I hope that everyone is staying healthy and safe!
As I mentioned in a previous blog, these are times of uncertainty and so much has happened in the last two weeks.

• Pandemic has peaked in some places while others are still experiencing an increase.
• Economic activity is slowly opening up in some areas while others will still stay with essential services activity to minimize the spread
• Slowdown of overall economic activity continues to impact individuals, businesses, states, and countries. Unemployment levels in the US have reached a point not seen in recent times.
• On April 20, crude oil (WTI) futures contracts for May dived below zero-dollar for the first time in history, and at one point in the day it was as low as -40$/barrel, a drop of $58 within a single day. WTI disconnected its relationship with product prices and other benchmarks (like Brent). This was the result of contract expiry approaching with no ability to either hold positions or to take physical delivery. Crude oil prices are in the $20/barrel range now and are an indication of the depth of demand destruction even with announced production cuts by OPEC+.
• Road to recovery remains uncertain and there appears to be a consensus among pundits and economists that it will take much longer than the earlier hope for a quick recovery.
• With an unprecedented reduction in activity due to lockdowns, this is the first-time people observed the impact of these activities on the environment (particularly in large urban centers) and nature. This is likely to have a significant impact on the younger population about the influence they may exert on businesses and policymakers in the future. This will likely put more pressure on hydrocarbon fuels and therefore on refineries.
• There is a silver lining for the petrochemical industry as the larger population and policymakers recognize the contributions this industry makes towards health, hygiene, safety, and quality of life. This provides an opening and opportunity for the petrochemical industry to build on the goodwill and keep focusing on circularity and sustainability.

When will things go back to normal? I am sure that this question must have crossed your mind. I believe in human ingenuity and adaptability, the disruption caused by this pandemic has exposed some of the fallacies and at the same time forced us to think differently. I will try to limit my observations to the impacts on our industry and to the new normal. Some of the elements of the new normal include:

• Lowest cost of production in combination with high reliability
• Sustaining operation with minimum staff at the plant site
  • Relying on automation, digital and smart technologies. Safety, security, and reliability will play an important role.
  • Remote monitoring, diagnostics, inspection, etc.
• Smaller, inefficient, and less sophisticated assets will be under pressure to shutdown
• Adapting processes and technologies for maintenance and construction to minimize site staffing for safe and efficient execution
• Low crude oil prices result in a competitive cost of production for liquid feed crackers in Asia and Europe as compared to ethane crackers in North America and the Middle East (see Figure 1 below)
• Post-pandemic demand growth will be driven by Asia (including China) and other emerging economies
• Experience gap will likely increase due to voluntary retirements and layoffs as a result of the cost reduction effort
• Strategic focus and leadership style will evolve to cater to the new normal

 
How well we prepare for and adapt to the new normal will determine our success. Please feel free to send me a message if you would like to discuss or brainstorm ideas and share your thoughts. 

​Figure 1: Cost of Production for Different Feedstock (Refer to previous blog – Sep 30, 2018)

 I hope that everyone is staying healthy and safe while coping with many changes impacting our working and social lives.

These are the times of uncertainty and at times seem like lacking hopefulness. We are faced with an unprecedented slowdown of economic activity due to the COVID-19 pandemic and that impacted the overall demand for petrochemicals, as it is tied directly to the GDP.

Oil prices plunged due to a supply glut created by a price war between Saudi Arabia and Russia, in parallel with an unprecedented demand slowdown because of the pandemic. Even though OPEC+ has agreed to significant production cuts, these may not be enough to deal with the demand impact. In the near term, crude prices will likely remain low combined with high volatility.

The petrochemical industry is seeing similar impacts, with exception of demand related to health, hygiene, and the food/grocery industry (and maybe to some extent for digital technologies-related activity). Even with demand increase in niche segments, overall demand has slowed down significantly. At this point there is uncertainty about the timing for the start on the road to recovery and how long will it take to reach the pre-pandemic levels. The pundits and economists have a large divergence in their estimates, starting from 3 months to 2 plus years (with some estimates of recovery very similar to the trend seen after the last financial crisis). I will leave these discussions to experts (pandemic experts and institutions to determine the timing for opening the economic activity and to economists/policymakers to find a path to help the individuals to participate in a productive recovery). These factors are not under our direct control.

Our focus and energy, as individuals and companies, need to be channeled toward the things and issues that are under our control. It goes without saying that we all need to be aware of the developments around factors beyond our direct control to make adjustments to our plans on a needed basis.

We must bring the financial discipline to conserve and manage cash in times of uncertainty. This translates to savings in operating expenses as well as managing capital spending in the right places to position the companies to come out stronger on the other end. Each idea and item on the savings list need to consider the direct and indirect impact on core business and success factors, given the competitive landscape in a demand-constrained environment. I have talked about the turn-down operation or shutdown of some of the facilities in the previous blog. There is tremendous potential for savings in the decisions related to the operation of these facilities. Keeping the needs of employees, customers, suppliers, and other stakeholders; during these hard times; in the overall decision-making process pays out many folds over. I am available to discuss (pro bono phone consultation) to brainstorm ideas that can help this analysis. Please feel free to send me a message to reach me.

​As I write this blog, let me start by saying that hope everyone is staying safe and healthy!
With double whammy of demand destruction (impact of pandemic and efforts to slow the spread) and oil supply/price war, the ethylene cost of production curve has turned-on-its-head.

• European naphtha cracking is lowest cost of production
• Even in US, naphtha or butane cracking is seeing lower cost of production as compared to ethane cracking

These trends may not represent long-term expectations but highlight some of the obvious issues around short-term volatility and feed flexibility.
The main issue, crackers are facing and may continue to face, relates to demand destruction and the decisions to run at turn-down or shutdown some of the facilities.
There is no silver bullet to address the challenges that each of the owners and operators face. There are specific knobs that each facility or company-wide operations can explore to minimize cost of production. At Apex PetroConsultants, we are available to discuss (pro bono phone consultation) with owners/operators about approaches and ideas for minimizing their cost of production.