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Driving innovation and enterprise resilience

March 27, 2020 Duncan Micklem, Executive Vice President Marketing

If there’s anything positive to take away from the COVID-19 situation, it’s that it forces innovation and enterprise resilience.

None of us need more doom and gloom … but this is the reality. We have to face this head on. Whilst the global energy mix is transitioning, global citizens require energy to maintain their daily lives and sustain the global economy. Everyone’s lives are different and we can all be more efficient with what we consume, but there’s no escaping that life needs to go on. So reading around the COVID-19 subject, it seems there are four options to address the situation:

  1. Do nothing. Let’s just say I don’t agree with this.
  2. Vaccination immunity. Medical experts reckon that approximately 60% of populations would need to be immunized to avoid further outbreaks – create a “herd immunity”. If all the testing goes smoothly and the vaccine(s) are successful, then large-scale production can start. Experts say achieving this at the scale needed is c.12-18 months away.
  3. Natural immunity. Country strategies about social distancing seem to balance infection rate and overwhelming hospitals against the consequences of economic collapse. This might buy time to increase medical capacity but unfortunately the virus has the potential to rise up again. The timing of achieving natural “herd immunity” amongst the population is uncertain – but think years not months. Some experts estimate c.2+ years.
  4. Behavior shift. We can permanently change our day-to-day behavior that allows us to keep transmission rates low and isolation of patients to try to stay on top of any outbreaks.

Will the world unify around one strategy? Let’s see. If it’s anything like achieving consensus on climate change, my guess is it’ll be a combination of the above. Whatever is the path, it’s going to take some time to work the uncertainty out of the system.

$20/bbl crude prices is a big hit on upstream oil producer revenues. Let’s see how long Russia and China can stomach the pain. All the while downstream refiners are supposed to profit with cheaper feedstocks … but not when people now aren’t consuming as much fuel in their cars and planes aren’t flying as much. So how does the oil refining industry take this in its stride and keep delivering? How can the refiners out there survive?

Refiners could mop up as much cheap feedstock into storage as possible? Maybe, if product demand is still strong. But it seems it’ll be at least a year before it will return. They could wait and see – this has worked in the past but not now, as the timing is so uncertain. The industry has an ageing workforce already. Leaders have been grappling with the challenge of knowledge transfer to the younger generation. In many cases it is our older and higher risk employees who have key skills, knowledge and decades of experience for enabling and empowering the younger generation.

Must do’s for refiners right now are:

  • Get capital structure efficient. Easier said than done as re-evaluating capital structure/leverage and free cash flow expectations may require revisiting covenants with lenders.
  • Get disciplined on the cash conversion cycle; keep an eagle eye on payables and receivables. Optimize inventory holding and processing. This is a tricky one for refiners as it is typically achieved with expert benchmarking, guided functional operational reviews and advanced analytical modelling.
  • Convert more feedstock to gasoline, diesel and chemical feedstock and less into jet fuel/kerosene. The jet fuel/kerosene crack is under heavy pressure; can you make less of it and for the minimum amount that is produced, what to do with it? Is storage a viable option given the length of time this situation could persist for?
  • Maximum cost efficiency is a given. Even in unusual operating envelopes, energy and yield optimization go hand in hand.
  • Reconsider your business model. Do you need all the capabilities and have everything done in-house and on-premise? Maybe you’ve been “on the fence” on the Cloud with perceived cybersecurity concerns. Now is the time to collaborate and scale via the Cloud, getting better at lower cost with flexible terms. Just as the co-pilot of an aircraft is to help at times of intense activity, the KBC Co-Pilot Program is there to remotely support facilities with our expertise, insight and technology, supplementing in-house capabilities and resources.

KBC routinely addresses these kinds of inventory holding, processing and optimization challenges with expertise and operationalized real-time digital twins; paying for itself 10 times over.

It's a no-brainer.

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