Changing the way we work in the Refining Industry
The North American Refining business exists in a competitive world market, and now faces an increasing emphasis by consumers on the environmental footprint of not only the manufacturing process, but also the product itself. This will impact demand with some refiners facing the pressure of additional imports and others with the opportunity to supply an increasing demand for exports. In addition, refineries and terminals must exceed the ever growing expectations and demands of their local communities and investors, coupled with the reality of low to negative demand growth.
How is the industry is reacting to this market? My hypothesis is that the very best don’t get to be the very best by spending more capital than others, nor do they necessarily have the best locations, but rather they have a workforce that purposefully works to continuously improve the way they work, each and every day.
This doesn’t happen by itself. It can be learned and rather than a one-time project to achieve a particular goal — which often backslides once the focus is removed — perhaps a better approach is to develop a continuous improvement culture within your organization. Characteristics include real-time measurement of critical processes, recognition of the value of local knowledge and expertise at all levels in the company, and management that acknowledges and celebrates successes and the people that made it happen.
Historically, there was a very low threat of substitution in the refining system. The transportation and heating products were vastly superior to anything else based on their high energy density and relative ease of transportation. Whether driven by consumer preference or government mandate, the advent of biofuels, high mileage vehicles, and electric vehicles has impacted and will continue to impact the demand for hydrocarbon based transportation fuels in North America, raising the very real threat of substitution.
Large upfront capital costs, a very high ratio of fixed to variable costs, and ever changing opportunites in crude oil qualities and availabilities, create very difficult decisions in local markets that are forecast to resume their downward trend over the next several years. This places a premium on those companies that are able to achieve significant flexibility while maintaining a comparative advantage.
The cost of less than flawless operations continue to increase. Whether it shows up as an environmental event with an impact outside of the fenceline, or as an injury to an employee or contractor, or as a lost opportunity/sub-optimal operation, the expectations are increasing such that those with the best performance will be successful and the others may find it increasingly difficult to survive.
It is no longer sufficient to mount a one-time project to achieve a certain objective. History has shown that performance gains achieved often deteriorate with time if the underlying root causes are not recognized and resolved, resulting in an inability to “keep up with the competition”.
With rare exceptions, it is difficult to develop flawless operations solely by investing capital. The financial returns relative to risk are also sufficiently high to offset the large capital investment to create a competitive advantage in market, with low-to-no demand growth.
It’s just not enough for a refiner to target becoming “as good as” or to chase after the leaders in our industry. We must become “better than” to overcome these challenges to successfully compete for market share and investment capital, relative to other global opportunities.
The longer-term opportunity is changing how we work. There have been reductions in capital spending and increased cost cutting, but there has been little substantive effort on transforming work to be sustainably leaner, with increased efficiency and productivity, into the future. The successful refining company understands the advantages of a continuous improvement mentality and purposefully creates a culture that recognizes the expertise within that company and the value of engaging all employees.
Historically many refineries have looked toward low operating costs as a path to gain competitive advantage and higher financial returns because operating costs are easily measured, generally seen as controllable, and therefore more easily influenced by the company.
Typically the two largest components of cash operating costs are energy and people. Many tools exist to measure energy consumption and efficiency, but most are retrospective, informing the refinery how well they did last month. While this is certainly important information, the best energy tools tend to be real-time and include healthy teamwork between the technical group and operations, with clear ownership by operations.
One of the refineries that I was priviliged to work in was consistently 1Q in energy consumption and often among the most energy efficient in the country. It was an older refinery spread over two sites with very typical equipment and typical sources of fuel. What made the difference were the metrics within the plant information system for each area of the refinery and how operations reported on them each and every day. Rather than delegating to the technical group, operations took ownership and engaged the technical group to help them achieve the desired results. Management’s role was to support the effort and recognize the result achieved and the people that made it happen.
The technologies available have enabled refiners to reduce headcount, but the most successful at that are not only receptive to new ways of doing business, but are also adept at eliminating some of the no longer useful and likely well entrenched existing processes. Typically some of these no longer needed processes may not be evident to senior management, but the employees engaged in the work are well aware as to what is needed and what is not necessary.
Often refiners choose to reduce maintenance costs in an effort to achieve low operating costs. While making the maintenance process (identification, planning, scheduling, working) more productive is always good, often the largest driver of maintenance costs is the work itself and especially the work caused by unplanned outages.
It seems the best refiners set a goal of eliminating unplanned outages, which initially may increase maintenance costs as the preventative programs are developed and implemented, which over time, should contribute towards reducing uplanned outages leading to a reduction in future maintenances costs.
It is also important to include operations in the reliability program by engaging the operators, who are there 24-7, to understand the operating envelopes of the equipment and noticing changes in the equipment such as unusual noises, increased vibration, change in oil usage or temperature, etc and notifying the reliability team. As one plant said, “we like to fix it while it is small”, which often is a modest fraction of the unplanned cost with none of the reduction in throughput.
There are many things that go into reliability, including clear process parameters, shift-to-shift consistency, clarity of workflow and decision making, rigorous loss reporting and root cause analysis
In addition to eventually reducing operating cost, the more significant factor in improving reliability is the increase in annual throughput. The financial gains from higher rates often dwarf the reduction in operating cost and are achieved at a fraction of the capital to add new capacity.
In my experience and there seems to be general agreement on this as I visit with other refiners, there seems to be a strong correlation between high reliability, excellent safety, and an absence of environmental events. Either you have a culture of flawless operations and it shows up in all of these areas or you do not.
As noted above, refiners typically have a very strong focus on operating costs, but may not have the same emphasis on gross margin which is a lost opportunity, considering that the ability to positively influence gross margin can be substantial.
