Many may succumb as demand dwindles and standards rise
If we compare the present time with different stages in the evolution of energy, we will find we are moving towards the latter stages of the oil age and the beginning of the age of natural gas.
In 10 to 20 years' time, we will enter the nuclear and hydrogen-powered age, in which energy molecules will become smaller and cleaner.
The boom period for the petroleum-refining industry spanned the entire 20th century. As the end approaches, we have seen record fluctuations in crude oil prices. They soared to US$147 per barrel in August 2008, due to high demand during the summer Olympics in China, and then, within just a few months, economic recession caused by the financial crisis in the United States plunged the price to just $45 per barrel. As a result, global oil demand has decreased dramatically. The fluctuation in oil prices has played a significant role in accelerating the development of technologies to make cars requiring less or no petroleum fuels at all, such as hybrid, battery-powered, or hydrogen-powered cars.
As well, increased social awareness of the impact of global warming has meant that the quality of petroleum products is expected to be higher. In order to meet those expectations, refineries have to invest billions of baht. Sometimes, the investment required is greater than the current value of an old refinery. Consequently, some refining companies are not yet ready to make that investment, and others may eventually have to close down.
At the same time, there have been ongoing efforts to use alternative energy, such as the addition of higher proportions of ethanol or biodiesel to petrol and diesel respectively, as well as greater use of renewable energy. All of this has inevitably affected the sales volume of refineries' traditional oil products.
A refinery's business is refining crude oil and turning it into different usable oil products. Revenue is generated from what is known as the gross refining margin, or the difference between the price of crude oil and that of the refined oil products. A refinery buys crude oil at the same price as other refineries around the world, but when selling its petroleum products it is not able to set its own price. Instead, it is bound to sell oil at market prices. Under these conditions, it has to increase its efficiency so that it can operate at minimal cost. Factors contributing to the survivability of a refinery are:
-Flexibility: the ability to use oil as a raw material for creating products with added value.
-Efficiency: effectiveness in all areas, making it possible to achieve the lowest operating costs.
-Reliability: consistency in quantity and quality.
There are now indications that there will soon be a petrol supply problem, due to decreasing demand. Most European cars now use diesel, while in the United States the demand for petrol has fallen markedly as a result of the economic recession. Refineries in the US are closing down every day, and in general terms, refineries around the world have excess production capacity, which means the world does not really need them.
However, that does not mean that every refinery is the same. There are differences.
At Thaioil refinery, the three survival principles mentioned earlier have been adopted as the key to our production, and we have consistently achieved 100-per-cent capacity utilisation. We are able to produce petrol at low cost, demonstrating our efficiency, while flexibility is apparent in our process of creating value-added petroleum products by transforming excess petrol into petrochemical products such as paraxylene and toluene, according to the industry's business cycle.
Market trends can determine a refinery's fate. Therefore, risk management is essential, to reduce the business risks. Moreover, another important mechanism is collaboration between the production and marketing units, to ensure consistency in quantity and quality. Therein lies the measure of our reliability.
We also create raw materials and products for other business units within the group. For example, there is an exchange of feedstock between the aromatics and the lube-base oil-production plants that helps to reduce transportation costs and, at the same time, offers an effective way to solve the problem of surplus products in the market. Self-generated electricity and steam energy are jointly used within the group, while pipeline transportation with the lowest cost is utilised to avoid inventory-carrying costs. All of these measures contribute to creating added value for the group's supply chain.
A trend of change has emerged, with refineries being forced to live within the global environment. For Thaioil, we determine our business based on market demand. If the world seeks forms of energy other than petroleum products, then Thaioil will be there to produce what the world needs.
With a close regard for stricter health and environmental regulations, we have been able to produce Euro-4 petrol ahead of the government's announcement promoting its use. In addition, we have been able to produce treated distillate aromatics extract from the lube-base oil-production process, reducing carcinogenic emissions from the abrasion of car tyres.
Eventually, in a world that may demand less oil, refineries may still have a prosperous future. They can become base plants for producing value-added products such as lube-base oil, car tyres, petrochemicals and other specialty products. Of this I'm confident.
Surong Bulakul is chief executive of Thai Oil.