refining trends part iv tough choices

7/29/2019 Refining Trends Part IV Tough Choices

1/12

Rening Trends:The Golden AgeOr the Eye of

The Storm?

by

Andrew [email protected]

Pedro [email protected]

Jayant [email protected]

Part IV: Tough Choices


2/12

Booz & Company is a leading global management consultingrm, helping the worlds top businesses, governments,and organizations.

Our founder, Edwin Booz, dened the profession when heestablished the rst management consulting rm in 1914.

Toda, with more than 3,300 people in 57 ofces around theworld, we bring foresight and knowledge, deep functionalexpertise, and a practical approach to building capabilitiesand delivering real impact. We work closel with our clientsto create and deliver essential advantage.

For our management magazine strategy+business, visitwww.strateg-business.com.Visit www.booz.com to learn more about Booz & Compan.

CONTACT INFORMATION

DallasAndrew [email protected]

BeirutIbrahim [email protected]

HoustonPedro [email protected]

LondonViren DoshiSenior [email protected]

McLean, VA

Eric SpiegelSenior [email protected]

So Paulo

Arthur [email protected]

Shanghai

Nick [email protected]

Sydney

Tim JacksonManaging Director, [email protected]


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Booz & Company 1

In the first half of 2008, therefining industr went fromexhilaration to desperation. Infact, so man contradictor signs

exist about the industrs futurethat it is hard to discern realitfrom mth, and even harderto chart a course. Where is theindustr reall heading? And whatshould smart plaers do? Weaddress these questions and morein this fourth installment of ourGolden Age of Refining series.

Rening is a cclical industr withhigh peaks and low troughs. Since

2002, the industr has been in whatindustr observers have called agolden age. Margins have remainedat historic highs without attractingsufcient demand and suppl-sidefeedback to end the ccle or drivemargins back down to pre-2002levels (see Exhibit 1, page 2).

Given the capital intensit of theindustr, plaers tend to makeinvestment decisions that have

time horizons of 20 ears or more.However, present circumstancesdo not easil lend themselvesto making assumptions abouttomorrows energ landscape.Man contradictor, game-changing signs lie on the horizon:

REFININGTRENDS:

THE GOLDENAGE OR THE EyEOF THE STORM?

Part IV: Tough Choices

Global demand that is growing

despite high oil prices, together

with recent evidence of demand

destruction in developed economies

New transportation technologies

that threaten to displace oil-

based vehicles entirel, but also

ultracheap internal combustion

powertrain cars that could create

vast demand in developing

economies such as India and China

Growth in rening capacit, but

delays and cancellations due to

rising construction costs

New legislation mandatingunforeseen levels of biofuel use,

but uncertain technological

advances and a rising tide of

popular dissent because of public

debate on whether crops should be

grown for food or fuel.

These signs clearl do not point to

a unied direction for the future

of the rening industr. But as we

show in this paper, we believe that

in the short-term, between 2008and 2013, overall margin levels

have alread topped out and will

move lower. Furthermore, a reces-

sion could end the golden age pre-

maturel. Finall, trade ows could


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2 Booz & Company

Exhibit 1Average Rening Gross Margins

Sources: Oil and Gas Journal; Booz & Company

change, shifting margins to Asia.In the long term, through 2025,global demand for transportationfuels will continue to grow despitethe emergence of alternative vehicletechnolog; the demand will bedriven primaril b economicgrowth in Asia. Whether marginsremain high in the long term willdepend on the ups and downs ofthe economic growth of developingeconomies. This represents a shift

from the dnamics of the recentpast, when margin ccles weredetermined almost solel b thespeed at which capacit was added.

In addition, regulators will plaa signicant role in determiningwhether investment decisions madetoda ield their potential. Policieson dieselization, high-efciencvehicles, and biofuels will all havean impact on rening margins.

Exhibit 2World Ground Transportation Fuels Demand per Capita

1 Transportation fuels include gasoline and distillate fuels.

Sources: U.S. DOE; World Resources Institute; CIA World Factbook; Booz & Company

AverageU.S.

