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HUMBERTO VAINIERI, PRESIDENT

Vainieri Consulting, Sarasota, Florida

Interesting times to continue for refiners in 2016

set to spill over into downstream.1 US refiners have indeed benefited from the low
oil prices caused by the large increase in
tight oil production.
However, somewhat of a surprise is the
fact that refiners in other global centers
have also improved their fortunes, making
2015 a good year for the refining industry
across the board. It is now time to shift our
attention to the coming year. As we prepare
to celebrate New Years Eve and look back
on 2015, we will definitely say that this year
brought interesting times for refiners. Will
those interesting times continue in 2016?
The fundamentals. According to BPs
HUMBERTO VAINIERI is president of Vainieri
Consulting, a firm that he established in 2005.
His consulting practice is based on more
than 35 years of industrial experience, which
includes research and development, plant
operations, human resources, acquisitions and
divestitures, and senior executive management
roles in several of the oil sector s most
successful global companies.
Dr. Vainieri has held posts such as senior vice
president of Global Refining at BP, president and
CEO at UOP, and senior vice president of R&D
and Engineering at Yukos. His business travels
have taken him all over the world, including
postings in London, Madrid and Moscow.
In 1999, Dr. Vainieri received the Executive
of the Year award from World Refining
magazine. He was also recognized as an
outstanding alumnus by the Engineering School
of the University of Pittsburgh, Pennsylvania,
in 2003. He currently serves on the boards
of Auterra in Schenectady, New York; Rive
Technology in Princeton, New Jersey; and
Chemrec in Stockholm, Sweden; as well as on
the advisory boards of Near Miss Management,
Maine Pointe, and the University of Pittsburgh
Swanson School of Engineering.
Dr. Vainieri holds BS, MS and PhD degrees
in chemical engineering from the University of
Pittsburgh, as well as an MBA degree from John
Carroll University in Ohio.

A year ago in this publication, John

England and Ashnu Mittal were prescient
in their article titled US shale revolution

Energy Outlook, global demand for energy will continue to grow and increase by
37% by 2035. This translates into average
growth of 1.5%/yr, and more than half of
it will come from oil.
Although the fastest-growing fuel sector will be renewables, it will contribute
only 8% of total energy consumption by
2035. Liquid fuels from oil will remain
the workhorse of meeting the worlds energy needs in 20 years time, and certainly
throughout 2016.

US tight oil production growth. Despite the large drop in oil rig count, which
drifted below 700 for most of 2015 from
more than 1,600 in October 2014, US oil
production has increased significantly and
leveled out only recently, as illustrated in
FIG. 1. In fact, US Energy Information Administration (EIA) figures indicate that
2015 US oil production will average approximately 9.3 MMbpd, exceeding volumes not seen for a very long timeback
in the early 1970s, to be exact.
A lesson has been learned: There is
not a straight-line relationship between
rig counts and oil production. A number of reasons exist for this inequality
namely, there is a delay between when
wells are drilled and when they start
pumping. Also, tight oil producers are
able to hedge production.

Most importantly, however, productivity has increased. Better seismic data,

improvements in fracking fluids and
more intensive deployments of rigs are
all contributing to lower marginal costs,
which are at or below market prices. As
a result, todays low oil prices have not
squeezed out the tight oil producers.
Low oil prices. The weak oil prices of
the last 18 months are mainly the result
of the dramatic growth in tight oil production and of rising output from OPEC
countries, which continue to pump oil at
very high levelsmore than 30 MMbpd.
As a result, short-term US oil stocks are
at their highest levels in 20 years, the days
of crude oil cover are significantly higher
than historical levels, and the markets
continue to be in contango. This scenario
has encouraged stockpiling and kept prices low, in the $40/bbl to $60/bbl range.
Earlier this year, the World Bank projected that oil prices in nominal terms will
not reach the $100/bbl mark again until
2025which, in relative terms, would be
around $80/bbl. Since then, the oil price
scenario has gotten worse:
1. The August devaluation of the
Chinese yuan has made USdollar-priced commodities more
expensive, weighing on the oil
demand outlook for China.
2. Continued concerns about the
overall health of Chinas economy
have caused many economists to
lower their oil price projections for
the coming year.
3. While it is early to quantify the
effect that the Iran nuclear deal
might have on crude oil prices, it is
likely to be bearish.
4. Refining and pipeline projects
planned in the Middle East will
worsen the oversupply situation.
Taking into account all of these events,
Goldman Sachs lowered its forecast in
September for US crude prices to $45/
bbl and Brent to $49.50/bbl. Therefore,
Hydrocarbon Processing|DECEMBER 201529