How to profit in the current oil market

Abu Dhabi

Guy Lewis, the vice-president for strategic marketing and planning of Honeywell UOP, talks to TOGY about the advantages of investing in refining and petrochemicals in the current market, the challenges to financing these projects and the impact of US shale production. Founded in 1914, Honeywell UOP develops and delivers technology, equipment, and catalysts and adsorbents to the oil and gas industry. The Parco Refinery, in which Abu Dhabi Petroleum Investment holds a 40% stake, announced it would install a Honeywell UOP’s Penex isomerisation unit and a modular Polybed pressure-swing adsorption system in April 2017.

• On common standards: “What we see now is a healthy trend in the region to move further downstream. In part, this trend has been enabled by a convergence of product specifications around the world. In the past, every part of the world had its own specifications for different fuels. Today, we see everyone converging to new, cleaner fuel specifications.”

• On margins: “Petrochemicals tend to provide more profit opportunities than transportation fuels.”

• On project finance: “You had this very big incentive to do refinery projects, but many could not fund them because they are integrated players. They rely on money from upstream to finance what they’re doing downstream.”

• On US production: “We talk about US shale as being a swing producer, but as a swing producer it’s actually not very good. The US can turn on maybe 1 million bopd in one year.”

• On project finance: “You had this very big incentive to do refinery projects, but many could not fund them because they are integrated players. They rely on money from upstream to finance what they’re doing downstream.”

Guy Lewis went in depth with TOGY about downstream diversification, the outlook for the North American upstream sector and his predictions about oil prices. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find an abridged version of the interview with Lewis below.

How is the Middle East diversifying downstream?
We view all of the Middle East as a high-growth region. There are a couple of reasons for that. One is the intention the countries in the region have to diversify their economies. We want to be part of that. We think it’s a great strategy for the region.
Going way back, the Middle East was a main source of crude oil for the world. Other parts of the world would upgrade that crude oil to refined products, transportation fuels and petrochemicals. What we see now is a healthy trend in the region to move further downstream.
In part, this trend has been enabled by a convergence of product specifications around the world. In the past, every part of the world had its own specifications for different fuels. Today, we see everyone converging to new, cleaner fuel specifications. This is enabling larger operations and plants to produce finished products for the rest of the world.
The difference is that it’s more standardised now. There is a real opportunity for this region to maximise the value of its advantages in raw materials, working population capabilities, logistics and access to coastal waters. They can produce for China, Southeast Asia, Africa and other parts of the world that are growing. Instead of exporting the crude for somebody else to upgrade, it can be done from here.

What are your expectations from US oil and gas producers?
The American producers will respond quickly to market forces. There are dozens of independent companies who are all looking at market predictions, and they know what their cost of production is. If the price is below that, they’re not going to produce. If it’s above that, they will.
But it’s also important not to view them as a monolith, just as we were talking about different countries and the GCC. We need to recognise that shale gas is a relatively new industry. Pilot development started back in the 1980s, but real, mature, very active operations are only about 10 years old. The technologies that are used are still pretty fresh.
We’ve been developing refining technology for over 100 years. And we’re still making improvements. Imagine the level of improvements you can get from new learning when you’re only 10 years in. The technologies and the changes just in the past few years have allowed them to strip out 30-40% of the cost, so where you thought you needed USD 60 a couple of years ago, now maybe you only need USD 40.

Have all of the easy-to-access North American resources been developed?
Here’s the thing: Permian recovery costs are USD 35-45. The other resources – the Bakken and the Utica, the Eagle Ford – all have different prices, so you might need USD 55 for some of those areas to start coming back.
If you go back four years, when shale oil development was at its peak, before the big drop in crude price, we were never adding more than 1 million bopd of new production in the US in a year. Right now, the USA is going to have 300,000 barrels more at the end of the year than it did at the start of the year. Compare this to global demand for crude oil rising at a rate of 1.5 million barrels per year.
We talk about US shale as being a swing producer, but as a swing producer it’s actually not very good. The US can turn on maybe 1 million bopd in one year. What’s likely to happen if the kingdom [Saudi Arabia] and other <a href='https://theenergyyear.com/companies-institutions/opec/’>OPEC producers continue with their strategy of pumping close to their limit, the world is going to have more volatility in production and prices. That’s because there isn’t the big flywheel like the Saudis were able to provide in the past. US shale takes longer to respond.

What do you think the oil price will be in the medium term?
No one knows for sure of course, but I personally think somewhere between maybe USD 50 and USD 80 over the next few years. I don’t think we’ll see too many drops to USD 30 or too many rises to USD 100. When prices went down on crude oil, refining margins and the profitability of refineries went up. The lower price of crude oil increased demand for petrol, for example, and when the price of raw material is falling, the products fall more slowly, so refiners had some very strong margins.
You had this very big incentive to do refinery projects, but many could not fund them because they are integrated players. They rely on money from upstream to finance what they’re doing downstream. And they had this uncertainty about future prices. This led to many holding off on making decisions.

What downstream sub-sectors are growing?
One big area of focus now is potential integration in petrochemicals. Babco, for example, is doing this, and there is a good reason for that. If you look at margins over time, petrochemicals tend to provide more profit opportunities than transportation fuels. They’re more specialised, so not everybody can make them.
Even though transportation fuels might be growing at 1.5% per year, the demand for chemicals is growing by 3.5% or more every year, depending on the chemical. China and India are coming up as big players as well with a lot of interest in petrochemicals.

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