This significant change will put many refineries around the world under pressure but for others, it represents an opportunity to make handsome margins. However, time is rapidly running out ahead of the introduction of the new regulation and refineries need to take action now to mitigate the challenges associated with IMO 2020 and to take advantage of the opportunities it potentially offers. Technology is the main tool available that can improve a refinery’s position in the next few months and as the new regulation begins to create some economic and pricing disparities.
Some have underestimated the scale of the impact of IMO 2020 on refineries, misled by the fact the forward price curves of high sulfur fuel oil (HSFO), low sulfur fuel oil (LSFO) and marine gas oil (MGO) do not currently reflect the scale of the change, but there is no doubt refineries will be significantly impacted. There is, for example, widespread concern that there may be insufficient supply to meet the demand for LSFO (leading to temporary product pricing opportunities).
For some refineries – those with low complexity, limited bottom of the barrel conversion and hydrotreating capacity – the advent of IMO 2020 will pose tough operational and commercial challenges.
Thus, these refineries will need to focus on operational efficiency improvements to make sure they are winning the ‘survival of the fittest’ battle in the lower quartiles. Here digitalisation approaches can provide competitive advantages over less sophisticated competitors and can be implemented in a much shorter time than capital investments. Fortunately, some of these strategies can be put in place quite quickly.
Others have more favourable process configurations in place and/or greater manpower and resource dedicated to addressing the IMO 2020 challenge and are therefore better positioned to take advantage of the new regulation. Generally, larger refineries with greater manpower and resource dedicated to addressing the IMO 2020 challenge have been best placed. They have often been in active discussion with legislators and have the financial capability to build new processing units, if necessary, to convert higher sulfur fuel into lower sulfur variants. Indeed, many of the larger refineries in the US already have coker units in place that take the residual crude streams and effectively obliterate them, forming in their place lighter streams of gasoline, diesel and coke. Large multinational and US refineries often have less of an issue with the new IMO 2020 regulation, as they have either implemented conversion technology or have already made the necessary CAPEX investment to build new units.
For these refineries and others that have the right processes and configurations in place, the advent of IMO 2020 is likely to present an opportunity to capitalise on higher margins driven by imbalances in supply and demand. Industry analysts are predicting this effect to peak in 2020 and reduce over a period of 4 or 5 years until a new equilibrium is established by investments in both the shipping and refining industries and potentially some refinery closures.
Furthermore, digitalisation approaches can help magnify the profit potential offered by the high-margin period between 2020 and 2025 that will result from the IMO regulation. As an example, based on industry analyst projections regarding the diesel/fuel oil price spread between 2020 and 2025, a typical 100 000 bpd refinery that is able to increase diesel production by 1% by lifting molecules up from the fuel oil pool, would generate US$36 million of incremental profits. For example, some businesses have already achieved a 10% increase in diesel production through better use of advanced control and also dynamic optimisation.
There is a lot that all refineries – whether favourably positioned or not – can do to make operational improvements, drive enhanced efficiencies, and maximise their yields of the most profitable feeds. Agility in planning, trading and scheduling are key to achieving better results in the post-IMO 2020 world. But with the regulation set to go live in a matter of months, the window of opportunity is fast closing. The message is clear: the advent of IMO 2020 ushers in far-reaching changes to the whole refining landscape – and refiners need to act now to optimise their future position.
The first key for refiners to concentrate on is maximising plant availability, which in this context is a major issue for every refiner, whether they are well placed to drive up margins or will struggle after the onset of IMO 2020. For both groups, unexpected shutdowns mean lost production and lost margin. The latest predictive analytics technology can help here by reducing downtime and ensuring refiners receive early, accurate warnings of degradation and impending asset failure.
However, the next step is not just about ensuring that the plant is available to run; it is also important to optimise the way the plant is utilised. Thus, in this time of opportunity, refiners need to take advantage of every chance they have to enhance performance and market positioning – and they need to take action now. By managing their operations more efficiently, they can maximise margins, and by enhancing their planning capability they can capitalise on market and capital opportunities.
The latest advanced process control and dynamic optimisation solutions can help in enabling both those refiners who see IMO 2020 as an opportunity and those that regard it as a threat to maximise throughput and yields of the most profitable crudes (typically, the high-value distillate products) while minimising the volume of residual fuel they have to produce and meeting all the requisite quality specifications. The latest advanced optimisation tools enable operators to evaluate proposed project economics and expand scenario analysis to mitigate business risk. This necessitates organisation agility as well as technology adoption. Several operating groups, who many have previously worked separately, need to collaborate in order to make this most effective.
Perhaps most important of all are planning and scheduling processes. IMO 2020 will lead to price spikes for LSFO and price craters for HSFO. The price spread between the two will open up and all refiners will need to carefully evaluate the crude they purchase for processing in the future. One of the key elements of this will be feedstock evaluation.
To maximise margins, refiners will need planning solutions in place that enable them to continuously evaluate and seek out the most profitable crudes. This whole planning process will be key for refiners moving forwards. They will need to have the flexibility, agility and control to be able to adjust production depending on what the most profitable scenario is at any given moment in time. More specifically, refiners will need to find a point of equilibrium between de-sulfurising HSFO and buying in more expensive LSFO supplies. They will almost certainly be forced to look at different crudes to the ones they have processed in the past. This is the kind of optimisation problem to which refineries will need to find a solution in the post-IMO 2020 world.
At a more granular level, scheduling is also critically important. Once the refinery has decided which crudes to buy and process, it also needs to work out what blend of crudes it should process on any given day. The latest scheduling tools can be instrumental in streamlining this process. Recently, significant increases in the adoption of APC, planning and scheduling have been seen. The latest software solutions go further, aligning APC with planning and scheduling, enabling unified production optimisation for refineries. A key element of this is dynamic coordination, which captures economic incentives every minute across multiple units, critical for refineries and plants where operational complexity and changing conditions are the norm.
The good news is that there is still time for refineries to make a difference, to counter the challenges and take advantage of the opportunities that IMO 2020 presents. The window to build units has closed but refiners can and must ensure they are in the best shape to thrive moving forward. In the four or five years after 2020, before the market finds a new equilibrium, refineries that have the capability to capitalise on the opportunities presented by IMO 2020 stand to make a lot of money but the flipside is some refineries are going to struggle.
Which category an individual refinery fits into will largely depend on whether or not it has the right configurations and processes in place. Although time is short, there is still an opportunity for every refinery to optimise their approach and their position in the post-IMO 2020 world.
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