HP Editorial Comment: Convergence of trends supports HPI opportunities
The downstream industry is halfway through 2015 and the second decade of the new millennium. Great changes have occurred over the past 12 months and five years. Change is not necessarily negative; in fact, it can be a welcome event.
The downstream industry is halfway through 2015 and the second decade of the new millennium. Great changes have occurred over the past 12 months and five years. Change is not necessarily negative; in fact, it can be a welcome event.
For example, lower crude oil prices provided a benefit for many independent refiners in the 1Q. Valero, Tesoro and Western Refining reported higher operating incomes from their refining segments as compared to last year. The higher income resulted from greater margins per barrel processed.
International integrated HPI companies also reported positive 1Q results. ExxonMobil, one of the world’s largest energy companies, managed to offset losses in its upstream business segment with an outstanding performance by its refining unit. The 1Q profit from ExxonMobil’s global network of refineries more than doubled to $1.67 B, as facilities outside of the US posted an almost six-fold increase. ExxonMobil’s international refining business took advantage of lower crude oil costs to process more crude in every market in which it operates.
Europe catches a break
In less than a year, the profit situation for European refiners has reversed. In the 1Q, European refiners earned the most profits from gasoline in more than 10 months. Much of the good news is linked to speculation that gasoline demand is rising due to growing fuel exports to Africa and Latin America.
Statoil, Vitol Group, MOL, Neste Oil, Eni, Gunvor and Total reported a rise in refining margins for the 1Q. These companies control 24% of refining capacity in the region, according to Facts Global Energy. BP reported 1Q profits that exceeded analysts’ estimates. Likewise, much of the good news for European refiners is closely linked to lower crude oil prices and spring refinery turnarounds by the US refining industry.
Conditions will shift again
The surge in European refining margins cannot be sustained. Crude oil prices are slowly starting to climb and were rising above $60/bbl as of May. The turnaround season for the US refining industry has ended, and refiners are preparing for summer gasoline production. Even after several refinery closures and conversions to terminals, the EU still has surplus processing capacity that is placing more pressure on regional refining margins. Higher crude oil prices will further impact refining margins.
Managing the inflection points
Using the business definition, an inflection point is a time of significant change within a business scenario. For the energy industry, several significant changes have converged. The North American (NA) shale oil and gas situation has shifted import activities for a major oil-consuming region. The US has all but completely replaced imports of light sweet crude oil.
However, the NA shale situation is hindered by difficulties in supply chain and distribution networks. Efficiently moving crude oil to refining centers remains a huge obstacle. For example, nearly 50% of crude shipments to US East Coast refineries are sent by rail. According to the US Energy Information Administration, since 2010, the growth of inland domestic and Canadian crude oil production has encouraged both US and Canadian railroads to move crude oil to US refining centers as sufficient pipeline capacity is not available. In the US, the Jones Act limits the vessels that can move cargo to and from US ports, thereby also hindering the movement of crude oil and refined products.
Crude oil prices may continue to rise, and, as a result, refining margins may continue to decline, due to a number of forces. For HPI operating companies, capturing and acting on economic opportunities is an ongoing quest, as these companies must continuously shift in response to significant changes. HP
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