$/bbl

USGC

NorthwestEurope

AsiaPacific

$0

$5

$10

$15

$20

08 1Q2007200620052004200320022001200019991998199719961995

Supply and Demand in theShort Term

The demand perspective:Propelled b worldwide economicgrowth, demand for transportationfuels has continued to grow despitesustained high prices (see Exhibit2). In the developing world, thisdemand has been supported bthe weak dollar and b policiesof subsidizing fuel prices in placessuch as China. In the developedworld, consumers have generallbeen unwilling to signicantlchange their driving habits,despite climbing fuel prices andthe gradual introduction of smallerand alternative-fuel vehicles into aver large installed eet.

However, as shown in Exhibit 3,there is evidence that demand hasstarted to cool down, at least inthe U.S. It seems that high pricesat the pump, together with fearsabout the econom, prompted U.S.consumers to curb their appetitefor gasoline in the rst quarter of2008. In fact, our analses showthat gasoline consumption ishighl correlated with consumers

personal disposable income (PDI),which is driven b economicgrowth and ination (see Exhibit4). Increases in PDI raise gasolineconsumption overall and alsoreduce individual sensitivit toprice changes. In the last threedecades, as gasoline spending asa percentage of PDI has dropped,we have seen the absolute priceelasticit of gasoline in the U.S.reduced b an order of magnitude

(see Exhibit 5). This dnamic hasuntil ver recentl dampened theimpact on demand of historicallhigh real gasoline prices in the U.S.

Against this backdrop lies thethreat of recession orjust as

GroundTransportationFuels1

Consump

tion(gallons/capita)

94

96

98

100

102

104

106

108

2000 2001 2002 2003 2004 2005 2006 2007


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Booz & Company 3

Exhibit 3Year-to-Year Percentage Change in U.S. Gasoline Demand (4-week Average)

Sources: Energy Information Administration; Booz & Company

menacingstagation. If gross

domestic product (GDP) decreasesand ination increases, then PDIwill drop, and demand for gasolinewill drop with it as consumersbecome more price sensitive. Theseverit of the demand decreasewill depend on the price of gas: Ifgasoline prices are high, the demanddecrease will be quite sharp; itwill be less sharp if gas prices are

%C

hange

Katrina Effect

Demand dropped by 1% inthe first 24 weeks of 2008

-6%

-4%

-2%

0%

2%

4%

6%

8%

01/05 05/05 09/05 01/06 05/06 09/06 01/07 05/07 05/0809/07 01/08

Exhibit 4U.S. Gasoline DemandPrice Elasticity vs.

Disposable Income

Sources: Energy Information Administration; Federal

Highway Administration; Census Bureau; Science;

University of California at Davis; Booz & Company

AbsoluteGasolinePriceElasticity

Gasoline Expenses as Percentageof Personal Disposable Income

R2= 0.90

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2 .0 % 3 .0 % 4 .0 % 5 .0 % 6 .0 % 7 .0 % 8 .0 %

1970s

1980s

1990s

2000s

relativel low. A US$4/gallon price

could reduce gasoline demand b 3percent, depending on the state ofthe econom (see Exhibit 6, page 4).

In terms of demand, the short-termimpact of alternative fuel technolo-gies will be limited, given how longit takes to replace the vehicle eet.However, the long-term impact ofhigh-efcienc vehicles is real, asdiscussed on pages 56.

The supply perspective: Reningcapacit increased between2003 and 2007, despite publicannouncements of delas andcancellations in building, as well asmassive increases in constructioncosts. During this period, renersadded 3 million to 4 millionbarrels per da (bpd) of distillationcapacit, and more than 9 millionbpd in capacit via other processes.In fact, the pace of building has

signicantl accelerated: Capacitunder construction more thandoubled from spring 2007 tospring 2008 (see Exhibit 7, page4). Furthermore, there has been asignicant increase in capacit inthe engineering stage (i.e., being

designed) and in the planningstage. As was the case in priorccles, there is a lag betweenmargin levels and capacitadditions. Not onl does it taketime for reners to start addingcapacit when margins rise, butit also takes time for reners toreduce the pace of additions oncemargin expectations start to drop.

