Capturing Value Through Refinery & Petrochemical Integration, Digital Transformation
As U.S. refiners continue to confront an increasingly volatile crude oil market, driven by increased U.S. shale production and a lag in offtake pipeline takeaway capacity, especially from the prolific Permian Basin, they also continue to seek new areas to drive earnings growth.
There has been an increasing focus on the benefits of integrating the processes of petroleum refining and petrochemicals production. The concept of oil refining and petrochemicals manufacturing integration is not new; however, declining profit margins have recently compelled refining companies to increasingly look at petrochemicals integration as a means for increasing revenues among independent and large integrated refiners alike.
Necessity vs. Luxury
With downstream operators facing flat-to-declining demand for transportation fuels in the years ahead, investments in integrating petrochemicals with crude refining may be a necessity as opposed to a luxury. According to the International Energy Agency, petrochemicals are set to account for more than a third of the growth in world oil demand by 2030, and nearly half the growth to 2050, adding nearly 7 million barrels of oil per day by then.
While downstream operators are able to capture additional value around petrochemicals integration, we are also seeing a renewed focus around commercial optimization, especially among independent refiners.
Several of our downstream clients have active programs in place to achieve earnings growth through commercial optimization. As most have grown through acquisition of geographically advantaged sites, they are now integrating those assets at the commercial level, optimizing crude purchasing and logistics across their downstream networks and leveraging more diverse refined product networks to drive margin growth.
Realizing these margins is to a large degree reliant upon integrated commercial business processes, as well as upon the use of digital technologies, such as SalesForce (Figure 1). These digital technologies continue to help automate processes to accelerate cash flow cycles and to enable marketing organizations to drive greater margins through their branded and unbranded marketing channels.
Digital technologies, such as SalesForce, provide a platform to digitize core downstream functions.
At Opportune, we are assisting several downstream clients with the adoption of digital technologies, such as Salesforce, and all have already achieved significant margin improvements. Our approach is to target those commercial activities that most impact the revenue cycle and to leverage those capabilities throughout the commercial organization.
Opportune has identified several areas in the commercial supply chain area, which are prime opportunities to leverage digital technologies to improve commercial performance. These include:
- Streamlining deal entry for high-volume, low-complexity physical trades;
- Integrating derivatives transaction processing from order, to confirmation, fill, through allocation and broker reconciliation;
- Maximizing utilization of electronic trade confirmation services;
- Automating market data acquisition; and
- Enhancing integration with logistics partners
Several major downstream companies have recently embarked upon large-scale digital transformations with anticipated capital spend tallying in the tens to hundreds of millions of dollars. While these initiatives promise significant returns, not all small to midsize refining organizations are prepared to double down on digital transformation projects and make investments of this magnitude. To that end, Opportune has been actively working with these refining organizations to identify more targeted opportunities to leverage digital transformation technologies.
About the Author:
Matt Flanagan is a Partner with Opportune LLP and leads its Downstream Industry Sector. He brings over 25 years of experience in global refining and marketing, pipelines and transportation (liquids and gas), petrochemicals and mining, encompassing corporate strategy, operations, transportation, marketing, IT and back-office processes. Prior to Opportune, Matt led the M&A Integration and Commercial IT functions at Petroplus Marketing AG, a Swiss-based independent refining and marketing company.