S05 ORME 7 2013 Analysis 3_Layout 1 01/11/2013 14:54 Page 24
Analysis Is the regional downstream industry in danger of complacency? Chris Hotblack, director, HPI & Modernisation Consulting, EMEA at Invensys advises caution.
Producers must focus on
continued excellence O NE CAN HARDLY describe the Middle East’s desert as barren land for it hides beneath its layers a bumper harvest of oil and gas reserves. Decades ago, following the discovery of oil, foresighted leaders in the region took the initiative to make the most of this natural asset and extend the value chain of oil and gas through increasingly complex processing activities within the region. Beginning with refining and basic petrochemicals the region’s downstream industry has, more recently, mastered the art of developing higher margin derivatives. Today, the Middle East is home to some of the top oil refineries and petrochemicals complexes in the world that boast state-ofthe-art large scale facilities, often integrated with advantaged economics. A large number of these facilities are based in the Gulf Cooperation Council state of Saudi Arabia, which is also home to the Sadara Project, the largest petrochemical facility built in a single phase. Qatar leads the GCC states in oil and gas reserves with an estimated proven bank of 13.1 per cent of the world’s natural gas, while Saudi Arabia commands 4.2 per cent and the UAE 3.2 per cent, which places the three nations among the top ten in the global rankings for gas reserves. This has strengthened the Middle East’s position as the leading oil and gas producer and established it as the primary global distributor of petrochemical products and a major player in refined products. The expansion has been driven by the growing demand in Asia and the Middle East’s low economics that helps displace products from European producers. For instance, China’s growth has been exceptional with demand comfortably outstripping domestic supply, and European refiners have been unable to compete with the economics of the Middle East. However, with the recent slowdown in Chinese growth we see the first signs of potential difficulties to come. Additionally, India and China have been building largescale downstream facilities with many due to come on-stream in the coming years. This becomes a greater cause of concern as India’s target markets are the same as that of the Middle East supplier. China is, 24
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Issue 7 2013
The region hosts some of the world’s top refineries.
however, focusing on its domestic market – for the time being. The European refining industry is lobbying governments to ensure security of supply. The exact measures are as yet unknown but the political imperative for the region not to be totally dependent on external sources for such a vital resource is likely to be persuasive. Europe too has its own supplies of crude and a large refining and petrochemicals base. While the closure of the smaller weaker refineries is painful, this will leave the industry stronger with a few large, technically advanced refining hubs that can compete with external refiners. And finally, unconventional oil and gas from shale in the US has brought a new player into the market. These dynamics could easily upset regional supply-demand balances and undermine the Middle East’s position. Consequently, the Middle East cannot rest on its laurels and must continuously evolve its industry to stay ahead of the game through focusing on marginal improvement. The downstream industry in the region cannot become complacent.
But what can the industry do to protect this valuable income stream? Firstly, it must recognise that competition will get tougher and that proactivity is the need of the hour. Most Middle East refineries have deployed world scale and modern processing technology. Therefore, implementing huge projects such as new refineries or the latest technology that require huge capital expenditure (CAPEX) will not address the problem. Instead, refineries must focus on operational excellence, seeking the right balance of people, process and technologies to extract every cent of margin from these advantaged assets. Much of the knowledge crucial for achieving this objective is at hand for the Middle East’s regional refiners through their international partners. At the heart of this is technology and, as these international partners have already shown, this technology provides attractive returns, particularly when deployed on world scale assets. Operational excellence technologies can be grouped into four areas: control, people, asset, as well as safety and environmental.