Porters Five Competitive Forces in the Downstream Industry
Published by : Industrial Automation
Dr Marcio Wagner da Silva analyses the current scenario of the downstream industry and the challenges it presents to the major players.
In 1979 Michel Porter wrote the revolutionary article in Harvard Business Review – ‘How Competitive Forces Shapes Strategy’ – introducing the concept of the five competitive forces. Through an analysis of these forces in a determined business the players can analyse their competitive positioning at the same time that is possible to define some strategies to achieve better competitive positioning.
According to the Michel Porter article, there are five competitive forces that define the competitive positioning of a player in a determined market:
1. The supplier power – How is the bargaining power of the supplier in relation to the consumers?
2. The customer power – How is the flexibility and alternatives of the customer in relation to your services and products?
3. Substitute products and services – There are substitute products or services capable of easily substitute the products/services currently offered?
4. The threat of new entrants – How difficult is it for a new entrant to join in the market?
5. Rivalry between the existing players – How aggressively the players are competing in the market?
Figure 1 presents the relation of the five competitive forces for a determined market.
According to the positioning of a player in relation to each one of the competitive forces, the players can define their strategies to improve the competitive positioning reinforcing the point considered the weakness.
The current scenario presents great challenges to the crude oil refining industry, what with the volatility of raw material prices, pressure from society to reduce environmental impacts and increasingly lower refining margins. The drastic reduction of sulphur content in the final product leads refiners to look for alternatives to reduce the sulphur content in the intermediate streams. In such a business environment it is possible to imagine how the Porter’s competitive forces to the downstream industry.
Porter’s competitive forces in the downstream industry
Considering what is shown in Figure 1, it is possible to analyse the five competitive forces listed by Michael Porter to the downstream industry.
i. Bargaining power of suppliers – The main supplier of the downstream industry is the crude oil supplier. Normally the refiners have low bargaining power because the crude oil price is defined by several factors, but refiners relying on flexible refining hardware have the advantage of the capabilities to process heavier and discounted crudes that present lower costs. In other words, adequate bottom barrel conversion capacity can offer a significant competitive advantage to the refiners. Over the years some companies have developed integrated operations to minimise the exposition of the variation of crude oil prices. Regarding the other suppliers, normally the refiners are considered great customers and these suppliers tend to present low bargaining power, in normal conditions, they do not represent a great threat.
ii. Bargaining power of buyers – The customers have low bargaining power in the downstream industry since it is difficult to find energy sources in quantity and quality capable to substitute the crude oil derivatives; of course, in markets with large number of players, the competition can offer alternatives to the customers, but it’s difficult to achieve great price variation in a commodity market. Despite this, the public opinion over the downstream industry is increasingly important and has the potential to change the energy market, e.g., the growing trend of energy transition efforts demanded by the society, requiring a transition to low carbon energy sources.
iii. Threat of new entrants – Due to the high capital requirements, it’s hard to face the new entrant threat in the downstream industry, but this threat can always be considered mainly due to government interventions.
iv. Rivalry among existing competitors – This is a great concern in the downstream industry – the greater number of players and the standardisation of the products create great pressure over the refining margins. To overcome this, the refiners have to look at improving their operational efficiency, but it’s normally quickly followed by the other players, reducing the profitability in the market.
v. Threat of substitute products and services – Nowadays, this is the great threat to the players of the downstream industry. As the reduction of the consumer market in the last few years became common, news about countries that intend to reduce or ban the production of vehicles powered by fossil fuels in the middle term, mainly in the European market. Despite the recent forecasts, the transportation fuel demand is still the main revenue driver to the downstream industry, as presented in Figure 2, based on data from the Wood Mackenzie Company.