Of course, we do not expectthat all announced capacitwill actuall be added. On thebasis of capacit announcementsand our understanding of thedifferent plaers, we estimatedistillation capacit will expandb approximatel 6 million bpd

between 2008 and 2012.

Biofuels are also altering the short-term industr outlook b addingsuppl, thanks in part to the shortlead times needed to add biofuelcapacit, and also to a regulatoremphasis on alternative energ.

Exhibit 5

U.S. Gasoline Cost as a HistoricalPercentage of PDI

1 Population greater than 16 years old.

Sources: Energy Information Administration; International

Energy Agency; Booz & Company

Consumption(AnnualBarrels/Capita)1

0

2

4

6

8

10

12

14

16

18

0%

2%

4%

6%

8%

10%

12%

14%GasolineExpendituresasPercen

tageofPDI

Demand

Relative Cost

Price to reach

1979 levels

~$4.00

$4.50/gallon

19

19

19

19

19

19

19

20

20

07

1959

1965

1971

1977

1983

1989

1995

2001

2007


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4 Booz & Company

Exhibit 7Evolution of Renery Capacity Addition

Sources: Oil & Gas Journal; Booz & Company

Exhibit 6U.S. Gasoline Demand vs. Price and Disposable Income

Source: Booz & Company

PerCapitaDeman

dChange(%)

US$/gallon

7Average Price

2% (recenthistorical rate)

Potential2008 Average

0%

-3% (0% per capita economicgrowth, 5% inflation)

Change in Personal

Disposable Income

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

2.00 2.50 3.00 3.50 4.00 4.50 5.00

The U.S. energ bill enacted in2008 has some aggressive targetsfor biofuel production, mandating1 million bpd b 2012, and 2.3million bpd b 2022. This newmandate represents an increaseof 600,000 to 700,000 bpd ofbiofuels b 2012, equivalent toas much as 7 percent of the totalexpected U.S. transportation fuel

demand in that ear, and morethan the total gasoline demandgrowth between 2007 and 2012.

The European Union also has amandate for biofuels, calling forthem to make up 5.75 percent ofthe transportation fuels pool b2010 and 10 percent b 2020.However, the E.U. is currentl re-

viewing the environmental impactof biofuels, and that mandate machange if the are found to havenegative effects on the environment.

Of course, there is a limit (tpicall10 percent) on how much ethanolcan be blended into the gasolinepool without the need for modica-tions to existing vehicles. However,with just a small penetration ofvehicles accepting E85 (a blend of85 percent ethanol and 15 percentgasoline), the U.S. could meet itsbiofuel target b 2012. The E.U. isavoiding the need for E85 b settinga target as a percentage of totaltransportation fuels suppl that isbelow the 10 percent threshold.

Putting all this informationtogether, what just a few monthsago looked like an imminent, albeitmodest, global suppl crunch hasnow turned into a situation ofoversuppl. Furthermore, it hasopened up the possibilit that theU.S. will become long in gasoline(i.e., a net exporter, rather than a

Distillation

Cracking

Coking

Hydrotreating

New Refinery(measured in

distillation capacity

As of Spring 2006 As of Spring 2007 As of Spring 2008

Total (in million bpd)

3.0 under construction

5.8 engineering

7.9 planning

16.7 total



4.6 engineering

7.3 planning

13.1 total



3.3 engineering

6.2 planning

10.8 total

0 5 10 0 5 10 0 5 10

0.9

1.2

2.2

2.4

4.1

1.0

0.8

2.5

1.7

7.2

1.4

0.9

2.7

2.0

9.6

Capacity (million bpd) Capacity (million bpd) Capacity (million bpd)

Construction Engineering Planning

Project Stage


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Booz & Company 5

net importer). This is particularllikel if demand is reduced b aneconomic slowdown or a recession(see Exhibit 8).

Such a shift will lead to changes inregional suppl/demand balances,affecting global trade ows and

rening margins (see Exhibit 9).In particular, on top of NorthAmericas reducing its need forgasoline, Europe will get shorter indiesel, and Asia will continue to bethirst for fuels in general.

