Significant long-term challenges to shake up oil & gas refiners globally

Two years ago marked the beginning of the collapse of crude oil prices and the upstream sector has been struggling ever since. Global oil & gas refiners have been spared from that, but significant challenges on the horizon threaten to separate industry leaders from laggards and possibly force lower performers from the field.

Bain & Company’s new report, “Full Potential for Oil Refiners in a Challenging Environment”, finds that Asia-Pacific’s oil & gas refiners have been largely unsuccessful in reducing imports and, ultimately, equalizing demand growth despite implementing massive capacity additions.

There are also several long-term challenges are looming for global refiners over the next few years, including: a global supply of crude that is becoming more difficult to refine, new refineries coming online that could boost capacity beyond demand for refined products, and more stringent regulations that will force developing markets to catch up with their developed counterparts.

Some segments and refiners will be impacted by these global trends more so than others, which will create competitiveness differentials for the different groups of refiners.

“These global trends will affect the entire refining sector, but when we looked at key competitiveness factors – market, operating conditions and quality of asset portfolio – we found that some countries are better positioned than others to thrive over the next decade,” said Francesco Cigala, a partner in Bain’s Oil & Gas Practice based in Kuala Lumpur, Malaysia.

Asia-Pacific independents, Middle East national oil companies (NOCs), and the Commonwealth of Independent States lead the pack, according to Bain’s analysis.  Africa and Latin America NOCs and EU Independents are quickly falling behind.

There is also a shift from developed to developing markets, especially China and others in the Asia-Pacific region, when it comes to consumption of refinery products, favoring the refiners there.  As a result, NOCs in the region are investing to transform their portfolios in a more competitive direction.

Refiners in the Asia-Pacific are in a good position to withstand the global shift in the flows of crude feedstock and refined products, but continued pressure and ongoing changes in the sector are also anticipated, said Cigala. “This means that even the most favored players will have to work hard to maintain their full potential,” he added.

Bain recommends that leading refiners focus on eight critical capabilities across four strategic areas:

• Market access. Access to large and growing markets, especially those in the Asia-Pacific region.
• Operating conditions. Three elements of operating conditions require special attention: feedstock strategy; operational efficiency; CAPEX project excellence.
• Some refiners will need to take a more strategic approach to portfolio strategy, one that balances scale, complexity and location.
• Capabilities and enablers.  Most critical are: a robust operating model and organizational framework that reduces costs and raises effectiveness; an understanding of the external agenda, specifically how to manage regulators and stakeholders; and a vision for the future that captures the promise of digitalization.

“As oil costs stabilize, refineries are in for tough times,” said Cigala.  “It’s important for refiners around the world to tackle competitiveness in a structured way, which is where a full potential agenda can create a strategic advantage.”