According to Figure 2 (Relation of Petrochemical Feedstock/Transportation Fuels Feedstock and Installed Capacity – Wood Mackenzie, 2019), the transportation fuel demand represents close to five times the demand by petrochemicals as well as a focus on transportation fuels of the current refining hardware, considering the data from 2019. Despite these data, there is observed a trend of stabilisation in transportation fuel demand close to 2030 followed by a growing market of petrochemicals. Still, according to Wood Mackenzie data presented in Figure 3, relevant growth in the petrochemicals participation in the global oil demand is expected.
The improvement in fuel efficiency and growing market of electric vehicles tends to decline the participation of transportation fuels in the global crude oil demand. Figure 4 presents the growth of electric vehicles in the last years in the global market (Global EVs Outlook 2020, IEA).
In addition to the electrification of the automobile, new technologies like additive manufacturing (3D printing) have the potential to produce great impact on the transportation demands, leading to even more impact over the transportation fuels demand. The growing trend of vehicle sharing services like Uber has great potential to destroy demand in the downstream industry. Another threat is the growing participation of renewable raw material in the crude oil refineries, in response to the society requirement for energy transition efforts. In the last few months, some important players have announced the conversion of some crude oil refineries into renewable processing plants while other players and technology developers have announced the production of diesel and jet fuel applying co-processing of crude oil and renewable raw materials like HVGO in some refineries around the world.
Facing these challenges, search for alternatives that ensure survival and sustainability of the refining industry became constant by refiners and technology developers. Due to these similarities, better integration between refining and petrochemical production processes appears as an attractive alternative. Despite these advantages, it is important to take into account that the integration between refining and petrochemical assets increase the complexity, require capital spending, and affect the interdependency of refineries and petrochemical plants. These facts need to be deeply studied and analysed case by case.
Petrochemical and refining integration as a diversification strategy
The main focus of the closer integration between refining and petrochemical industries is to promote and seize the synergies and existing opportunities between both the downstream sectors to generate value to the whole crude oil production chain. Table 1 presents the main characteristics of the refining and petrochemical industry and the synergies potential.
As mentioned earlier, the petrochemical industry has been growing at considerably higher rates when compared with the transportation fuels market in the last few years, which additionally, augurs well for the future and is environmentally less aggressive to crude oil derivatives. The technological bases of the refining and petrochemical industries are similar, which lead to possibilities of synergies capable of reducing operational costs and adding value to derivatives produced in the refineries. Figure 5 presents a block diagram that shows some integration possibilities between refining processes and the petrochemical industry.
Process streams considered with low added value to refiners like fuel gas (C2) are attractive raw materials to the petrochemical industry, as well as streams considered residual to petrochemical industries (butanes, pyrolysis gasoline and heavy aromatics) can be applied to refiners to produce high quality transportation fuels. This can help the refining industry meet the environmental and quality regulations to derivatives.
The integration potential and the synergy among the processes rely on the refining scheme adopted by the refinery and the consumer market. Process units such as Fluid Catalytic Cracking (FCC) and Catalytic Reforming can be optimised to produce petrochemical intermediates to the detriment of streams that will be incorporated into the fuels pool. In the case of FCC, installation of units dedicated to produce petrochemical intermediates, called petrochemical FCC, aim to reduce to the minimum the generation of streams to produce transportation fuels; however, the capital investment is high once the severity of the process requires the use of material with noblest metallurgical characteristics.
High competitive and flexible refining hardware – petrochemicals and residue upgrading synergy
As mentioned earlier, the residue upgrading units are capable of improving the quality of bottom barrel streams. The main advantage of the integration between residue upgrading and petrochemical units like steam cracking is the higher availability of feeds with better crackability characteristics.
Bottom barrel streams tends to concentrate aromatics and polyaromatics compounds that present uneconomical performance in steam cracking units due the high yield of fuel oil that presents low added value; furthermore, the aromatics tends to suffer condensation reaction in the steam cracking furnaces, leading to high rates of coke deposition that reduces the operation lifecycle and raises the operating costs. In this case deep conversion units like hydrocracking can offer higher operational flexibility.
