Full Potential Oil Refining in a

Challenging Environment

Refiners have enjoyed comparatively good times as the

rest of the oil industry suffered, but they should prepare
for a more competitive season ahead.

Pedro Caruso, Diego Garcia and José de Sá

Pedro Caruso is a partner with Bain & Company in Houston, Diego Garcia is
a principal with Bain in Buenos Aires and José de Sá is a Bain partner in São
Paulo. All three work with Bain’s Global Oil & Gas practice.

Copyright © 2016 Bain & Company, Inc. All rights reserved.

 Full Potential Oil Refining in a Challenging Environment

While much of the upstream sector has struggled
mightily since crude oil prices began collapsing in
the summer of 2014, refiners have enjoyed a period
of relative prosperity. Falling crude prices buoyed re-
finers’ margins, even as upstream producers trimmed
costs and strained the capacities of their suppliers.
For starters, the global supply of crude continues to
get heavier and more sour, except in the US, where
light tight oil production has increased (see Figure 2).
Unstable supplies from North Africa and the Middle
East, together with fading production from the
North Sea, are also affecting this mix.

But the easy times for refiners may be fading rapidly.

Margins have already tightened as crude oil prices
stabilized and refiners began to pass their savings Over the next few years, refiners will
on to customers (see Figure 1). That’s not all— have to cope with several long-term
over the next few years, refiners will have to cope challenges sure to separate leaders from
with several long-term challenges sure to separate
laggards and possibly force some poor
leaders from laggards and possibly force some poor
performers from the field.
performers from the field.

Figure 1: Overcapacity and price adjustments are pushing margins down

Actual and projected refining margins in different regions

(indexed to Q1 2015=1)

1.5 Projected

1.0

0.5

0
Q1 2015 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16E Q4 16E

US Midwest (West Texas Intermediate) US West Coast (Alaska North Slope) Asia (Singapore)
Credit Suisse North West Europe Indicator US Gulf Coast (Light Louisiana Sweet) US Gulf Coast (West Texas Intermediate)

Source: Credit Suisse Weekly Refining Margin Pack, March 2016

1
Full Potential Oil Refining in a Challenging Environment

Figure 2: The quality of crude has declined since 2000

Oil production is getting heavier ... ... and sulfur content is growing

Total growth in medium and heavy crude oil production (mbpd, 2000–14) Crude oil production by sulfur content (mbpd)

6 60
Getting heavier

CIS
4 Middle 44
East
40 38
Getting lighter
2 Canada
APAC 28
25 24
Africa US 22
20
LatAm US
0
Rest
of
EU world
−2 0
−2 0 2 4 2000 2014 2000 2014 2000 2014

Total growth in light crude oil production (mbpd, 2000–14) Sweet Medium sour Sour

15 mbpd, 2014 production

Note: mbpd=million barrels per day

Sources: ENI World Oil and Gas Review 2015; Bain analysis

These changes are creating more volatility in pric-
ing, forcing refiners to adjust their feedstocks more
frequently and dramatically than in the past, and
making long-range planning more difficult than
ever. The influx of heavier and more sour oils also
industry, making life harder for refiners that operate
in regions with high labor and energy costs, or have weak
operating and capital project-execution capabilities.
Third, refiners can expect more stringent regulation

puts pressure on less complex refineries that must in fuel specifications, refinery emissions and biofuels—

consider investing in conversion units if they want and in most cases, new regulations will require addi-

to stay in the game. tional investment and operating costs. Although developed
economies are leading this agenda, developing econ-
Second, new refineries are coming online that could omies are rushing to catch up with these strict guide-
boost capacity beyond demand for refined products lines. Mexico, for example, is adopting rules that will
(see Figures 3 and 4). Most of these large and require heavy-duty vehicles there to comply with
complex refineries are closer to the most dynamic emission standards as strict as those in the European
centers of demand in the Asia-Pacific region. Their Union, and Saudi Aramco is working to reduce car-
preferential access to markets, crude stocks and afford- bon emissions and tail gas flaring.
able labor supplies will bring structural shifts in the

2
 Full Potential Oil Refining in a Challenging Environment

Figure 3: With increases in capacity, global supply of refined products will exceed demand

Global demand and production capacity for oil products (mbpd)

120

110

100

90

80

0
2015 16 17 18 19 20 21 22 23 24 25

Demand Supply scenarios

Refined Biofuel, direct use of crude oil Minimum case: oversupply Base case: Maximum case: very
products and other non-refined products accelerates shutdowns balanced shutdowns limited shutdowns

