Refinery-chemicals integration: how to benchmark success

Identifying the winners and losers in a changing industry landscape

By Alan Gelder, VP Refining, Chemicals & Oil Markets; Nathan Schaffer, VP Petrochemicals; John Stewart, Principal Analyst; Oil & Refined Products and Matthew Chadwick, Head of Petrochemicals.

The growing trend of integrated refinery-chemical facilities is intensifying. Standalone oil refineries, focused only on fuel, are looking increasingly outdated as the energy transition takes hold. The future of oil is now inextricably linked to petrochemicals.

In a recent webinar, we examined the drivers behind this trend and the new methods of analysis investors and other stakeholders need to assess the changing landscape. Got an hour to spare? Fill in the form to watch the webinar replay of 'Chemicals integration: the winners and losers'. We’ll also send you a copy of the presentation slides.

Got just five minutes? Read on for a summary of some of the key themes.

Transport is slowing, petrochemicals are soaring

Oil producers and refinery operators face complex decisions over the next two decades, as the shape of oil demand shifts significantly.

On the one hand, global demand growth is slowing. Increased electric vehicle adoption and fuel-efficiency improvements mean gasoline demand will peak in 2030, while diesel consumption will also slow. On the other, total demand remains strong in emerging economies, particularly India, where economic activity, household incomes – and vehicles on the road – are rising. At the same time though, we forecast consumption of petrochemical feedstocks, such as LPG, ethane, and naphtha, to rise continuously between now and 2040.

As these changes take place, refiners face a challenging period. Utilisation is well below recent levels and likely to stay that way over much of this decade, due to a combination of a coronavirus-influenced slump in demand and capacity additions going ahead unabated. The sustainability of refining sites is being challenged in areas with low utilisation and weak margins, such as Europe, the US east coast, and some parts of Asia. Capacity rationalisation is now likely.

Against this backdrop, refinery-petrochemical integration has become a strategic imperative. Some companies are also exploring the crude-oil-to-chemicals (COTC) approach to create further synergies and maximise the potential value per barrel for oil producers and refiners.

Preparing for the next generation

Three distinct generations of integrated refinery-petrochemical facilities are emerging. Already, hundreds of first-generation sites are established worldwide, including BP’s Gelsenkirchen refinery and Total’s in Antwerp. Their focus is still primarily on fuel, with the most integrated of these sites having a chemicals yield of up to 20% of the output.

Some second generation sites are now up and running, including Hengli in China, which began operations last year. These are geared more towards producing chemicals, such as the aromatic paraxylene and olefins, and yield up to 40% chemicals by weight. However, under 2020 pricing conditions they are responsible for around 60% of the product value.

The third generation will flip the production mix on its head. The aspiration is that chemicals make up to 80% of output – with fuel relegated to a by-product.

Integration is proving it can add significant value. Producers have the flexibility to optimise yields between refining and chemicals, depending on where the greatest value lies at the time, helping them to improve overall profitability.

Benchmarking success – a new method

As integration becomes more commonplace, the tools the industry uses to benchmark facility competitiveness need to change. With several different feedstocks you can’t simply focus on the perspective of one primary chemical product, but instead need to look across the entire integrated complex.

That’s why we’ve created a new modelling technique to assess the changing refinery/chemicals market. Building on our refinery evaluation model (REM), REM-Chemicals expands site coverage across the olefins, polyolefins, and aromatics chains, providing a broader perspective on integrated assets. This allows companies to more meaningfully benchmark against peers and assess an individual site’s competitiveness.

Find out more about REM-Chemicals.

Finding the potential winners

The core concern for investors and other refinery stakeholders is, ultimately, portfolio sustainability. Our expanded analysis helps reveal the companies and assets that have the best chance of remaining competitive over the medium and long term.

In this example, looking at profitability across European refineries in 2019, integrated refinery-petrochemical sites dominate the upper quartiles. At the other end of the scale, the refining sites in the lower quartiles are fuels-oriented and with lower (or even negative) net cash margins (NCM). Overall for 2019, the NCM contribution from petrochemical integration is around double the average for refinery-only operations.

New methods of analysis will be invaluable right across the downstream sector. With our comprehensive benchmarking, whether at an industry-wide or company-level view, we’re able to give a much clearer picture of which facilities could be at risk during any periods of rationalisation, and which sites are more sustainable through a downturn.

Integration strategies in action: a look at the Majors

How significant is chemical integration to Shell and Total’s refining portfolio? How do their portfolios compare? And which assets are showing the strongest performance? Fill in the form at the top of this page for complimentary access to our webinar replay to find out.