More and more gasoline fromEurope, and possibl from theU.S., will ow into Asia. Demandin Asia will be able to absorb thissuppl, but margins in Europe

and, especiall, the U.S. will beaffected. In the case of Europe,exporting over longer distancesto Asia will mean lower gasolinenetbacks relative to exporting tothe U.S. In the case of the UnitedStates, this change could mean

gasoline would be priced at exportparit rather than at import parit,reducing gasoline crack spreads bapproximatel $4 to $6 per barrel.

Given the wa rener economicswork, a reduction of relativegasoline prices would, for the same

crude price, reduce the differentialbetween light and heav products,thereb reducing rening margins.Reners will have a choice: ship,shift operating mode to producemore diesel, or reduce runs.

In the short term, then, it appearsthat the rening industr in theU.S. and in the E.U. is read fora shake-up, even if the industrcontinues to do ne in Asia.

Supply and Demand in theLong Term

The demand perspective: Thelong-term picture is plaguedwith uncertaint as several

game-changing, and sometimescontradictor, drivers come intopla. For starters, small changesin economic growth in emergingmarkets could signicantlchange future demand. In fact, anadditional 1 percent annual growthin the GDP of the BRIC countries(Brazil, Russia, India, and China)would add 3 million bpd ofdemand for ground transportationfuels b 2025.

Exhibit 8Short-Term Supply/Demand Balance

1 Transportation fuels include gasoline and distillate fuels2 Supply is domestic supply; rest of the demand is fullled with imports

Sources: Energy Information Administration; International Energy Agency; Booz & Company

Exhibit 9Changes in Regional Supply/Demand Balance (2007 to 2012)


Diesel

Short(-)/Long(+)

(millionbpd)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Europe

Africa

NorthAmerica

AsiaPacific

Latin America

FormerSoviet Union

Middle East

Gasoline Short (-)/Long (+) (million bpd)

Global Gasoline and Distillate U.S. Gasoline(Domestic Supply Only2)

Demand (Reference Case)

42

44

46

48

50

52

2012201120102009200820072006

GroundTransportation

Fuels1(millionbpd

)

Demand (Low Case)

Supply

Supply with Biofuels

Signicant

capacity previously

announced, now

likely to be

delayed or not

used in full

7

8

9

10

2012201120102009200820072006

GroundTransportation

Fuels1(

millionbpd

)

Shift to net

exporter in low

demand case

Demand (Reference Case)

Demand (Low Case)

Local Supply

Local Supply with Biofuels


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6 Booz & Company

Similarl, the advent and adop-tion of ultracheap vehicles (such asTatas recentl announced $2,500car) ma bolster conventionalfuel demand b unprecedentedamounts (see Exhibit 10). Thisma result in a marketplace withvastl increased demand for trans-portation fuels as vehicle owner-ship suddenl becomes affordableand attractive to millions of peoplein developing economies.

Another potential scenario,however, represents the absoluteopposite. Entirel new autotechnologies such as plug-inhbrids ma threaten absolutedemand destruction for groundtransportation fuels, marking theend of the hdrocarbon era as weknow it and ushering in the eraof electried transportation (seeExhibit 11). The speed at which

this shift could happen dependson the pace of advancements inbatter weight-to-power ratios andreductions in batter costs, bothof which have been occurring at 5to 10 percent per ear. Consumersvehicle purchase decisions

will be determined b how the

different technologies compare

in performance and cost. The

latter will be affected, positivel

or negativel, b government

incentives, depending on how

various governments choose tostructure those incentives.

In addition, an new vehicle

technolog will take several ears

to penetrate and eventuall replace

the eet. For example, even after

ears of being commerciall

available, hbrids still account for

less than 3 percent of total new

vehicles. It also takes about 15 to

20 ears to replace the vehicle eet,

signicantl delaing the impact of

new technologies.

Since it seems clear that numerous

questions regarding the long term

remain unanswered, we have

assembled four demand scenarios

(see Exhibit 12):

Robust economic growth

with continuous eet efcienc

improvements

Robust economic growth with

high penetration of alternativevehicle technologies

Moderate economic growth

with continuous eet efcienc

improvements

Moderate economic growth with

high penetration of alternative

vehicle technologies.

