Last Sunday’s column introduced several of what I labelled as nuts and bolts matters related to oil refining, of which I believe an informed Guyanese public needs to be aware. My intent then and now is to raise public awareness of issues pertinent to an educated discussion on the maximization of benefits for the country, following its first entry into the world of oil and gas production and export. As repeatedly indicated in these columns, there is no shortcut to arriving at being an informed member of the public. And this is perhaps even more necessary, as worldwide the petroleum industry has attracted more than its fair share of charlatans and hustlers, all ready and eager to put their private commercial interests above those of any nation.
Last week’s presentation had focused on the refining stage of the industry. This stage was treated in the presentation, as a more-or-less distinct phase of the industry structure. That approach was adopted in order to facilitate my discussion of the nuts and bolts matters. However, in sophisticated industry formations, oil refining is typically portrayed from a more integrated perspective. Rather than emphasize a two-step or two-stage industry profile, the industry is portrayed as embodying a fully interlinked value chain, where activities are linked practically, contractually, and physically either within a single firm or across several firms. Thus, in Guyana that linkage would run from crude oil output in the Stabroek block or wherever else, right through to the marketing and distribution of various petroleum products derived from the crude oil.
Most persons find that a good metaphor for envisioning this integrated perspective is to consider the industry as a stream composed of three areas of flow. One is the upstream flow, at the source of the stream. This upstream flow, as it is termed in the industry, is where exploration for, and the production of, crude oil is concentrated. The stream terminates in the downstream flow. Here, crude oil is typically refined to produce an enormous range of value added petroleum-based products. In between the upstream and downstream flow, there is the midstream. Here the shipping and pipelines required to ensure the physical product flows are primarily concentrated.
At this juncture, two observations are warranted. First, worldwide, petroleum is the chief chemical feedstock. Therefore the numbers and varieties of petroleum-based products are huge. To cater for such varied end products, blending of petroleum with other products plays a principal role in oil refining. It is for this reason that, in last week’s column, I had indicated some analysts would add blending to the three types of oil refinery stages, which I had mentioned (separation, conversion, and treating).
Oil services operations
As industry analysts are wont to say, the principal task of a refinery is to “physically, thermally and chemically” separate crude oil into finished products. For this they need to be closely tied to oil services companies. As a rule, such oil services companies operate across all phases of the industry’s operations. Traditionally, however, there have been two broad specialist areas where oil services operate: drilling and other oilfield services. As the name suggests drilling companies specialize in drilling and extracting the crude oil. They have their own specialist staff, specialized equipment, and technology, which they employ. Drilling companies tend to operate as contractors to the oil companies who own the crude oil. Oilfield services companies assist the drilling companies in the provision of a number of specialist services.
Further, it is also usual for oil services companies “to assist the drilling companies in setting up oil and gas wells [and] to manufacture, repair and maintain the equipment used in oil extraction and transport”. Such services are quite varied, including engineering, fluid hauling, geological services, seismic testing, directional services, non-destructive testing, transport and maintenance and so on.
Although oil services companies work across the entire industry’s operations, they make the most money in circumstances where a strong booming demand for crude is driving exploration and production. Refineries however do better at the other end of the market. That is, when strong demand is driving value-added petroleum-based products, benefiting when the price of crude trends lower.
In this regard another nuts and bolts term for which readers need to be familiar, is the crack spread in oil refineries. This spread constitutes the difference between what the refinery pays for crude oil and the price at which it can sell the petroleum products this crude oil yields. It is similar to the term ‘gross margin’, which is employed in finance as an indicator of profitability. To maximize the crack spread a refinery has two broad options. One of these is to have lower costs for its crude oil input. And, the other, is to produce a profitable mix of saleable refined products with the right prices, given the demand for these value added petroleum-based products.
While oil refineries perform downstream functions, many of the companies who own refineries combine such functions with midstream and also upstream production. This is what is meant by integrated production in the oil and gas sector. Big transnational corporations, like ExxonMobil (the principal firm in Guyana’s oil sector), embrace all phases of the petroleum industry from exploration to the final sale of petroleum products.
Today’s discussion wraps-up, for the time being, my discussion of the nuts and bolts matters. Others will be introduced as I proceed to tackle the specific issue of a Guyana oil refinery. As I have repeatedly observed, there is no short-cut towards this goal; even though there are many peddlers who would like readers to take their judgement at face value and not reason with you, hoping that ignorance and misdirection will triumph to their private gain. There is the venerable adage: ‘buyers beware’.
Next week I start an appraisal of the view that a local oil refinery would be the pinnacle development, based on the economic doctrine: Guyana should produce, all it can produce.