Sources: OPEC 2015 World Oil Outlook; Enerdata, December 2014; Bain analysis

Figure 4: Refineries around the world plan to increase their capacities for desulfurization and produc-
ing higher-octane grades

Conversion Desulfurization and quality

Projected additions to conversion capacity, 2015–20 (mbpd) Projected desulfurization and octane addition capacity, 2015–20 (mbpd)

1.0 2.0
1.0 2.0

1.4

0.5 0.5 1.0

0.4 0.8
0.7
0.3 0.3
0.5
0.2 0.2
0.2
0.1
0.0 0.0
Asia- Middle CIS Latin Africa North Europe Middle Asia- Latin Africa CIS North Europe
Pacific East America America East Pacific America America

Average NCI 8.9 6.6 5.8 7.6 5.8 11.7 9.0 Desulfurization Higher octane

Notes: NCI=Nelson Complexity Index, averages for 2014; mbpd=million barrels per day
Sources: OPEC 2015 World Oil Outlook; ENI World Oil and Gas Review 2015; Bain analysis

3
Full Potential Oil Refining in a Challenging Environment

Figure 5: Middle East and CIS national oil companies are the most advantaged, EU independents and
Latin American NOCs are challenged, and African refineries are failing to capitalize on opportunity

Feedstock Capex Energy costs Labor costs

Average crude slate adjusted Capital spending to expand Industrial electrical energy Average yearly salary in the
by yield plus logistics (indexed) capacity adjusted by cost of price (indexed)** oil and gas industry (indexed)
capital (Thousands of US
dollars per barrel of oil)*

Global integrated 100 N/A 100 100

US independent 96 22 71 130
EU independent 102 27 127 96
APAC independent 103 23 98 90

APAC NOC 101 43 74 46

Middle East NOC 99 34 21 86

Latin America NOC 97 58 65 101

CIS NOC*** 103 28 32 82

Africa NOC 103 45 64 73

Best performers Average performers Worst performers Market vs. upstream break-even price difference

Notes: *Adjusted by cost of capital in the region to oil and gas firms; **electrical energy as a proxy for refining energy prices; ***Includes CIS independents
Sources: Hays; Oil & Gas Journal; EIA; IJGlobal; WACC expert; OPEC; ENI; Bain analysis

Evaluating players and positions • Markets. Consumption of refinery products is

These global trends affect the entire sector, with
some segments and refiners impacted more than
others. When we look at the key competitiveness
factors for refiners—markets, operating conditions
and quality of asset portfolio—we see that some are
better positioned than others to thrive over the next
decade. Middle Eastern national oil companies
(NOCs), globally integrated oil companies, indepen-
dent refiners in the Asia-Pacific region, and refiners
in the Commonwealth of Independent States (CIS)
are well positioned, while national oil companies in
Africa and Latin America and European indepen-
dents are under greater pressure (see
shifting from developed to developing markets,
especially to China and other developing coun-
tries in the Asia-Pacific region, favoring the in-
dependent refiners there as well as the NOCs in
the Middle East and CIS independents, which
have competitive access to this market.
• Operating conditions. Middle Eastern NOCs
and CIS refiners have favored access to feed-
stock, lower energy costs and efficient capital
spending, which all can give them an edge in
operating conditions. European independents
and Latin American NOCs are the most chal-
Figure 5). lenged. Africa, given its low labor costs and sur-
plus of crude, seems a good candidate for refin-

4
 Full Potential Oil Refining in a Challenging Environment

ery operations, but refiners there have not
capitalized on these advantages due to a lack of
engineering and construction capabilities.
• Asset portfolio. Globally integrated companies
and independents in the US and the Asia-Pacific
region are best positioned in terms of the scale
and complexity of their portfolios. Next in line
are the NOCs in the Asia-Pacific region, the
Middle East and the CIS, which are investing to
make their portfolios more competitive. The
portfolios of African NOCs, on the other hand,
are clearly at risk.
These changes will combine to shift the flows of re-
fined products around the world
with the Middle East and the CIS becoming the ma-
jor suppliers to the world, North America increasing
its surplus, and Europe, Latin America, Africa and
the Asia-Pacific region remaining net importers.
In addition, they will create interesting and chal-
lenging supply-and-demand dynamics in local mar-
kets. For example, demand for fuel could decline on
the US West Coast, given the rising popularity of
hybrid and electric vehicles. If this occurs, the re-
gion would produce more gasoline than it needs,
and refiners would have to reduce capacity or export
more refined products to Asia.
Also, gasoline exports from Europe will face increas-
ing challenges from new export-oriented players,
including the US. NOC refiners in Latin America
(see Figure 6), and Africa are likely to feel the pressure from public
opinion as they continue to be net exporters of oil
and net importers of derivatives.