In all cases, we have taken a

consumer-back approach to sizing

total demand for liquid ground

transportation fuels. In otherwords, we have purposel left

biofuels out of the demand-side

scenarios, and we will consider

them as part of the suppl side of

the equation.

The likelihood that a given demand

scenario will materialize depends

on future fuel prices. At one

extreme, high prices would likel

deter global economic growth

while favoring a high penetration

of alternative technologies. At theother extreme, low prices would

favor global economic growth and

reduce the attractiveness of alter-

native vehicles. Then, of course,

the price of oil will be affected b

crude oil availabilit; limited avail-

abilit will support high prices.

Our demand forecast, presented

in Exhibit 13, highlights the

emergence of two centers of

demand moving in opposite

directions. On the one hand are

the developed economies where

growth in demand is slow, and

will eventuall be negative as new

technologies become entrenched.

On the other hand are developing

economies, particularl in Asia,

that will drive signicant demand

growth even after new technologies

become available. This is not onl

Exhibit 10Impact of Ultracheap Cars on Demand

(by 2015)



GroundTransportati

onFuels

(millionbpd

)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

China Russia India Brazil

2.25.6

0.92.3

0.61.6 0.61.5

Total potential of 411million bpd; or more than

20% of 2007 globaltransportation fuel

demand in just thesefour countries

Exhibit 11Vehicle Technology EvolutionExpected Timeline

Sources: International Energy Agency; Booz & Company

M

iles/Gallon

100

0

90

80

70

60

50

40

30

20

10

Fuel Cells

Plug-InHybrids

Diesel

Hybrids

E100Gasoline

DieselGasoline

Hybrids

Current Technologies

2000 2005 2010 2015 2020 2025 2030 203


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Booz & Company 7

because of their high economicgrowth rates but also because

an percentage of GDP growth in

those countries has a larger relative

impact in fuel consumption than it

would in developed economies.

The developing worlds economic

growth means that global demand

for transportation fuels is poised

to continue growing. For the

most part, that will be true evenif alternative vehicle technologies

achieve a high penetration rate. In

fact, onl in the case of long-term

moderate economic growth and

high penetration of alternative

vehicles does the total global

demand stop growing before 2040.

To be sure, demand will peak

much sooner in developed

economies. This is particularl thecase for gasoline (with ethanol)

consumption in the U.S., which

will likel peak within the next 15

to 20 ears. Diesel will probabl

continue growing for another

decade or so after that. This trend

toward diesel is a global one, with

the global gasoline/diesel mix

poised to move from 50/50 in

2007 to 45/55 in 2030.

Exhibit 12Long-Term Demand Scenarios

Note: All cases include the impact of ultracheap cars in a similar way


Scenario Economy

Alternative Technologies

Hybrids Plug-In Hybrids

Continuous limitedpenetration


From 1% of new vehicles in2008 all the way to 25% ofnew vehicles by 2032

From 0.1% of new vehiclesin 2012 all the way to 25% ofnew vehicles by 2042



From 1% of new vehicles in2008 all the way to 25% ofnew vehicles by 2032

From 0.1% of new vehiclesin 2012 all the way to 25% ofnew vehicles by 2042

Strong real GDP growth acrossthe world:U.S. 2.4% p.a.

Europe 1.9% p.a. China and India at 8.0% p.a.

fading down to 3% p.a. Other: 1-4% p.a.

75% of Robust GrowthGDP CAGR

Continuous fleet efficiencyimprovement

High penetration ofalternative vehicletechnologies


High penetration ofalternative vehicletechnologies

RobustGrowth

ModerateGrowth

Exhibit 13Ground Transportation Fuels Demand Outlook


Sources: Oil & Gas Journal; Booz & Company

RobustGrowth

Overall Demand Scenarios

Regional Breakdown

GroundTransportationFuels1(millionbpd)