All refiners measure gross margin, but not all divide gross margin into price effect which might be considered less controllable and volume effect which is considered more controllable. Volume would include the impact of higher throughput, lower cost crude and feedstocks, higher valued products, and improved yields or what some call “molecule management”. The best have created metrics which gauge the actual gross margin obtained relative to the appropriate margins for their refinery and track performance over time.
Clearly it is possible to improve the volume impact on gross margin with capital. The “better than” refineries have developed a culture in which they improve the volume impact on gross margin with little or no capital. While the impact may not be as large as that achieved with a large amount of capital, refiners with that workforce culture gain competitive advantage by spending less capital and achieving a significant portion of the benefits.
Sometimes this involves challenging the status quo. I can recall an example in which the refinery economics group set the target for a distillate hydrotreater at the limit they had been given some years ago which was reported as “the permit limit”. A recent transfer to the organization took it upon himself to investigate this limit which the rest of the organization accepted as fact and determined that it was not a throughput limit, but rather a limit on the emissions from the fired heater, which enabled the technical and operations group to immediately begin to debottleneck the unit and eventually increased its’ throughput by about 15% which was worth about $20mm per year for no capital invested.
While some may suggest this is an obvious example, that would never happen in their facility, in another example, working with a well known major oil company, their planning group wondered why their crude slate looked different than a nearby competitor, which led them to discover an old constraint placed in their LP several years ago for a reason no one could remember which had the unintended consequence of restricting certain types of crudes. When removed, their gross margin increased by $10mm per month for zero investment.
I’ve often had the good fortune to participate in monthly performance reviews in which a young engineer or more experienced operator describe a project they developed based on their local knowledge and made happen within the organization. When asked how much capital they spent to achieve their results, the sense of accomplishment they have when they say “none” seems to be as important to them in that moment as their salary. That is a culture worth developing.
Another opportunity for changing the way you work resides in project execution. Despite all of the reductions in capital budgets, there is still a need for sustaining capital programs for critical maintenance and focused margin improvement projects.
A culture that initially looks for low or no-capital solutions before jumping to a new capital solution can create significant competitive advantage for their refinery. Ensuring the capital solution selected is the best one should include the active participation of those with the best local knowledge which requires culture of cooperation and an ego that can accept the best solutions no matter where they come from.
Leaning out the execution process to reduce cycle time and standardization of design can also yield a double benefit of production and cost savings. A more rigorous, value-based approach to project selection can also help companies choose the right projects (and avoid the wrong ones).
Even small plant projects primarily focused on safety, improved operability and higher reliability cross many internal disciplines (field operations, process engineering, facilities engineering, procurement) that report to different leadership with different processes. As much as they work in teams, these different disciplines can sometimes be siloed, which negatively impacts communication, planning, scope changes and collaboration. These issues can create substantial engineering rework , scope creep, schedule loss, and sometimes even a failure to deliver the expected benefits.
Leadership and Culture
In that most refiners have similar hardware and the vast majority of the process technology is licensed by third parties and therefore available to everyone, one might argue that the culture of your workforce and the systems by which you operate and manage your businesses are really the differentiators between “good enough” and “better than”.
The most successful refining companies make culture a priority and communicate their values and philosophies as clearly as possible in order to attract potential employees with similar views. They also seek out people with varied backgrounds and experiences as they understand the importance and value of creativity and innovation and the role diverse experience plays.
In my experience, there is usually sufficient expertise within the company, but for various reasons, the company culture is not one that encourages active involvement at all levels and that expertise and experience remain untapped and the employees unengaged.
Certainly there is value in learning from the experiences of others and there is no question that companies that are able to seek out and successfully adopt “best practices” from others will gain a competitive advantage, but consider how much more powerful that is if employees at all levels participated in that practice. That is the value of a healthy culture.
As an illustration of the value of people, over a period of years, I worked with a joint-venture refinery that struggled with low reliability and below market performance which caused the owners to sell their interests in the refinery. Prior to putting it on the market, the partner that operated the refinery made several changes in the refinery leadership and over the next year or two, the throughput of the refinery increased by over 15% and the value of lost opportunity caused by unplanned outages dropped by over $45mm per year. Nothing changed in the hardware, there were no major capital expenditures in this time period, but the new refinery leadership understood the importance of engaging all employees and value of have a strong culture with certain values and that was their priority.
A culture in which employees feel responsible for their area of work and are engaged to apply their expertise is so much more profitable than the alternative in which employees do not have that ownership. This can result in a sense of powerlessness or “who cares” or even fear which may cause employees to be less innovative and just keep their heads down trying not to stand out or create any ripples in the organization.
To enable real change, the successful refineries will find ways to create the right environment for real innovation. This also creates longer-term benefits by getting your people to figure out how to do more with less, grow their skills and increased job satisfaction as employees know they are making a positive difference They will change the way they work by increasing collaboration, reducing cycle time, changing spans of control and creating improved efficiencies.
It is paramount that our industry adopts a culture of increased collaboration, both internal and external, to increase productivity, efficiency and net asset value. Working to create that culture within your organization may be more work and a bit more nebulous than bringing in an outside expert to solve a particular problem, but I would argue the results will be much more sustainable because the positive results achieved and recognized along with the sense of ownership created in your employees will reinforce itself and remain long after the consultant has left.
Evolve Partners Advisory Board Member Bob Kent brings more than 34 years of refining leadership experience to our board. As President of Corpus Christi, Texas-based REK Energy, Bob helps downstream companies worldwide reduce operating cost, improve reliability and increase gross margins.
As Evolve Vice President of Business Development, Jim guides the growth of the business by identifying and pursuing new opportunities to extend the firm’s customer base and ensuring that we maintain a healthy balance of expansion and quality.