How to make robust investments in today’s volatile, capital-constrained market

For instance, there is a wide range of options for them to consider when evaluating what project they should select, what kit they should install and what configuration changes they should make. Moreover, the economics of each option may ultimately prove to differ enormously, depending on how the mid- to long-term market dynamics play out.

So what steps should a refiner take to make a robust investment? At Shell Global Solutions, we typically deliver more than 10 investment planning studies per year for refineries and petrochemical plants around the world. The first step, according to our methodology, is to have a view of the future market. What crude price should you use in your calculations? Which products will be in highest demand? Will the product specifications in your markets and environmental legislation tighten further?

For instance, in 2020 for Europe and in 2025 for the rest of the world, the sulphur specifications for bunker marine fuels will shift from 3.5 to 0.5%. The potential consequences of this are that demand for high-sulphur fuel oil may collapse, which will have an immediate impact on its price. Clearly, market trends and events such as this must be considered in any investment scenario.

The impact on different businesses will vary according to, for example, their asset base and the markets they serve. Consequently, the solution will be different too. In that respect, it is particularly important to establish the so-called margin drivers of a site. Why are we doing business? Which products, units and supply and trading options generate the most value?

The client’s overarching strategic considerations and objectives are built into this analysis. Once there is an agreed set of premises and we have defined the sensitivities to be tested and the desired flexibility, we work with them to develop a list of all the investment options that could help the customer to achieve their objectives: a task that calls for considerable experience and industry insights.

"It is particularly important to establish the so-called margin drivers of a site. Why are we doing business? Which products, units and supply and trading options generate the most value?"

Let us take a simple example in which a refiner has determined that it must respond to market changes by increasing middle distillates capacity. It could build a new unit, revamp an existing unit, upgrade to a higher-activity desulphurisation catalyst or improve the refinery’s hydrocarbon management in another way. But which option would be the best fit for that specific refinery?

Screening those options requires detailed technical and economic evaluations. Capital cost estimates are made using an extensive projects database. Operating costs are estimated using operating experience and best-in-class benchmarks. A scenario-based approach is applied so that the selected option is robust under a wide range of economic circumstances. This is then taken for development into a firm investment proposal: one that aligns with the client’s long-term vision and overarching strategic objectives.

If a business were to launch a capital project without such an in-depth evaluation of what each option involves, substantial value could be at risk. A seemingly value adding project could potentially turn into a poor investment decision, especially if integration opportunities are overlooked during the early phases. A key consideration is whether all the existing units will be able to cope with the streams coming from the new assets. For instance, can an existing gas oil hydrotreater deal with some light coker gas oil or is a new unit required?

Likewise, additional hydrogen is likely to be required, but how much and from where will it come? Can you expand the hydrogen plant or implement hydrogen recovery, or should you contract a hydrogen supplier? There are usually many different options, but the economics can vary substantially.

Similarly, although most revamps do not significantly increase the demand on utilities, it is important to confirm that the existing utilities system has sufficient capacity. For example, there have been cases in which owners have discovered at a very late stage that the existing boilers could not cope with the extra demand. Consequently, the owners had to either dial down their operations or add an additional boiler at considerable expense.

In recent years, many refiners have had to reduce the sulphur levels in their diesel from 50 to 10 ppm. This often requires a revamp of the hydrodesulphurisation unit involving the replacement of the existing reactor internals with state-of-the-art reactor internals for improved catalyst utilisation and using a more active catalyst. That, however, is only part of the story.

The refiner must also look carefully at the impact on the rest of the refinery. For instance, the higher concentration of hydrogen sulphide in the reactor section means that the wash-water facilities may need upgrading and that the amine treating and sulphur recovery units need checking and possibly revamping. It is vital that all these changes are also included in the evaluations.

Substantial value can be won or lost during front-end development. No matter what your business objectives are, there is likely to be a wide range of potential responses and it is important to consider them through a range of operational and strategic lenses.


More in Industry Focus