Figure 6: The Middle East and CIS are likely to strengthen their positions as net exporters, while Europe,
Latin America, Asia-Pacific countries and Africa will import more

Regional balances in 2013 and 2019

Thousands of barrels per day

1
2 Europe Stable, riding the light tight oil boom to remain
Gasoline Diesel a net exporter to Latin America and Europe
4 CIS
718 652 2
Gasoline Diesel
1 Continued need for diesel imports and competition
OECD Americas 897 835
for gasoline exports force M&A and closures
Gasoline Diesel 469 528
984 995 −1057 3
−1592 Integrating downstream, deploying the advantage
145 3 from local oil to supply Europe and Asia-Pacific
Middle East
−205 Gasoline Diesel 4
5 Asia-Pacific Investing to supply diesel to Europe and Asia-Pacific,
1023
702 762 Gasoline Diesel but upgrading outdated capacity is a challenge
6 358
Latin America
1280 5
Gasoline Diesel Attempting to reduce imports with massive capacity
469
additions, but not enough to offset demand growth
7 Africa
−471 Gasoline Diesel 6
−526 −559−548 Efforts to increase local capacity and revert import
−974
−143 −1490 status facing major financial and technical challenges
−332
−657 7
−998 Historic importer, trying to expand into refining but
facing financial, operational and commercial challenges

Notes: Positive numbers indicate net export potential, negative numbers net import requirements; 2013 net exports to do not equal imports due to feedstock trade and product
classification differences
Sources: US Energy Information Administration; OPEC 2015 World Oil Outlook; Enerdata; Bain analysis

5
Full Potential Oil Refining in a Challenging Environment

Figure 7: The Refining Full Potential Playbook helps refiners tackle competitiveness in a structured way

Markets Operations Assets

Market access strategy
• Local and regional market
full potential (channels,
footprint, mix, pricing)
• Export market strategy
• Commercial excellence
• Specialty strategy
(e.g., lube, chemicals)
Feedstock strategy
Operational excellence Capital projects excellence Portfolio optimization
and yield management
• Feedstock sourcing • Maintenance and plant • Capital projects- • Refinery configuration
strategy reliability management process assessment and
• Crude slate to product • Energy efficiency and system reconversion plan
slate optimization • Frontline labor productivity • Vendor management • Portfolio assessment and
• Feedstock supply chain • SG&A optimization • Project and turnaround optimization
capabilities • Working-capital planning • Refinery closure plans
• S&OP excellence management • Joint ventures and
adjacencies

Organization

• Operating model • Organization effectiveness • Talent management • Results Delivery®

Regulatory and stakeholders

• Regulatory risk-assessment and adaptation plan • Regulatory compliance strategy

Digitalization

• Commercial digitalization
(digital B2B sales and
marketing, pricing models)
Source: Bain analysis
• Digital operations and maintenance • Digital supply chain (supply • Digital organization and
(predictive maintenance, operations and demand market analytics, capabilities (agile, digital
intelligence, digital workers, digital processes) innovation)
remote operations)

Clearly, the world will become more complex for even
the most competitive refiners, requiring them to em-
brace an agenda of strategic and operational efficien-
cy, with the elements differing from one player to the
next, depending on the situation of each.
Toward full potential
As the conditions for the refining industry become
more challenging, even the most favored companies
have to work hard in five critical areas to achieve and
maintain their full potential. The Bain Refining Full
Potential Playbook offers a structured plan that can
help refiners remain competitive (see
• Protect and expand access to markets. Whether
focused on a local market or exports, refiners
must understand their competitive differential
in each potential market, as well as key competi-
tive threats and how to achieve a logistical edge
over them.
• Optimize access to advantaged feedstock and
product yield. Now more than ever, refiners
must sharpen their linear program models to
reflect changing availability, quality and price
deltas of different crude oils. This has been par-
ticularly valuable in recent years in the US,
where refiners that quickly tapped into light tight oil
reaped great benefits.
Figure 7).
• Achieve operational excellence. Focusing on
plant reliability, energy efficiency, frontline labor
productivity, SG&A optimization and working-

