Energy Facility Maintenance: Balancing Short-Term Benefits and Long-Term Risks
Opportunities and Challenges
Downstream oil companies that are benefiting today from the temporary improvement in margins are likely to face increasing headwinds in the medium- to long-term. While margins in the downstream sector are strong today, the outlook for the future is less clear.
Continued improvements in energy efficiency and the increased use of alternative sources could act to limit demand for oil and gas over the long-term. In addition, prices are set to rise in some Asian countries that previously regulated fuel prices, notably India and Indonesia, and that, too, could suppress demand. On the other hand, the move from coal to gas will increase demand over time for clean burning gas.
The shifting and often unpredictable reality of supply and demand is not new to the oil and gas industry, and the industry has proven to be quite resilient in balancing different factors with differing time frames.
For downstream oil companies in the Middle East, maintaining maintenance and safety commitments can help ensure they are able to take full advantage of today’s opportunities while maintaining their competitive advantages in the face of tomorrow’s challenges.
A Complex Calculus
An ongoing challenge for refineries and petrochemical facilities is how to best align capital expenditure (CapEx) spending, including maintenance budgets, with production levels – that is, optimizing CapEx and maintenance in light of the market today, and expectations about where the market is headed.
When margins and demand are strong, taking a plant offline for maintenance means missing out on the opportunity to earn sizeable profits. And when margins and demand are weak, any monies spent on maintenance could temporarily reduce whatever profits the facility may still be earning, or worsen any losses it’s incurring.
While the circumstances are quite different, the implications often are similar: the time and costs associated with maintenance can negatively affect short-term profits.
Nonetheless, it’s critical when setting Capex budgets that senior management recognizes that maintaining a commitment to maintenance and safety helps create resilience in an uncertain market environment, and minimizes the potential for major losses.
Potentially Significant Consequences
In June, 2000, operators attempted to isolate a leaking condensate line between an NGL plant and a refinery. The failed pipe had corroded – something the inspection and maintenance program had not detected.
Efforts to isolate the line failed and an explosion occurred. Three crude units were damaged and two reformers were destroyed. Moreover, five people were killed and another 50 injured. The explosion cost USD 380 million at the time – about USD 600 million today.
While other factors contributed to this explosion – the refinery did not own the condensate line so there was some confusion about the responsibilities for inspecting and maintaining it – this disaster nonetheless shows how the failure to properly inspect and maintain even one part of a complex industrial facility can have significant consequences.
Structured Hazard Assessments Are Critical
Maintenance expenses should be treated as a fixed cost; a scheduled shut-down to inspect, clean and re-furbish a refinery, for example, should cost essentially the same regardless of market conditions.
Time will tell if the situation today represents the “new normal,” or is simply a “mini-cycle” within a global “super-cycle”. In the meantime, downstream oil companies in the Middle East should consider basing decisions about adjusting maintenance schedules on structured risk analyses that monetize the risks, and resist the allure of options where the short-term benefits have a high probability of being overshadowed by long-term risks.
A version of this article originally appeared in the April edition of ADNOC Bulletin.