By: Matthew V. Veazey

For many in the downstream oil and gas industry, 2017 was a year of growth, solid financial returns, and even some surprises. What can we expect to see in 2018? To answer that question, a panel of keen industry observers have offered their perspectives on how and where the industry’s landscape might change this year. Check out their predictions below.

More Digitalization/IoT Opportunities

Clearly, after such a good year in 2017, it may be challenging for US refiners to repeat such favorable results next year. In Deloitte’s oil and gas executive survey, conducted in the summer of 2017, only a small minority of downstream executives saw further increases in refined product exports in 2018.

Rising crude oil prices, stemming from the continuation of the OPEC/non-OPEC production restraint agreements, could squeeze refinery margins, as there is often a lag between crude oil prices and refined product prices. And then, when product prices do respond, that could somewhat slow demand growth. In preparation for a longer-term business environment in which demand efficiency and alternatives to petroleum-based fuels seem to be becoming more prominent, refiners should be expected to focus on efficiency and cost reduction, increasingly taking advantage of the new possibilities opened up by digitalization and Internet of Things (IoT) connectivity. –Andrew Slaughter, Executive Director – Deloitte’s Center for Energy Studies

‘Future-Proofing’ European Refineries

European refiners have been finalizing their strategies for the implementation of new bunker fuel specifications in 2020. A number of new capital projects have been launched, and further new projects are under consideration even though they won’t all be completed by 2020. Coking and residue hydrocracking complexes will help to future-proof European refiners by further reducing low-value high sulphur residue production and boosting distillate yields. While absolute demand for transport fuels will plateau in the early 2020s and then start to decline after 2030, the additional supply of distillates, which remain significantly short in the European market, will keep European refining output aligned with regional demand for at least the next decade. –Stephen George, Chief Economist, KBC Advanced Technologies Ltd.

Western Canada Pipeline Bottlenecks?

A trend going forward is the future of pipelines serving Canada’s Oil Sands. By mid-2018, we should know more definitively if TransMountain and Keystone XL are on track. If not, there could be a bottleneck in Western Canada that will impact certain North American refiners.

To complement Mexico-related trends, strong investment in storage and transport capacity for fuel is expected since current pipeline and storage capacity is both saturated and de-facto controlled by PEMEX.

We’ll also be watching preparations for the International Maritime Organization (IMO) bunker fuel specs that will be in place in 2020. This will be a major disruption.

Also, new digital solutions are emerging – ranging from more automation in refineries to enhancing the customer experience at retail.

With the growth in Permian crude oil production, we’ll see potential pipeline bottlenecks.

We should also see continued advancements in electric vehicles and autonomous vehicle technology, but this is a longer-term trend beyond 2020. –Clint Follette, Partner and Managing Director, Boston Consulting Group

A Petchems Breather?

For 2018 we will see more of the same trends, especially in the U.S. as the wave of new ethylene plants come on-line. ExxonMobil and ChevronPhillips (facilities in Baytown, Texas) will be up 1H 2018 while we still wait for Formosa and Sasol as well as Shintech. Natural gas liquids (NGL) production will continue to grow per the U.S. Energy Information Administration (EIA) Short-Term Energy Outlook, thus providing continued support for these projects.

With the next wave of investment for ethylene plants being contemplated, the world’s demand response will be monitored closely. With many U.S. derivatives destined for overseas markets, will they slowly or quickly drive marginal players out? Expected higher oil prices in 2018 will also support additional NGL exports out of the U.S. to mitigate the ethylene plants relying on naphtha-based feedstocks. The higher that crude goes the more NGL exports we may see to Europe and Northeast Asia.