2005

2010

2015

2020

2025

2030

2035

2040

ModerateGrowth


High penetration ofalternative technologies

Different Breakdowns for Robust Growth, High Penetration of Alternative Vehicles

0

10

20

30

40

50

60

70

80

2005

2010

2015

2020

2025

2030

2035

2040

AfricaMiddleEast

South & CentralAmerica

Asia Pacific

Europe & Eurasia

North America

0

10

20

30

40

50

60

70

80

2005

2010

2015

2020

2025

2030

2035

2040

Global Product Breakdown

Diesel-Like

Gasoline-Like

30

40

50

60

70

80




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8 Booz & Company

The supply perspective: In additionto demand-side uncertainties, thereare signicant unknowns on thesuppl side. Chief among them isthe emphasis on alternative sourcesof transportation fuels. Biofuelshave garnered a good deal ofinterest in man different forums.However, a number of parties areraising questions about whethergovernment targets for biofuelscan be achieved: Various interestgroups are concerned about thefuels environmental impact, andthe United Nations and the newsmedia have raised worries aboutbiofuels effect on food prices. Spe-cicall at issue are the economicsof emerging technologies and the

ultimate environmental impact ofbiofuels cultivation and use (i.e.,the amount of water consumedand carbon dioxide generated ateach step of the process). Thisincreased scrutin could slowbiofuels penetration of the main-stream, substantiall limiting theiradoption while issues concerningtheir deploment are worked outb the government and the public.

For our analses, we are assumingboth E.U. and U.S. biofuelmandates will be met.

When pairing our demand forecastwith our expectations for additionsto rener capacit, creep, andbiofuels production, we nd thatin the case of moderate economicgrowth, the world will need 3million bpd in distillation capacityb 2025 beond what is alread inthe pipeline (see Exhibit 14). Andif the global econom experiencesstrong growth, there will be a needfor 16 million bpd of additionaldistillation capacit.

However, there is a signicant

regional imbalance, with two areasworth pointing out. On one end,the Middle East is adding morecapacit than is required for localdemand. On the other end, Asiawill fall short.

The actions of the Middle Eastshould not come as a surprise.In fact, oil-rich Middle Eastcountries have made it clear that

these investments are part of theiroverall economic and domesticindustrial plans.

Ver different circumstances willdevelop in Asia, with the regionscapacit becoming signicantlshorter thanks to the sheer size ofthe expected growth in demand. Ina wa, this situation is not uniqueto the rening industr in Asia, asthe region overall struggles withadding the infrastructure requiredto continue supporting itseconomic growth.

We are experiencing a dramaticshift within an inherentl cclicalindustr. We believe the peaks

and valles of the industr will bedetermined b the combined effectof two drivers. The rst one isthe speed at which capacit (bothbiofuel and rening capacit) isadded. The second one is the upsand downs of economic growthin developing economies. Thisis different from the past, whenccles were determined mainlb overbuilds of rening capacit

Exhibit 14Additional Required Distillation Capacity by 20251

1 Assumes E.U. and U.S. biofuels mandates are met.2 Based on typical renery yields


02468

10

0

5

10

15

20

Moderate Growth Scenario

Robust Growth Scenario

Africa Asia NorthAmerica

Europe FSU Midd leEast

LatinAmerica

Total

1.8

6.9

(0.6)(2.4) (0.3)

(2.5) (0.1)

2.9

2.9

13.51.6

(1.2)

0.6

(2.3)

0.8 15.8

Regional Breakdown

(Additional Capacity Required to Supply Local Demand)

RefiningC

apacity(millionbpd)

Global Requirements vs. Expected Capacity

Expected withCurrent Plans

Required

RefiningCapacity1

(millionbpd)

New Capacity

Creep

1730

~13


11/12

Booz & Company 9

against a backdrop of consistent

and predictable demand growth.

However, as demand growth is

now underpinned b developing

economies, it is therefore highl

dependent on their more volatile

economic growth.

Implications

The rening industr is on course

to experience a severe dislocation

as the regional suppl/demand

balances change, affecting global

trading ows and therefore

rening margins. As never before,

the whole industr depends on

demand growth in Asia.

