 10 years ago, the picture was much clearer. Supply agreements were far more defined over the long term, and refiners knew what to expect. Now given the wide variety of crudes available with an equally wide range of characteristics (light and sweet, to heavy and sour) a refinery must build in a higher level of process flexibility.
Jeff Hazle, senior director, refining technology for AFPM (American Fuel and Petrochemical Manufacturers) said that refiners are always keeping an eye on the changing regulatory picture, but the overall crude sourcing question is just as important. “Other than projects driven by regulations, the biggest driver in terms of refinery investment is lowering crude acquisition costs,” he said. “I think the picture of which crudes are going to be the best possible price and the best possible match for your refinery and how you’re going to invest as a result is very fuzzy right now. People are taking a wait-and-see approach to observe how it all settles out. People will invest to run a different crude slate, but right now they are uncertain as to what that crude slate is going to be.”
Marcelo Carugo, director of global refining marketing for Emerson Process Management, said, “Refiners are expanding their flexibility to handle opportunity crudes. This varies area by area, but there are two large trends:
Refiners trying to handle tight oil, and that means making changes in their crude units and condensers.
There are others that are trying to handle heavy sour crudes. The trend world-wide is adding the flexibility to handle more types of crudes.
Refiners can’t control the price of crude, but they can control what they select, so they give themselves the ability to manage that choice to improve margins and profitability.”
A recent example that has been unfolding over the past decade is BP’s Whiting, Ind., facility. The company made a decision to undertake major modifications at the facility to process crude oil from the Canadian tar sands. Hazle has been watching that development. “A few years ago when BP Whiting made the decision put in the coker and expand their refinery, it looked like the cheapest crude available would come out of Canada, so they built for that,” he said. “Given the availability of all the light oil coming out of Bakken in North Dakota and other sources, in hindsight, maybe that wasn’t the optimal decision. However, I think the Canadians are going to continue to produce and develop their oil sands, and for at least the foreseeable future, pumping it to places like Whiting will remain an economical crude choice for the Midwestern refineries that have cokers. I don’t put the BP Whiting decision in the bad category yet. Discounted Canadian crudes can still be taken advantage of.”
Incremental technology advances
Given the high degree of uncertainty, most refiners are being cautious about major plant upgrades. Improvement projects are underway, but generally owners are slowing down the pace of implementation. At the same time, market conditions are very positive, driving producers to keep output as high as possible. Export markets are very profitable at the moment, so that motivation is very strong.
“With today’s crude prices, we see refineries raising their utilization, having longer crude runs, and certainly trying not to stop production,” Carugo adds. “So what we hear and see a lot is refineries going for smaller operational improvement projects and reliability improvement projects without stopping the refinery. Some technologies are helping them: New types of sensors that weren’t available five years ago, and the possibility of having installations without wires help them execute deployments without stopping and to monitor areas that were not possible in the past.”
“Energy asset operators are faced with a paradox today: Increase efficiency and reliability levels while fighting to extend the lifespan of aging plant assets,” observed Sean Baird, energy and engineering industry leader for EMC’s Information Intelligence Group. “To meet these often opposing aspirations, customers frequently discover that it is critical to create a comprehensive view of the energy asset, its history, performance data, technical information, and associated documentation. Many solutions try to do this but fail because there are simply too many varied types of information to manage.”
Baird added that systems capable of dealing effectively with engineering drawings, real-time analytics, and document management generally have to draw on multiple solutions that are capable of managing one or two types of information, but they have to be coupled together to handle the entire range. In some situations, moving to platforms that offer software as a service makes it easier for users to try new technologies without making a huge commitment. The ultimate value of having this kind of visibility is maximizing production by reducing the number of outages.
At the same time, refineries are not immune to issues related to changing worker demographics and safety. As new workers replace the generation that is retiring, training and operator effectiveness have emerged as concerns, and there are technological elements to that discussion.
Ganesh Venimadhavan, senior customer marketing manager for refining for Honeywell Process Solutions says that something as simple as improving human-machine-interfaces (HMIs) for operators combined with better training can have a major effect. “Sites run with multiple operator shifts, and all shifts are not the same,” he said. “Over time, a best shift emerges and there’s also a worst shift. HMI improvement projects often aim at closing that gap, helping the worst shift produce like the best performing shift. The payoff for that is very fast, but it’s not an easy justification. You have to benchmark your good shift against your bad shift, you have to choose the right KPIs, and normalize other factors like processing conditions and specs. It takes a lot of effort, but once you do that, you’ll see the value. It isn’t some mythical thing, you will know the best performance and the worst performance and the delta between. The company now has an internal benchmark and the company can say, ‘If my worst guys get 50% closer to my best guys, here’s the value.’”
Safety and production
The relationship between safety and production is well known: a plant that operates safely produces more because incidents that interrupt production are avoided. Training is a critical component of that relationship because operator effectiveness is good.
Honeywell’s Miller said that much has been learned about improving operator effectiveness through the Abnormal Situations Management Consortium and similar organizations. These groups look at how people absorb information, and how best to design HMIs and create work practices with human characteristics in mind because operators who are not on top of their game put a drag on productivity. He says, “When we look at the impact of improved operator efficiency, it has a substantial impact on things such as slowdowns as a result of abnormal situations, shutdowns, and even being able to push production, yields, and flexibility of operations during more normal periods.”
