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Pedro Caruso: Full Potential Refining in Developed Economies

How refiners can overcome compressed margins and eventually reap the benefits of the industry's structural shift.


Pedro Caruso: Full Potential Refining in Developed Economies

Oil refiners face challenging times ahead amid rising demand, more stringent regulations and growing capacity. Pedro Caruso, a partner in the Oil & Gas practice, offers a structured plan that can help refiners overcome compressed margins and eventually reap the benefits of the industry's structural shift.

Read the Bain Brief: Full Potential Oil Refining in a Challenging Environment

Read the transcript below.

PEDRO CARUSO: Refineries are entering a period of compressed margins, after lower crude prices have finally fully translated into lower product prices, ending the nice one-to-two years of high margins that the industry enjoyed.

As we look ahead, things are actually challenging, particularly if you're in a refinery in a developed economy. Peak demand is on the horizon. Many people expect it in the next decade. The most optimistic players expect it a bit later. But most people are talking about peak demand in the US and in Western Europe.

To make things worse, regulation will continue to get more stringent, both on fuel quality and emissions. So it's a tough time for refiners on that end.

And finally, [there's what you could call] the "killer app"—capacity is going to continue to go up, driven by developing economies and the Middle East.

So when you put all this together, the outlook is just not positive in the short- and even into the longer-term. So what do you do?

Well, the playbook is actually a very interesting one. You have to work on four areas. You have to get market access. You have to work on operational excellence and optimize your portfolio. And then you have to build enablers that will actually allow you to do all those other things in a systematic way.

Let me double-click on a few of those. Let's talk about market access. And let's say that you are a US Gulf Coast refiner. And you've been enjoying for these last few years the ability to export your products to Mexico, to the Caribbean and nearby places; the closest places to you.

What happens when demand in the US peaks and the Venezuelans and the Mexican refiners are actually running at full capacity, and their assets should be able to support [their deals]? Are you going to be locked out of those markets? What do you do today to make sure that you have access that is not a one-time thing, but is actually permanent, so that when demand peaks and refinery capacity in other places actually runs as it could, you're not left out? That's market access.

What about operational excellence? Well, the industry has been really, really good at managing the cents per gallon, rather than the dollars per barrel, as the upfront costs have gone. So how do you take an industry that's been very good at managing cost and efficiency to the next level?

It comes down to two things: First, you have to put operational management systems in place. And these are systems that allow you to systematically improve what you do, so that you make continuous improvement part of how you run your operations at the next level. This is not the typical old continuous improvement cycle. This is one that's very systematic, very well done, across refineries, in a very rigorous way.

And to enable that, now finally we have the analytical tools to capture all the data that we've been gathering over the last decades. We finally have the ability to process it and to get insights from it, so that you can take that reliability on that pump from 98% to 99.9%; you can take that gasoline yield an extra 1% in the summer months, and so on, so that you can actually get that advantage and get that capability to improve it all the time. And whoever does it first will actually reap the benefits from it in a disproportionate way.

As I look forward, the typical industry insider reaction is to say that margins will come back. They always do. We're in a cyclical industry. My response to that is that this case is different. In this time, we're facing peak demand. And when we hit peak demand, then we're going to have enduringly excess capacity, and margins will just not come back. We're in a structural shift. And the old playbooks will just not work.

Read the Bain Brief: Full Potential Oil Refining in a Challenging Environment


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