In closing, we may see the global petrochemical industry taking a breather at the end of 2018 to assess how this new capacity will sort itself out. If the impacts are too negative, then rationalization may occur with delays to new U.S. investments. –Larry Schwartz, Principal, LS Consulting and former NGL fundamentals advisor with BP

A Downstream Talent Gap

A small part of the boost in opportunities would be with the amount of Distributed Power Generation coming on-line which is feeding directly from midstream assets and power plants being developed close to recovery points has created some hybrid midstream/downstream types of roles specifically in engineering and operations and maintenance. It is not only distributed power assets, but also new power plants and an increasing amount of natural gas combined cycle plants that we are seeing be developed at a rapid rate. There is some debate in the market about the influence that the depressed pricing markets for upstream had slowed down production allowing for the midstream market to “catch-up” in their efforts to build assets to serve the upstream market has few new wells had gone on-line over the past few years.

We are also starting to see an attrition rate similar to what upstream has been seeing over the last 10 years. This has created the beginning of a talent gap between the first & third levels and the third & fifth levels of staff/leadership in many hierarchies. Recruitment is starting to show similar ratios for needs versus qualified candidates that we saw in the latter part of the last decade and beginning of this one for upstream. We also believe the continued growth of the U.S. LNG market is going to accelerate new employment opportunities tremendously in the coming year. –Christopher Melillo, Managing Partner, Practice Leader, Energy Practice, Kaye/Bassman International Corp.

NAFTA Modernization

One of the largest changes in 2018 will be the implementation of comprehensive tax reform. A dramatic cut in the corporate tax rate will help increase investment and bolster U.S. manufacturing, ensuring America continues to be the leader in the production and export of refined products.

Petrochemical manufacturers expect the shale boom to continue, with increased production, as well as the development of new facilities in areas such as Appalachia. Other priorities in 2018 include the modernization of the North American Free Trade Agreement (NAFTA) to establish North American energy security, as well as TSCA implementation and renewed efforts to reform or repeal the Renewable Fuel Standard. –Michael Frohlich, Manager, Communications, American Fuel & Petrochemical Manufacturers

Peaking LNG Supply And Challenged Consumption

Over 2018/2019 we expect somewhat of a reversal (from 2017). Supply growth will peak, whereas we see some challenges on the consumption side. Emerging market Asia looks very healthy, but Latin America and MENA will likely seem some declines in demand, due to rising domestic production, an increase in piped gas and competition from other fuels in the power sector. That should tip the market into surplus and drive down spot prices. This links to most of our other key themes for the next 12 to 24 months. 

One is the emergence of Europe as the global gas sink – it’s the only market that’s large, flexible and liquid enough to soak up the glut, but that’ll need a more competitive LNG price because the demand isn’t really there. We expect European and Asian prices to stay closely bounded, with shipping costs emerging as a key driver of regional price differentials. U.S. hub prices will help provide a floor.

Another theme for 2018/2019 is production shut-ins triggered by spot price weakness. This really only applies to the U.S, potentially also some coalbed methane in Australia. The rest of the global supply is highly price-inelastic because the bulk is contracted and projects are fully integrated, so marginal production costs are very low. 

The last one is the return of final investment decisions (FIDs) on liquefaction projects. Market conditions are not the easiest for sellers, but contract prices should get a lift from oil; also, company balance sheets are looking healthier than they have done for a while. There’s a good pipeline of LNG projects that are pre-FID and we expect to see a number of those committed to next year. –Emma Richards, Senior Oil & Gas Analyst, BMI Research

More M&A Among EPC Firms

For 2018, we anticipate continued activity through mergers and acquisitions, particularly within the engineering, procurement, and construction (EPC) space to help manage costs and consolidate organizations’ capabilities in their go-to-market strategies. Much-needed pipeline and import infrastructure will also continue to be focus areas in the coming year. Infrastructure to support growing natural gas demand in regions like Mexico or moving increasing supply from the U.S., for example, are essential for market growth.

Overall, the United States’ emerging role as a major LNG supplier is slated to shape the global LNG market over the next year and beyond. Optimism about increasing U.S. LNG supply is being driven by low production costs and a profound shift in contracting practices that place the advantage in buyers’ hands and challenges LNG’s long-standing overseas contracts. The expectation that spot LNG is expected to increase will require the development of new global gas markets, advancing LNG processing technology and innovation in project structuring. –Deepa Poduval, Senior Managing Director and Oil & Gas industry leader, Black & Veatch



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