A generally conservative nature
While there have been rapid advances in drilling techniques, refiners are generally slower to adopt new technologies. Some of it is safety-related where the amount of explosive and combustible product in one location calls for greater caution. If a single isolated well head has an incident resulting in a fire, there is little chance it will spread. Such is not the case where far larger amounts product is concentrated.
That’s not to say there are not evolving technologies in refining, but they have different motivations. “When we talk to our customers, they aren’t saying, ‘I want to do something different,’” said Paul Bonner, vertical market leader for oil and gas for Honeywell Process Solutions. “If you look at the major changes of the past few years, they’re being driven by changes in the market and by policy changes in compliance. So whether it’s shale oil, ultra-low sulfur gasoline and diesel, MSAT2 regulations, oxygenates, or BOB gasoline, all those things have forced companies to invest. As a supplier, we have to be dialed into what’s current policy and what’s coming so we can help our customers through that in the long term.”
Different kinds of companies approach technologies and projects differently. Companies have a variety of internal policies on selection and implementation influenced by specific motivations. “Smaller companies typically take risks more readily on a new, emerging, and novel technology, especially if they believe it can save on capital costs,” said Brad Bonnette, global automation technical authority for Wood Group Mustang. “Smaller operators also tend to take more of a shorter term focus, thinking less of a total cost of ownership or lifecycle costs. They think more about how a technology can reduce the current cost of a project being considered.”
Bonnette believes the opposite is also true: Larger and more integrated producers are more circumspect as they look at these questions. “Larger companies put a lot of emphasis on standardization, reliability, compatibility, and maintainability with their current systems, so their view is longer,” he added. “That may make them a little slower to adopt a technology, but when they do adopt a technology, they put a lot of effort into making sure they believe they’re buying a product that’s going to have a sustainable multi-decade lifecycle.”
Implementation and project management varies from company to company and site to site. System integrators find they have to adapt how they handle relationships in the plant. Maverick’s Swindler noted, “The way we approach a project depends more on the size and operating philosophy of the company, rather than the specific industry. Smaller companies, those with maybe one refinery, tend to look more to us for guidance. They turn us loose to do the work. When you’re working with a larger company that has multiple refineries or is a fully integrated producer, there’s a lot more rigor around engineering standards and project execution processes along with some added bureaucracy. They’re trying to mitigate the risk by putting these processes in place. With a smaller company, the onus is on us to use good discipline when executing projects.”
Enjoy it while it lasts
For the time being, maybe every refinery isn’t seeing this as a golden age, but for most, times are better now than they were just a few years ago. Production is going full tilt, export markets are strong, and there’s money to be made. The picture down the road could be a whole different matter. If markets can change as much as they have in a short time, there’s nothing that says they can’t change just as drastically in some other direction or other way. That’s a difficult thing to prepare for.
Automation answers to refining challenges
There are technologies available to help solve the problems discussed in this article. Various suppliers offer solutions, and sometimes simply knowing what something is called is a first step to finding the answer. There are dozens of articles on the Control Engineering and Plant Engineering sites that address these topics in greater detail, so a little searching may yield some helpful articles.
Working with multiple crude sources
No refinery can process every variety of crude oil, however a growing number of facilities are adding equipment that broadens possible crude slates.
Process simulators: A high-fidelity process simulator allows processors to analyze how a specific crude might perform in a given facility based on that crude’s characteristics. This makes evaluation of a new source far easier and reduces the time needed to make a change-over.
Process monitoring: Sometimes a new crude brings unpleasant surprises. For example, a specific grade that’s unfamiliar to a facility might be loaded with particulates that can clog processing equipment. Adding instrumentation to monitor critical areas continuously can discover these problems more quickly than manual checking.
Maintaining maximum output
Avoiding shutdowns is a critical part of maximizing output. There are three major aspects to that objective: Automation, maintenance, and people.
Automation: Keeping a plant running on an even keel requires a suitable level of instrumentation and actuators reporting to a control system running an appropriate strategy. Various advanced process control approaches can reduce variability, allowing a plant to run closer to its theoretical maximum more of the time. Deploying such strategies involves having equipment that performs reliably with well-trained operators. New sensors and instrumentation devices can now be deployed easily using wireless communication, avoiding the necessity of expensive communication infrastructure.
Maintenance: A plant that is trying to operate using equipment that breaks down and causes large or small interruptions will have a hard time maintaining high production levels. When maintenance departments can schedule efforts using diagnostic information, they can concentrate on the things that need attention most before they cause an outage so production can be optimized.
People: One of the most frequent causes of production interruptions and safety incidents in process plants is operator error. Far too often, people in the control room do not know how to perform procedures (startups, shutdowns, grade changes, etc.) nor can they respond correctly to abnormal situations. Some of this relates to inadequate training. Companies often use training simulators to allow operators to deal with these situations in an environment that is a faithful representation of the plant, but where no actual harm can be done.
The way operators interface with the control system can also be an issue. Poorly designed HMIs can make it difficult for operators to find the information necessary to solve a problem or correct an upset. Good HMI design concepts provide information clearly and consistently helping operators make better decisions.
– Peter Welander is a contributing content specialist for Oil & Gas Engineering.
Original content can be found at Control Engineering.