Once cracking potential is better to paraffinic molecules, and the hydrocracking technologies can improve the H/C in the molecules converting low added value bottom streams like vacuum gasoil to high quality naphtha, kerosene and diesel, the synergy between hydrocracking and steam cracking units, for example, can improve the yield of petrochemical intermediates in the refining hardware. An example of highly integrated refining configuration relying on hydrocracking is presented in Figure 6 (UOP, 2019).
Taking into account the recent trend of reduction in transportation fuels demand followed by the growth of petrochemicals market makes the presence of hydrocracking units in the refining hardware raise the availability of high quality intermediate streams capable to be converted into petrochemicals, an attractive way to maximise the value addition to processed crude oil in the refining hardware. The synergy between carbon rejection and hydrogen addition technologies like FCC and hydrocracking units can offer an attractive alternative, sometimes the hydrocracking and FCC technologies are faced by competitor technologies in the refining hardware due to the similarities of feed streams that are processed in these units. In some refining schemes, the mild hydrocracking units can be applied as a pre-treatment step to FCC units, especially to bottom barrel streams with high metals content that are severe poison to FCC catalysts. Furthermore, the mild hydrocracking process can reduce the residual carbon to FCC feed, raising the performance of FCC units and improving the yield of light products like naphtha, LPG, and olefins.
Considering the great flexibility of deep hydrocracking technologies that are capable of converting feed stream varying from gas oils to residue, an attractive alternative to improve the bottom barrel conversion capacity is to process in the hydrocracking units the uncracked residue in FCC unit aiming to improve the yield of high added value derivatives in the refining hardware, mainly middle distillates like diesel and kerosene.
The current scenario of the downstream industry imposes great challenges to the players, achieving a better competitive positioning in a highly competitive commodity market is a hard task. As presented above, an attractive alternative is the production diversification through the integration between refining and petrochemical assets, changing the focus from the transportation fuels to petrochemicals catering for the growing demand for petrochemicals. It is important to consider that integrated processes lead to a higher operational complexity; however, given current and middle term scenarios to the refining industry, a better integration between refining and petrochemical processes is fundamental to the economic sustainability of the downstream industry.
Refiners relying on flexible refining hardware can enjoy competitive advantage in the current scenario once they are capable of adding value to low cost crude oils, and at the same time are capable of maximising, in an easier way, petrochemicals. It is important taking into account that the operational efficiency is a different strategy – the operational efficiency is normally quickly responded to by the competitors while the strategy defines differentiation, and a higher bottom barrel conversion capacity and closer integration with petrochemical assets can be a competitive differential. At this point it’s possible to ask that the refiners can also reply to this strategy, again taking into account the high capital investments and long term to adapt a refining hardware, few players will be able to follow the leaders in the short term.
Gary, J H; Handwerk, G E – Petroleum Refining – Technology and Economics. 4th ed. Marcel Dekker., 2001.
Porter, M E – The Five Competitive Forces that Shape Strategy. Harvard Business Review, 1979.
Refinery-Petrochemical Integration (Downstream SME Knowledge Share). Wood Mackenzie Presentation, 2019.
Vu, T; Ritchie, J – Naphtha Complex Optimisation for Petrochemical Production, UOP Company, 2019.
Dr Marcio Wagner da Silva is Process Engineer and Project Manager focusing on the Crude Oil Refining Industry based in São José dos Campos, Brazil. A Bachelor in Chemical Engineering from University of Maringa (UEM), Brazil and PhD in Chemical Engineering from University of Campinas (UNICAMP), Brazil, Dr Wagner has extensive experience in research, design and construction to oil and gas industry including developing and coordinating projects to operational improvements and debottlenecking to bottom barrel units. Dr Marcio Wagner also has an MBA in Project Management from Federal University of Rio de Janeiro (UFRJ) and is certified in Business from Getulio Vargas Foundation (FGV).