Furthermore, although the outlookfor global demand is positive for

the next 20 ears, there is the

possibilit that rening margins

will drop and never recover; the

potential for demand destruction

and alternative supplies is real. The

future scenario depends on how

different reners and regulators

worldwide react.

Reners will have to consider:

Pulling the plug or delainginvestments on expansion

projects in developed economies

Expanding into Asia if the

want to grow

Adjusting rener conguration

to favor diesel, or at least gain

more exibilit

Finding a material wa to pla

in biofuels

Improving operational excellence

at the plant level to maximize thevalue of their existing assets.

Canceling or delaing investments

in capacit addition in developed

economies is advisable, at least

until the biofuel suppl situation

becomes clearer. In these countries,it is wise to carr forward onlinvestments related to improvingthe competitive advantage ofspecic reneries. Furthermore,there could be an opportunitto drive consolidation in matureeconomies. Some plaers ma wishto reserve some of the signicantcash ows of recent times to leadthe consolidation wave that couldbe required when the industr hitsbottom again. U.S. plaers willbe forced to consider this if themarket moves from short to long,driving margins down and openingopportunities for acquisitions.

On the other hand, as Asia and

emerging economies will plaa large role in the increasingdemand for transportation fuels(and energ more generall) in thefuture, there exists a clear need forreners to have a rml estab-lished presence in these regionsto increase the likelihood of solidreturns. Currentl, local plaers arethe ones capturing most opportu-nities in Asia, to the degree thatlocal price regimes allow them to

be captured. Reners based in thedeveloped world should redoubletheir efforts to participate.

In addition, regardless of thegeograph, when investments aremade in rener capacit, it will bewise to favor diesel over gasolineproduction. At the ver least,reners should aim for increasingoperational exibilit.

Reners must also consider expand-ing their energ portfolio to includebiofuels, as this could give themthe opportunit to benet from theincreased emphasis on this area.In addition, several of the skillsrequired to succeed in biofuels, such

as process engineering, transporta-

tion, optimization, and marketing,

are core downstream competencies.

With these strategic points in

mind, however, it is all too eas to

overlook the fundamental opera-

tional elements that are still thebackbone of a successful rening

sstem, regardless of external cir-

cumstances. There should remain

a deliberate focus on improving

efcienc and reliabilit, taking

the time and effort required to

examine processes to ensure that

the are as lean as possible in order

to maximize prot and minimize

unnecessar expenditures.

On the polic side, regulators facesome interesting dilemmas:

Faced with the threat of

increasing diesel price premiums,

will Europe push back emphasis

on dieselization?

Faced with increasing concerns

about biofuels environmental

friendliness and increasing food

prices, should U.S. and E.U.

regulators reverse course?

Faced with the rest of the worldbeing long in rening capacit, will

China continue to favor the import

of crude over nal products?

Given the impact of regulator

changes in the rener industr, it

is important for reners to monitor

the signposts of impending change,

remain strategicall exible,

diversif portfolios, and be aware

that esterdas planning ma not

suit the world that sits before us.Though the golden age is under

threat, signicant opportunities

still beckon for those willing to

look at the world differentl than

in the past.


12/12

Asia

BeijingHong Kong

SeoulShanghai

TaipeiTokyo

Australia,New Zealand,andSoutheast Asia

Adelaide

AucklandBangkok

BrisbaneCanberraJakarta

Kuala LumpurMelbourne

Sydney

BOOZ & COMPANy WORLDWIDE OFFICES

07/08 Printed in USA

2008 Booz & Company

The most recent list of our ofce addresses and telephone numbers

can be found on our Web site, www.booz.com.

Europe

AmsterdamBerlin

CopenhagenDublin

DsseldorfFrankfurtHelsinki

LondonMadrid

MilanMoscow

MunichOslo

ParisRomeStockholm

StuttgartVienna

WarsawZurich

South America

Buenos AiresRio de Janeiro

SantiagoSo Paulo

Middle East

Abu DhabiBeirut

CairoDubai

Riyadh

North America

Atlanta

ChicagoCleveland

DallasDetroit

Florham Park

HoustonLos Angeles

McLeanMexico City

New York CityParsippany

San Francisco

refining trends part iv tough choices

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