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November 28, 2018

For refiners, hour to reinvent is nigh

Investments in petrochemicals can provide some offset to the inevitable long-term loss in transportation fuel demand

Hour to reinvent the business model


The revenue model of refineries is typically based on optimum capacity utilisation and maximum production of fuels such as petrol and diesel.


Profitability is determined mainly by gross refining margins (GRMs), which, in turn, is a function of the price of crude oil and petroleum products, and the demand-supply scenario.


Petroleum product ‘spreads’ were healthy in the past because of strong demand from the transportation sector in both developed and developing economies.


However, recent volatility in crude oil prices has meant spreads haven’t increased apace with crude oil prices, leading to shrinking GRMs.


Moreover, regulatory pressure and technological advancements - such as the increasing use of electric vehicles – have led to greater use-case efficiencies that have had a bearing on demand growth for transportation fuels.


Refiners are therefore trying to reinvent themselves through diversification and revenue-stream expansion by producing more value-added products such as basic petrochemicals.