Move towards higher value downstream

How do new diesel and petrol specifications impact the sector?
Since 2016, through Resolution 5, issued by the Secretariat of Hydrocarbons, the industry has a clear outlook to the path that will be followed for fuel specifications, particularly concerning sulphur content, as it is of great interest to the industry due to its impact on the refineries.
A first milestone is set for January 2019 that consists of a reduction of sulphur content for both petrol and diesel. However, that will have an impact mostly on regular or grade-two diesel, for which a sulphur content of up to 1,500 ppm [parts per million] is currently allowed. That number will drop to 1,000 ppm in 2019. Come January 2022, the maximum sulphur content allowed in grade-two diesel will be 350 ppm.
The mandated reduction is significant; however, this is not the main challenge for the refineries in terms of diesel. The Argentine market has two diesel grades, grade two and grade three. Grade-three diesel is also known as ultra-low-sulphur diesel and has sulphur content of 10 ppm. This was launched in the market a few years ago and it has been growing consistently at double-digit rates year after year, of course, in detriment to the other diesel grade.
This growth is fuelled by consumer demand for a premium product. Consumers are not required to use this premium product, but they prefer to. Even though it has a higher market price, consumers demand this product, putting stress on the refineries that need to produce more grade-three diesel. Since there is not enough of this diesel produced locally, there is a need to import it. At the same time, refineries need and intend to gradually adapt their facilities to produce it locally, which means treating higher-sulphur diesel streams with hydrogen to reduce sulphur content.

What is the role of new technologies in Argentina’s refineries?
Technology is key in achieving higher-quality products and manufacturing larger amounts of more valuable products. Some refineries in Argentina have a high conversion level; they squeeze the barrel to the last drop and produce minimal or no fuel oil. Other refineries perform a less-intensive processing of the crude oil and 40-45% of each barrel of crude results in fuel oil.
Placing that fuel oil, which has a significant price discount from that of crude, is a great challenge and an economic restriction. Refineries that can turn this fuel oil into more valuable derivatives by means of deep conversion, such as in a delayed coker, will be in an advantaged position in this market. Demand for light derivatives will continue to grow.

Why is fuel oil losing its market share?
Fuel oil has been used in electricity generation for decades, and still is. Over time, demand for fuel oil drops. More and more natural gas replaces fuel oil due to its advantages regarding both costs and emissions. Fuel oil is being left out and the best approach is to convert it in a deep conversion unit.
Also, effective in 2020, a maximum sulphur content of 0.5% will be allowed in marine fuel oil. This is a structural issue for many refineries across the world, and certainly for the ones in Argentina. Heavy crudes in Argentina are relatively low in sulphur. Escalante has a sulphur content of 0.2-0.3%.

How prepared are Argentina’s refineries to meet the challenges of changing product demand?
The range of preparedness varies. While some local refineries started the development earlier, a number of units face a challenging situation as they are still developing plans to handle those changes.
For instance, YPF finished a grassroots coker unit at the La Plata refinery in October 2016. That unit almost doubles the scale of the previous one and is operating very well. Axion Energy’s refinery in Campana is in an advanced stage for the construction of its second delayed coker unit. This will allow for the incremental production of petrol and diesel to be in demand in the next few years, through converting fuel oil into higher-value derivatives.
Other refineries may or may not have conversion units. Sometimes, because of their scale, viability for installing conversion capacity may be limited. Such units are likely to be challenged, not only in terms of products obtained from each processed barrel, but also regarding quality of the products obtained. As the market evolves towards ultra-low-sulphur diesel and petrol, refineries will also be in need of incremental hydrotreating units.

Is the higher production of shale oil impacting the refineries?
Shale oil has a relatively higher paraffin content, so diesel derived from it will exhibit weaker cold properties than that obtained from conventional crudes. That is a challenge.
On the other hand, shale oil yields more medium distillates than its conventional counterpart, thus resulting in less bottom-of-barrel products and easing the load of existing conversion units.
Another challenge with shale oil is quality variability. Sometimes shale oil produced in areas near to each other exhibit different properties from one another. Even a given well can yield crude with changing properties throughout time. These crudes pose new challenges to the refiner. Refiners are used to handling changing properties, but in this case, we are dealing with variations occurring within a relatively short period.

How is the government addressing cheap petrol and diesel imports?
We introduced a measure in 2017 with Decree No. 192, establishing mechanisms to register imports to move towards a total market opening in an orderly fashion. It is a transitional measure meant to facilitate the transition to a free market. That measure accompanied the price transition agreement for the hydrocarbons industry signed between producers and refineries on January 9, 2017. It provide conditions for local refineries to maximise local crude processing, aiding in managing potentially detrimental effects to that end, derived from imports.

