As the world transitions to a lower carbon future, Ferenc Horváth, MOL Group, Hungary, presents a case for transformational change in refining.
As the global economy is in transition, the pace of change in the European energy industry has been faster than ever. Oil and gas companies are facing the same challenge – how to prosper in a lower carbon future, characterised by constant technological innovation and ever-shifting customer habits. In fact, the relatively lengthy period of high oil prices and the changing viewpoints of more environmentally aware consumers, have resulted in significant investments in new, alternative – and cleaner – technologies. Several of these technologies are already becoming competitive with traditional fossil fuels. The pace and effect of technology development, combined with increasingly rigorous air pollution legislation and consumer mobility preferences, is increasing the need for fundamental changes on the demand side of current fossil-based products, hitting mostly traditional motor fuels.
The story is not any different for MOL Group, the Hungarian-based international oil and gas company. The company’s mid-term view is that its position is likely to be threatened by decreasing regional demand and increasing import pressure to Europe, which could translate into lower spreads and margins. The magnitude of these factors may be hard to predict definitively, but it is likely to have a substantial effect on the company by 2030.
The group’s downstream division operates four refineries and two petrochemicals plants and consists of different business activities that are part of an integrated value chain. It serves the market through a region-wide logistics, wholesale and retail network in Central and Eastern Europe (CEE). The retail network consists of nearly 2000 service stations in 10 countries, predominantly located in the supply radius of the refineries, enabling the maximising of synergies across refining, marketing and retail.
As with other oil and gas companies, MOL Group's downstream division grew based on intensified fuel consumption, but as the external environment is expected to fundamentally change, reliance on an asset-based operating model will not ensure success in the long-term. In November 2016, a long-term transformation strategy was announced, ‘MOL Group 2030 – Enter Tomorrow,’ to leverage earlier successes and assets in order to build on the opportunities provided by a significantly changing environment.
Within the overarching strategy, the company intends to maintain its upstream-downstream business model, which is likely to deliver strong returns. However, it also plans to diversify from motor fuels by growing its petrochemical business and transforming its retail into a broader service provider.
MOL has set up three primary focus areas, which aim to transform the core downstream business: ensuring high efficiency and flexibility of assets; transformation away from hydrocarbon-based motor fuels by raising the yield of high-value non-fuel products and growing the petrochemical business; as well as a number of ‘soft actions’ focusing on greater employee engagement and customer satisfaction. These areas are part of Downstream 2022, the recently adopted programme, which serves as a roadmap for implementing the 2030 strategy. In financial terms, results of the programme are already being anticipated, with an expected uplift in EBITDA of US$500 million by 2022, of which efficiency and transformational projects will account for US$360 million and the rise of petrochemical products account for a further US$140 million.
In a highly competitive environment with declining fuel demand, the efficiency and flexibility of assets and processes will be the differentiating factors between players who successfully stay in the market and those who shut down their production capacity.
Driving asset efficiency
In refining, efficiency provides the basis of value creation. The main drivers of efficiency are energy costs, reliability and availability of downstream assets. Key areas have already been identified for improvement in relation to scope and targets, along with the specific actions needed. The company is aiming to reach the first quartile in cost efficiency and move up to the second quartile in energy efficiency, which would ultimately boost profitability.
A target has also been set to optimise the maintenance costs of downstream assets and increase refining operational availability to 96% by 2018 and 96.4% by 2021, respectively. The company plans to invest in improving steam cracker capacity, reliability and efficiency, with targeted cracker operational availability of 97% by 2021.
Good asset availability will always support improvement in asset utilisation and energy efficiency, so these key performance indicators (KPIs) beyond 2021 will be closely monitored, with new indicators continuously put in place to track performance.
The company also plans to continue on the path of crude basket diversification, moving from the current 25% of alternative seaborne crude intake to above 33% and aiming for 50+ crude grades in its portfolio until 2021. As part of this strategy, it is developing a new crude blending system at its Duna (Danube) refinery, which will begin operations in 2018, and is installing new oil tanks in Bratislava, Slovakia, by 2020.
Diversification from motor fuel to petrochemicals
The company plans to enhance flexibility in refining by reducing the current motor fuel yield from 70%+ to 50% by 2030. While this will be done mostly through increasing feedstock transfer to chemicals (to as much as 3 million tpy), the yield of high-value non-motor fuel products (e.g., aromatics, LPG, jet fuel, base oils and waxes) will also be raised.
While hydrocarbons can be replaced in transportation, there is currently no such option for replacement in the chemical industry. With stable and long-lasting growth in demand for petrochemical products and plastic solutions expected across Europe and globally, petrochemical feedstocks provide an excellent diversification opportunity from production and sales of fossil-based motor fuels. MOL plans to invest approximately US$4.5 billion in petrochemicals by 2030. The long-term petrochemical target is to move away from the commodity segment, turning to higher value-added products and entering markets accommodating specialty petrochemical products – organically and inorganically – independently and with partners.
The propylene value chain has been highlighted as the most attractive option for diversification. Obtained, along with ethylene, by cracking naphtha, polypropylene is one of the most versatile polymers with applications, both as a plastic and as a fibre, in virtually all of the plastics end-use markets.
With a review of propylene derivative markets, polypropylene (PP), polyol and other propylene derivatives have been selected by the company as an organic growth option for further investigation based on attractiveness, technology fit and synergy potential. These derivatives represent 80% of the total propylene derivative market.
Polyol (belonging to the polyurethanes value chain) is the second biggest and dynamically growing derivative of propylene, with an expected annual demand growth rate of over 3% in the CEE by 2025. Used in the automotive, packaging, construction, furniture and bedding industries, polyols offer attractive investment options. Last year, the company secured all technological licenses for a 200 000 tpy polyol project, the largest single investment until 2021.
Another expansion opportunity is in styrene production. With styrene used in electronics, packaging, insulation and household goods, Western Europe and CEE are large net importers. Growth opportunities in the butadiene market can also be seen. In order to capture benefits of the forward integration into derivatives in this value chain, a synthetic rubber plant (SSBR) via a joint venture (JV) with JSR will be launched this year.
Along with the downstream transformation investments into petrochemicals over the next five years, the company will increase the complexity and flexibility of its current units through both short-term operational de-bottlenecking and longer-term strategic developments. One example is the revamping the fluid catalytic cracking (FCC) unit at the Duna refinery to increase production of propylene, with start-up anticipated by 2021.
The need for culture change
The transformation which has been discussed so far requires not only considerable operational changes, but also a significant mind shift in terms of how companies operate. When it comes to implementing the transformational strategies to pursue operational efficiency and retain profitability, people become even more important. It is essential to source talent with not only the right set of professional skills and leadership competencies, but the right attitude to make targets achievable. Greater customer focus is also essential.
Over the next decade and a half, the more traditional oil and gas business will remain profitable. However, it is expected that there will be a gradual decline in the demand for fossil-based fuel products. As such, it is important not to simply follow old strategies. With its 2030 strategy underway, MOL has committed to ambitious efficiency programmes, as well as major long-term investments, in preparation to take advantage of new opportunities. These opportunities will be realised through the production of higher value-added products and through entering markets that demand specialty petrochemical products. All in all, the future remains uncertain, but through the combination of existing strengths, gradual transformation and the right corporate culture, companies will be able to adapt to market changes and thrive.
Figure 1. The Duna refinery in Százhalombatta, Hungary.
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/19062018/transition-to-thrive/