The 2020 Solomon Fuels Refinery Study Will Share Learnings of How Top Refineries Fared Amid the COVID-19, Low Oil Price Environment
Over the last few months, many of us have witnessed events that we never expected to see in our lifetime. As a result of COVID-19, the economies of almost every country worldwide have experienced a significant shock, many airlines are facing a very uncertain future, and familiar names in our shopping malls are facing bankruptcy. Our industry is no exception to this turmoil.
While the circumstances surrounding the events today may be unique, a simple search of the internet will uncover multiple historical examples of geopolitical uncertainty and extended periods of low refinery margins.
One of our clients recently told us how one of these events in the late 1990s served as the catalyst for a significant transformation program at their refinery. The refinery manager at that time was called to a shareholder meeting to explain the performance of his refinery. Rather than blame the world for his troubles he promised the shareholders that he would never again allow external events to put his refinery at risk. By using Solomon data to identify gaps and monitor performance, this refinery is one of the most reliable and profitable refineries in the world today.
When we look back at 2020, there will be a wide range of performance among refineries, and some will fare much better than others in each region. How can you ensure that your refinery will perform optimally under geopolitical and economic duress?
World’s Best Refineries Relentlessly Focus on Reliability, Minimizing Non-Turnaround Downtime
Each Solomon cycle, we review the performance of a small group of refineries that we refer to as the “World’s Best Refineries” peer group and report. These 12 refineries are selected to have top half performance in operational availability, maintenance cost, energy efficiency, and return on investment. We are confident that many of the refineries that were selected in 2018 will remain in the “World’s Best Refineries” peer group in 2020.
World’s Best Refineries have a relentless focus on reliability and absolutely minimizing non-turnaround downtime, and they are proactive with maintenance and prevent failures before they occur. This helps to minimize maintenance cost and allows these refineries to operate with fewer staff and contactors on-site.
History has proven that times of crisis drive innovative thinking. World’s Best Refineries have studied the lessons from the past and understand how to be competitive when margins are depressed. They understand that the control of cost is extremely important. However, they do not stop spending in the areas that matter the most to their long-term growth. Our benchmarking studies provide the granularity to help our clients understand the allocation of spending on the things that are critical to sustain good performance. That is more than just how much you spend but more specifically where you spend it.
The situation we are currently experiencing today may be short lived, but it could become the new normal for the foreseeable future. Transportation fuel demand is on the long-term decline and the transition to alternative energy may be accelerated as a result. Understanding how refineries react during these unprecedented times may prove to be an unparalleled learning event.
World’s Best Refineries Don’t React to Short-Term Cost Pressures
Refinery competitiveness has never been more important than it is in the current environment. At Solomon, we measure competitiveness using the Cost or Transportation Fuels (CTF). (Figure 1) When crude prices fall, control of operating cost becomes much more important. Our World’s Best Refineries peer group performs better relative to other refineries when crude prices are lower because they understand the fundamentals of operating in a low margin environment. They don’t react to short term cost pressures because they already have good cost control and a high reliability culture in place.
There is a significant benefit to the discipline of collecting and analyzing quality data to maintain a competitive edge. Many of the refineries in our world’s best peer group are long-term Solomon participants. Refineries that pause these efforts to reduce costs in the short-term will be on the back foot for years to come.
Solomon Taking Extra Steps to Analyze How Best Refineries Navigated COVID-19 Pandemic
In Solomon, we are actively looking for ways in which we can analyze the impact of the COVID-19 pandemic on our industry. We already have the ability to trend your data and strip out many of the impacts that result from a depressed margin environment. Much of this analysis is already included in our results presentations.
- We provide both standard and custom peer groups that will allow you to compare your performance with other refineries that have experienced the same economic pressures as you.
- We normalize the environmental impacts on gross margin by converting it to a relative gross margin. The relative index divides the site gross margin by the average of the other refineries in the regional supply corridor.
- Many of our cost and efficiency metrics such as the Energy Intensity Index™ account for utilization, so the impact of reduced rates will already be considered.
- We normalize inflation on maintenance cost by converting it to a relative maintenance efficiency index. The relative index divides a refinery’s maintenance cost by the average of other refineries in the study area.
For 2020, we will take a further step and use all the resources at our disposal to capture additional insights to better understand how the best refineries have reacted during these difficult times. We will capture additional information that will give you a more granular look into the performance impacts that were a result of the challenging times experienced throughout the year.
Just like the client we mentioned at the start of this article, the insights you gain through the 2020 Solomon Fuels Refinery Study could be the catalyst that will lead you to become a World’s Best Refinery of the future.
Contact us today to learn more about our benchmarking products and data-driven decision support solutions.