6

capital management are key to achieving excel-
lence. Many refiners have focused on this task
in recent years, but a large gap remains between
the most- and least-efficient players. Leading
performers use a system (see the Bain Brief
“What ‘Good’ Looks Like: Creating an Opera-
tional Excellence Management System”) that
clearly describes what excellence looks like, how
to achieve it and how to continuously improve
on it.
• Improve ability to manage capital projects. As
with operational excellence, achieving excellence
in capital projects requires refiners to implement
and relentlessly improve robust project- and vendor-
management systems. Understanding the driv-
ers of cost, and working systematically to reduce
them, are especially important in regions that
have not been able to perform well in this dimen-
sion, such as Latin America or Africa.
• Optimize the refinery portfolio. Refiners
should pursue full potential for each refinery
and for their entire system without compro-
mising safety, yield, reliability or environmen-
tal compliance. They must evaluate scenarios
for the future and decide which signposts to
monitor to determine the most likely scenarios.
(For more, read the Bain Brief “Beyond Fore-
casting: Find Your Future in an Uncertain En-
ergy Market.”)
Finally, leading performers tend to focus on three
capabilities that put them in the best position to
tackle a full potential agenda.
7
Full Potential Oil Refining in a Challenging Environment
Clearly, the world will become more
complex for even the most competitive
refiners, requiring them to embrace an
agenda of strategic and operational
efficiency, with the elements differing
from one player to the next, depend-
ing on the situation of each.
• First and foremost, they get the organization
right, with a robust operating model and organi-
zational construct that reduces costs and raises
effectiveness. (For more, read the Bain Brief “De-
sign Principles for a Robust Operating Model.”)
• Second, they grasp the external agenda, develop-
ing an essential understanding of how to manage
regulators and stakeholders, including govern-
ment agencies, owners, communities, vendors
and customers. Failing to properly engage with
any of these stakeholder groups may result in
asymmetric regulation, operational challenges
and loss of commercial opportunities.
• Third, they prepare for the future, capturing the
promise of digitalization—from delighting cus-
tomers with transparency and novel interfaces,
to improving reliability and the supply chain
with predictive analytics, to making internal
processes more efficient. Refiners have been
pioneers in the use of data and analytics, and
digitalization can take these capabilities to the
next level.
Full Potential Oil Refining in a Challenging Environment

The refining sector is poised for a cycle of “natural

selection” that will separate the fittest from the rest,
based on how well they used the profits from this
most recent cycle to prepare for the storm on the ho-
rizon. The agenda is quite complex, even for the most
prepared players. But if tackled in a structured man-
ner with a focus on the highest value opportunities,
the odds for success increase dramatically. Time to
think ahead wisely and execute impeccably.

8
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 Key contacts in Bain’s Global Oil & Gas practice

Americas Riccardo Bertocco in Dallas (riccardo.bertocco@bain.com)

Pedro Caruso in Houston (pedro.caruso@bain.com)
Diego Garcia in Buenos Aires (diego.garcia@bain.com)
Ricardo Gold in São Paulo (ricardo.gold@bain.com)
Eduardo Hütt in Mexico City (eduardo.hutt@bain.com)
Jorge Leis in Houston (jorge.leis@bain.com)
Rodrigo Más in São Paulo (rodrigo.mas@bain.com)
John McCreery in Houston (john.mccreery@bain.com)
José de Sá in São Paulo (jose.sa@bain.com)

Asia-Pacific Sharad Apte in Bangkok (sharad.apte@bain.com)

Francesco Cigala in Kuala Lumpur (francesco.cigala@bain.com)
Dale Hardcastle in Singapore (dale.hardcastle@bain.com)
Brian Murphy in Perth (brian.murphy@bain.com)

Europe, Joachim Breidenthal in Johannesburg (joachim.breidenthal@bain.com)

Middle East Christophe de Mahieu in Dubai (christophe.demahieu@bain.com)
and Africa Torsten Lichtenau in London (torsten.lichtenau@bain.com)
Roberto Nava in Milan (roberto.nava@bain.com)
Peter Parry in London (peter.parry@bain.com)
Mark Porter in London (mark.porter@bain.com)
Tiziano Rivolta in Milan (tiziano.rivolta@bain.com)
Natan Shklyar in Moscow (natan.shklyar@bain.com)
Luis Uriza in London (luis.uriza@bain.com)

For more information, visit www.bain.com