How do you expect the fuel consumption matrix to evolve in the medium and long term?
We expect the fuel matrix to evolve towards a greater participation of environmentally friendly fuels. Extensive use of biofuels already exists and is a reality through the mandatory content of 10% and 12% for biodiesel and ethanol, respectively.
We hope that in the short term, we can have schemes such as urban buses using fuel mixtures with up to 20% of biodiesel, for example. During winter, we import diesel for electricity generation when there is insufficient domestic natural gas supply. Here, there is an opportunity to incorporate 100% biodiesel in electricity generation. The technology exists and the local production of biodiesel is more than enough, so that is another way in which one can introduce biofuels.
Likely, we expect CNG demand will ramp up again as the natural gas supply tends to normalise.
We are working with other ministries such as environment, agroindustry, production and transport, and in co-ordination with Chief of the Cabinet of Ministers Marcos Peña, on the introduction of flex-fuel engines that can run on any mixture of petrol and ethanol. Also, we are working to set conditions for use of hydrated ethanol as an alternative fuel for light vehicles such as in Brazil.
The fundamental facilitator for this is the flex-fuel technology in the engines. The technology already exists and is fully mature. In Argentina, flex-fuel vehicles still are not available for sale, although, they are manufactured domestically for export markets.

How will the EU’s opening to Argentine biofuel imports impact the domestic downstream sector?
I don’t expect that it will have an impact because they operate separate from each other. Pricing for biodiesel used locally in mandatory diesel fuel blending is still done taking into consideration scale of the manufacturer. Smaller ones typically are eligible for promotion, while in the case of larger ones, such promotion may be limited or none. Promotions are ruled under Law of the Congress 26093.
Export-oriented companies are currently only allowed to supply foreign markets. Therefore, their sales are subject to bilateral or international negotiation processes.

How is Argentina’s petrochemicals sector developing?
With natural gas from unconventional resources becoming increasingly available, the petrochemicals industry has very good prospects. The petrochemicals industry has played under international, open market rules for several years, largely isolated from domestic political and economic woes.
A viable petrochemicals operation today lies in at least three key factors: ample raw material availability, a strong local/regional market and large-scale, world-class plants.
For natural gas-derived petrochemicals, there is such possibility. Existing petrochemicals sites can increase polyethylene and polypropylene production capacity and there is the opportunity to produce other polymers and related materials from naphtha and light hydrocarbons streams. Clearly, the opportunity is there.

Has the government’s gas price incentive programme provided more certainty in the petrochemicals sector?
It certainly provide more certainty. An interesting situation has arisen: The growth of unconventionals requires prices to make such production attractive and all the needed development sustainable. The petrochemicals sector might find that those prices could hurt profitability. With prices at the right level, non-petrochemicals consumers can be supplied at affordable prices, and demand for industrialisation ensures consistent raw material availability.
Currently, there are very interesting prospects to expand conversion of ethane and propane into higher-value polyolefins and related products. Butane also has an opportunity. Natural gas imports that will continue on for some years are to be used in power generation, households and to meet industrial demand. The great opportunity is in methane consumption and growth of the industrialisation of associated fluids. That is the path for developing the industry.

On what fronts are Argentina’s energy undersecretariats working together?
I believe that energy efficiency is one of the subjects that cuts through all the different areas. The oil refining industry has historically been very watchful about the efficient use of energy. Energy efficiency is not only politically correct, but also economically important. Above all, it makes room for the emergence of new businesses, because those energy resources are no longer being burned to produce calories and are now being used to produce other molecules. I believe efficiency is one of the indicators that is transversal to all the undersecretariats.

What are the objectives of the Undersecretariat of Refining and Marketing through 2019?
A key objective has to do with hydrocarbons market normalisation. We come from several years of distortions in regulations and prices, or prices that are artificially fixed lower or higher than what they should be. Today, the great opportunity that we have as the managing team for energy policy has to do with normalisation.
The normalisation of the hydrocarbons market is, among other factors, to fully harmonise local and international prices, eliminate subsidies and ease the degree of intervention by the regulating authority, especially on issues where we believe it should not intervene, such as in price and volume setting. The regulator should oversee compliance of safety regulations, establish operational rules and quality standards, and let free and open markets act whenever possible.
Another opportunity we have is to continue with the normalisation of the LPG market. Today, a part of that market is open and competitive: essentially, the propane sector. We will continue to move towards an open and free-market scenario for butane as well, evolving from the unequal and inefficient low price scenario that prevails, into a scheme that fully covers all costs in the value chain, subsidising only those end consumers in a vulnerable economic situation who actually require it.

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