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Margins Define the Winner
Vinayak Pai, Managing Director, KBR Technology Indian refining industry has done exceedingly well in establishing itself as a major player globally. India is emerging as a refinery hub and refining capacity exceeds the demand. The last decade has seen a tremendous growth in the refining sector. Vinayak Pai, Managing Director, KBR Technology, India, talks about refining sector in country. Selection of crude and level of integration is the key to the refining margins, Pai highlights.

With degrading quality and fluctuating prices of crude oil, increased global focus on environment and therefore need for producing cleaner fuels, delivering financial results to the shareholders has become a challenge for the refining industry. Under these circumstances, the gross margin of refineries depends on several factors such as efficient operations, flexibility to process opportunity crudes and the ability to produce a high value product slate.

To sustain profitability in the current competitive environment, the refiners continuously need to reexamine what really creates value in their market segment. They also need to look at evolving technologies with emphasis to produce more high value products through higher conversions.

There have been four main operating models in place in the refining industry: upstream integration, merchant refiner, downstream integration and vertical integration. Traditionally, vertical integration, including upstream and downstream integration, has been thought to better position owners to capture value by making the most of advantages across the value chain. However, with pressure on improving margins and sustaining profitability in volatile markets, the financial viability of each asset and each region has become the key. On the other hand, standalone refineries with no related downstream units nearby may find their operations inefficient due to some stranded streams and transportation costs of low value products. In such cases, the refiners may be tempted to install downstream units selectively.

The changing patterns in quality of available crude oils, the demand for refined products and to some extent due to increased concerns about the environment, there is a continued pressure on refinery margins, and as a result, smaller refineries especially in developed countries are shutting down and larger refineries are being expanded and modernised. The increased demand is expected more from the developing countries especially for diesel. The availability of shale gas is playing an increasing role in the energy mix. As a result, new fertiliser plants are being announced in the US.

Slate flexibility, scale and technology are going to be the main value drivers for the refineries in the years to come. The refineries need to adapt the technologies that allow operational flexibility to change crude baskets. A balanced approach is called for as too much flexibility may result in inefficient operation and increased capital costs.

Although refining business is a volume game, it is the margins that pose the big challenge and define the winners. Refining margins are subject to substantial uncertainties and are impacted by global fluctuations in regional feed and product pricing structures. New globalising trends like changing transport-fuel supply and demand balance, geographical shift in consumption, soaring crude-oil prices, depressed natural gas prices and impending regulations, pose interesting challenges to the very survival of many small and medium sized refineries. As refining inputs have declined in quality, demand for high-quality refined products have increased.

Refinery economics are largely impacted by three basic factors: crude cost, type of products produced and disposition of low-value, stranded streams.

Out of these factors, the cost of crude is the single most important factor in setting refinery margins. This is the primary reason for the recent surge in refinery upgrades targeted at processing opportunity crudes - cheapest crude available to any refinery on a given day. This consists of heavy or extra heavy crudes, bitumen derived crudes, high-acid/high-metals naphthenic crudes or high metals-containing, paraffinic, heavy inland crudes.

Aided by low crude oil prices and high natural gas prices, the delayed coker has been the technology of choice for resid upgrading. However, with high crude prices and low natural gas prices, slurry-phase hydrocracking is emerging as the preferred approach for upgrading residue streams via hydrogen addition.

The principles of slurry phase hydrocracking essentially overcome the limitations of fixed-bed and ebullated bed technologies and provide for substantially higher conversion of the residuum. The combination of lower cost 'opportunity crudes' and the need to produce high quality distillate selective products will remain important considerations for refiners when making high-dollar investment decisions.