RAND Report Released

This newly issued (28 August, 2003) document reports the results of discussions with representatives of refining firms, technologies, and services providers, research institutions, and other organizations on current and future trends in the U.S. refining industry. Discussants were generally optimistic about the future of the industry but were concerned about the effects of environmental regulations. They recommended that the Department of Energy assume a more prominent policy role on refining and fuels issues.

Following is a breakout of the chapters and a summary of their content:

Chapter One: Introduction: A Critical Infrastructure

• Petroleum Products in the U.S. Economy
• Change and Challenges in Refining
• A Critical Infrastructure
• About the Study
• Organization of the Report

Chapter Two: The Refining Industry and Petroleum Products Markets

• Industry Segments and Business Models
• Economic Hardship and Restructuring
• Is the Downstream Enjoying an Economic Recovery?
• Product Slate
• Higher-Performance Fuels
• Regionalization of Products Markets
• Future Demand
• Imports

Chapter Three: Refinery Operations and Technologies

• Current Operations Trends
• Current Trends in Technologies
• Longer-Term Trends in Technologies and Operations
• The Environment for Technology Innovation
• Human Capital

Chapter Four: Regulatory and Financial Environment

• Return on Investment
• Capital Constraints
• Regulatory Flexibility
• Regulatory Uncertainty
• Implications for Future Product Supplies
• Industry Views of Policy and Regulation

Chapter Five: The Refining Industry in a New Era: Key Findings and Policy Issues

• Key Findings
• Policy Issues of Importance

Chapter 3 is of specific interest to the Inspectioneering community. This chapter presents key trends in refinery processes and technologies highlighted in the RAND discussions, including maintenance and reliability. The important roles of technologies like risk based inspection and fitness for service are discussed. Their importance grows as process facilities age. It also addresses trends in refinery operations.

According to the industry leaders with whom RAND spoke, some of the most important changes at U.S. refineries in the past decade and looking to the future concern not the processing itself but how refineries are operated and managed.

The chapter closes with a discussion of industry leaders’ views on the status and trends in refining technology R&D and the availability of human capital.

Oil refiners expect fuel supplies and prices will remain volatile around the United States in the next few years, as refineries work to churn out fuels at near capacity levels in response to rising demand for petroleum products, according to the study.

Most refiners expect demand for petroleum products to grow over the next two decades at the brisk rates seen in the 1990s and as projected by the federal government’s Energy Information Administration, the RAND report says.

RAND also found that refiners question their industry’s ability to keep up. To this end, many have called for greater regulatory flexibility. But “a few refiners are contemplating the potential for a significant easing of demand,” the study says, perhaps as soon as 2010-2012.

These issues are among those discussed by RAND researchers D.J. Peterson and Sergej Mahnovski in their in-depth analysis of the U.S. oil refining industry, which is based upon wide-ranging discussions with 72 officials from 40 refining industry organizations. While quotes are not directly attributed a listing of discussants can be found in the appendix.

The report was prepared for the U.S. Department of Energy’s National Energy Technology Laboratory to help federal officials understand issues facing the domestic oil refining business over the next decade, and how federal programs and policies may impact the industry.

The RAND researchers found a generally optimistic business outlook among oil refining executives, a contrast to the generally pessimistic outlook during much of the 1990s when the industry underwent an unprecedented period of corporate restructuring and downsizing. “After many years of turmoil within the industry, most refining executives appear to have a very upbeat attitude about their own operations,” Peterson said. “Refineries today are leaner operations, and executives feel prepared to respond positively regardless of what direction the market goes in the future. They have a ‘can-do’ attitude.”

The industry shakeout has left just 58 companies operating refineries, a dramatic consolidation from the 189 refining firms 22 years ago. The remaining plants now operate at 92 percent of their capacity, up from 78 percent in 1985.

The decline in unused manufacturing capacity and other efficiencies allowed the industry in 2001 to report the highest profit margins seen by the Energy Information Administration since it started collecting the information in 1979.

The reduction of spare capacity has helped drive up prices at the pump and leaves the market vulnerable to shortages caused by a plant breakdown or other unpredictable events. Industry leaders appear to have accepted the situation, seeing no economic logic in straining for more capacity.

“I think the industry has learned that it’s okay to fall short on product,” said an industry observer. “There is no reward being long on product or production capacity.” Added another: “Every investment a refiner makes is stranded in his eyes...you win by doing nothing.”

The report is titled New Forces at Work in Refining: Industry Views of Critical Business and Operations Trends. A printed copy (ISBN: 0-8330-3436-7) can be ordered online by visiting the website www.rand.org or call toll-free 877-584-8642.