Global Oil Industries Stand at Crossroads
Post-Crisis Landscape Takes Shape This Year
By Kim Tae-gyu
One of the hardest-hit industries by the financial tsunami that swept the global economy was refineries, which saw their bottom lines plunge amid the unprecedented economic slump.
As economies worldwide show clear signs of getting back on track, the once jolted oil-refining segment is improving. Then, will things will be just like before-crisis world? The consensus answers seem to be negative.
First of all, the trend of movement from fossil fuels to renewable energy resources matter in the face of a pair of problems ― depleting oil sources and environmental threats generated by greenhouse gases.
``The consumption of oil decreased last year in the aftermath of the global recession. It is expected to rebound this year but refineries should not expect the golden age of the mid 2000s to revisit them right away,'' a Seoul analyst said.
``In particular, they are required to grapple with strong initiatives toward renewable energy. Otherwise, their viability will substantially decrease. In other words, they are at a crossroads although the economy is getting better.''
SK Securities researcher Baek Young-chan concurs.
``Green energy such as solar or wind power will not replace conventional fossil fuel overnight, whose consumption is projected to increase over the next few decades,'' Baek said.
``But the year-on-year growth rate of oil consumption is tailing off, affected by the wide-ranging efforts toward renewable energy resources. Nobody can deny that fossil fuel will lose steam in the long run and refineries also understand this.''
As the world growingly becomes conscious about carbon footprints, greenhouse gases and the resultant global warming, finding renewable energy sources is on the lips of people more and more frequently.
In this climate, the oil-refining and petrochemical industries cannot have the luxury of turning a deaf ear, since they are regarded as one of main culprits causing such problems.
The broad-based paradigm shift in the energy industry from fossil fuels to renewable energies is expected to weigh on refineries in various ways ranging from short-run profitability to long-term prospects.
``In a few decades, dependency on fossil fuels will start to diminish. Even though green energy is unlikely to take center stage in the immediate future, it will increasingly gain more ground,'' Shin Young Securities analyst Oh Jung-ill said.
``Refineries both at home and abroad are now putting the development of renewable energy on the front burner. They understand that they have to do so to prepare for the post-fossil fuel era.''
Global players including Exxon Mobil and British Petroleum (BP) are spearheading the initiative. BP is passionately seeking for non-oil business.
Things are similar for Korean companies such as business bellwether SK Energy and runner-up GS Caltex.
The former has channeled funds to develop solar energy generation and rechargeable batteries, which are used to efficiently store electricity created via alternative resources.
Early this week, GS Caltex also came up with a blueprint to convert waste into energy using plasma. The Seoul-based outfit said that it would be a cost-efficient as well as eco-friendly alternative to today's incineration processes.
``Using conventional incinerators, we faced various environmental problems such as the production of heavy metals, dioxin and incinerator bottom ash, Using plasma, the amount of toxic materials will be reduced to one tenth,'' GS Caltex Senior Vice President Ryu Ho-il said.
``In addition, we are now working on developing an all-in-one system of generating hydrogen from plasma arcs while processing waste, which will catch on in the up-and-coming hydrogen era.''
GS Caltex has put forth efforts in preparation for the commercialization of hydrogen use, as the firm set up a hydrogen filling station in Seoul back in 2007 ― the first among domestic private companies.
Hydrogen stations are projected to inundate the nation when hydrogen eventually takes the place of conventional fossil fuel in traditional internal combustion engines.
The single most-important variable determining the businesses of refineries is indisputably crude oil prices, which have fluctuated sharply during the past few years in the midst of the economic turbulence.
Prices soared to a record high of around $145 per barrel midway through 2008, but then plummeted to about $40 in early 2009 when the global economy was hit severely by the financial crisis.
Early this year, few experts predicted that oil prices would rise to as high as $85 per barrel in 2010. Back then, it took bravery to project the value would peak at beyond the $100 mark.
But oil prices are already moving in the neighborhood of $85 per barrel and it is now not difficult at all to find those who talk about $100 a barrel.
The state-run Korea National Oil Corp. (KNOC) said this month that international crude has a shot at exceeding the $100 plateau soon thanks to the much faster-than-expected economic recovery.
``Because of the concerns on the double-dip downturn or lackluster crude demand, its price remained by and large weak last year. Plus, expectations on the end of expansionary policies in big economies curbed price hikes,'' KNOC said in a report.
``With the global economy clocking faster recovery during the past two months, however, lots of observers predict that oil prices could top the $100 mark by this summer.''
In the past, high crude prices typically led to high profitability for refineries since in most cases, the price hike mirrored strong demand for the raw material, dubbed ``black gold.''
Refineries could increase prices if the economy was good, as was the case in the mid 2000s, when their gross refining margin amounted to as high as $8 a barrel. In addition, the price hike increased values of their reserves.
The margin dipped to below $1 per barrel during the financial crisis even though it recovered somewhat to approximately $4 during the first quarter of 2010.
However, analysts are concerned that overly high prices could dent the business of refineries in the wake of the economic turmoil ― too expensive price tags may scare away customers, who are now reluctant to open their wallets.
``I think proper crude prices should be somewhere between $80 and $90 a barrel. If they surpass $100, it could be bad news for refineries because that might chill consumer sentiment,'' SK Securities analyst Baek said.