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The oil price downturn: an opportunity for new technology?

Published on February 29, 2016

At Imtex we often get asked the question, “How will the current oil price impact your company?” and “Are you concerned?” The short answer is initially, yes, but ultimately, no.

The current status of world oil prices is creating consternation in any industry that is in some way connected to the supply chain. That’s pretty much everything, including traders, equipment suppliers, downstream processing, commodities, transportation, energy and consumer products. Many questions are being asked from the time oil first dropped below $60 to its recent fall to below the $30 per barrel mark (both WTI and Brent spot trades in mid-January).

Everyone is searching for ‘the reason’ or a crystal ball based on a handful of fundamental factors. In reality, it is an extremely complicated and dynamic picture with many aspects simultaneously predictable, unpredictable and unforeseen and so it should be for the one commodity that arguably defines our global community in the 21st century. Overall the reduction in oil and associated energy prices should be a good thing for anyone downstream of production, but it’s not always that simple.

The petrochemical industry itself has a very complex and highly integrated nature, both technically and commercially. It takes advantage of multiple feedstock options, including natural gas, and other intermediate sources which are arguably just as influential as oil. These used to be tightly linked to fluctuations in oil price but that is no longer the case. The future of commodity prices is largely decoupled compared to previous trends, and market dynamics are changing as we become increasingly globalized. Profitability in the petrochemical industry for individual plants will vary widely and will ultimately be affected by feedstock and product prices (spread), operational cost, associated energy cost and feedstock utilization(margins).

Current winners and losers

The current situation should be playing into the hands of the downstream companies and consumers. Some companies are vertically integrated in which case there may be less capital available as they struggle with the costs of extraction and exploration, but even these companies tend to partition the various businesses sufficiently to enable smart business decisions.

The typical applications considered for the deployment of Imtex Membranes’ Permylene™ technology, for olefin/paraffin separation, is more prevalent in the downstream industry. Logic would suggest that with low feedstock prices these companies are riding a wave. However, it is not just feedstock price but also the commodity price and associated margins or spreads (along with operating costs) that underpin profitability.

Many olefin-based facilities also focus on specialty products which further enhance value. This clearly links the industry to the dynamics of the global consumer market, which again is multifaceted and fickle. In practice there are still further regional, political and specific market factors that will influence this and can make a significant difference for plants and operating companies.

Most important for these companies and operating plants are the sources of feedstock being used to produce the various olefins. This has driven a recent resurgence in the interest in on-purpose olefin production, making use of available resources and targeting certain products. The feedstock question then changes the focus to not just being about oil, but the whole pallet of possible feedstocks, adding a further layer of complexity to the discussion.

Generally, if a company is able to take advantage of the current situation and has a healthy balance sheet, then it could be in an ideal position to invest in operational improvements and/or capacity expansions - if the local economics are justified. If a company is struggling at present and is operating under tight margins dictated by the market, and it doesn’t see a justifiable shift in the present situation, its only option to stay in business and be competitive is to improve the efficiency of its operations and reduce operating cost and/or increase feedstock utilization.

This is a mature industry and many companies have already invested in programs to find the quick and easy wins by fine-tuning their existing operations. The next step is to invest in new and advanced technologies that could help to achieve their goals and remain competitive.

The long term view

Companies are more than aware that the $/barrel and other feedstock commodity prices that are discussed on a daily basis are a short term view. In the long term, markets will cycle and the priority will be to remain competitive, especially in a price-taking environment. The market is constantly correcting itself and the view today will unlikely be the view in five years. This plays into the hands of companies that are more strategic in nature with regard to their operations and are able to make good long term decisions, especially around investments that involve extensive development periods (capital projects and technology). This is a fundamental driver behind the development strategies of industry leaders.  Due to the long lead cycles involved with capital investment, companies have to take a long term view that in many cases is for five, ten or more years into the future.

One thing we cannot ignore is the impact of sentiment on timing. A fundamental factor behind both the consumer market and global oil prices is global growth and prosperity. While investment and technology advancement is inevitable, any uncertainty may delay key decisions. This is, however, also the ideal environment for the strategic opportunist.

So what does this mean?

It means that the market dynamics and integrated complexity are such that if the economics for a specific application at one plant decrease, the size of an opportunity for a different application at another plant may increase. So, the plethora of opportunities is expected to be sustainable.

Any company that has developed a game-changing technology, such as Imtex, should be in a great position to make an impact on the industry; it’s just a matter of timing. Technologies have developed significantly over the past 50 years through several severe economic cycles, and will continue to do so. Technology will develop to meet society’s needs. The key factor of timing is somewhat linked to global economic growth and sentiment. If this has reduced enough to limit technological advancement then we have much greater issues to be concerned about.

Imtex is liaising with many companies with a long term strategy who are able to see through the current market uncertainty and recognize the need for advancement to meet the future needs of society and remain competitive.

Are we concerned?  Yes, of course, that’s a natural reaction, but pragmatically this has to be seen as another dip in the cycle and the markets should return to some form of normalcy. Industry leaders are already looking past the current downward cycle in oil prices to future opportunities.

Tagged as: Petrochemical, Permylene, Oil, Imtex, Oil Price, Technology

Imtex Membranes 2596 Dunwin Drive Mississauga, ON, L5L 1J5 Canada