BP 2012 Annual Report Download - page 75

Business review: BP in more depth
Business review: BP in more depth
BP Annual Report and Form 20-F 2012
73
With effect from 1 January 2012, we reported the Refining and Marketing
segment as Downstream, with no changes in the composition of the
segment.
Market commentary
The weakness in the global economy continued in 2012 (see page 12),
creating a challenging demand environment for our downstream
businesses.
In 2012 we saw a significant improvement in refining margins, which
were, on average, over $3 per barrel higher than in 2011, driven mainly
by supply-side issues experienced by the industry throughout 2012.
We track the margin environment by way of a global refining marker
margin. Refining margins are a measure of the difference between the
price a refinery pays for its inputs (crude oil) and the market price of its
products. Although refineries produce a variety of petroleum products,
we track the margin environment by way of a simplified indicator that
reflects the margins achieved on gasoline and diesel only. The refining
marker margin (RMM) is calculated at a regional level using region-specific
marker crudes and product grades that are then weighted by our refining
capacity in the region to an aggregate BP average RMM. The RMM may
not be representative of the margin achieved by BP in any period because
of BP’s particular refinery configurations and crude and product slates.
Many of our competitors adopt a similar approach as it enables simplified
benchmarking on a like-for-like basis. The RMM does not include
estimates of fuel costs or other variable costs.
$ per barrel
Crude marker 2012 2011 2010
Refining marker margin (RMM)
US West Coast Alaska North
Slope (ANS) 17.4 13.6 13.1
US Gulf Coast Mars 16.1 11.9 10.2
US Midwest Light Louisiana
Sweet (LLS) 10.3 7.5 6.0
Northwest Europe Brent 16.1 11.9 10.4
Mediterranean Azeri Light 12.7 9.0 8.8
Singapore Dubai/Tapis blend 15.3 14.6 10.7
BP average RMM 15.0 11.6 10.0
The RMMs for 2012 were higher than 2011 in all the regions that we
operate in. The global BP RMM averaged $15.0/bbl compared with the
2011 RMM of $11.6/bbl. Higher margins were mainly attributable to the
refining capacity gap left by refinery closures on the US east coast and in
Europe, removing nearly 1.8 million barrels per day of refined products
from the market at the peak of the closures. Refining margins tend to
follow a seasonal pattern in which they usually peak in the second quarter
and then decline through the rest of the year. In 2012, however, the peak
occurred in the third quarter as a result of unplanned refinery unit outages
and closures combined with hurricane activity in the US Gulf Coast and
low product inventories. Industry-wide utilization rates were around the
same level as 2011, but significantly lower than the five-year average,
mostly driven by the previously mentioned refinery closures.
These restrictions on supply were partially offset by lower demand for
petroleum products in the OECD. This demand reduction was driven by
low economic growth, increased blending of biofuels and increased car
fleet efficiencies. In addition there have been changes in consumer
behaviour such as a long-term decline in demand for gasoline and growth
in diesel demand in Europe. Nonetheless, higher refining margins were
available in the year due to growth in non-OECD countries’ demand for oil
products, which attracted gasoline and diesel exports from the regions in
which BP operates.
Our refineries, particularly Toledo and Whiting in the US, benefited from
a location advantage as they were able to access discounted crudes.
Throughout 2012, US midcontinent crudes priced off the West Texas
Intermediate (WTI) marker, remained cheaper than waterborne crudes of
a similar quality, such as European Brent and Gulf Coast LLS, due to
increased production from shale oil, combined with bottleneck logistical
capacity constraints in transporting these crudes to the coast. Heavy
Canadian crudes continued to flow into the US as producers ramped up
production and consequently these grades of crude were less expensive
than last year when compared with lighter crudes.
Globally, the impact of Libyan sweet crude returning to the market after
the end of the civil war of 2011 was compounded by the advances in
shale oil production in the US, which reduced the demand-pull of these
crude types from abroad. This made sweet crudes globally less expensive
compared with previous years. OPEC production was also higher than
2011 and reached around 31.5 million barrels per day, on average. This
helped to offset the loss of Iranian oil following an embargo by the US and
Europe and markets generally remained well supplied throughout the year.
Upward pressure on prices, mainly attributable to geopolitical issues such
as unrest in the Middle East (particularly Iran and Syria) and concerns over
the stability of the eurozone were generally offset by a tepid global
economic outlook.
In February 2013 BP updated the RMM methodology and regions to
reflect the changes to our US portfolio after the refinery divestments and
trends in regional crude markets since the RMM was established. For
example, a new Australia region, using Brent crude, replaced the
Singapore RMM, which was based previously on a Dubai/Tapis crude
blend. This change has been made to better reflect the types of crude
that Australian refiners process. In addition, we changed the marker crude
for the US Midwest region from Gulf Coast LLS to WTI to reflect the
increased availability of the lower-cost crudes in the US midcontinent
mentioned previously.
The effect of this update is that the 2012 BP average RMM will be
restated in the BP Annual Report and Form 20-F 2013 from $15.0 per
barrel (as reported here) to $18.2 per barrel.
The global lubricants market continued to be challenging in 2012 as a
result of economic slowdown and low demand growth. The automotive
sector has been squeezed by pressure on real incomes, which has
resulted in demand for new passenger vehicles in the EU falling 8.2% in
2012. Industrial demand has also been under pressure from weak
manufacturing production. Lubricants base oil prices were, however,
lower than in 2011, which helped alleviate some of the downward
pressure on margins.
Compared with 2011, there was a sharply deteriorating business
environment for the focused group of petrochemicals products that BP
produces. Substantial capacity additions in Asia in combination with global
demand slowdown meant a deterioration of both purified terephthalic acid
(PTA) and paraxylene (PX) margins with PTA margins at very low levels.
The petrochemicals margin environment has tended to be cyclical in the
past, with times of high margins during periods of demand increases and
economic growth leading to investment in new capacity to meet this
demand, followed by periods of lower margins as this new capacity
comes onstream. 2012 has represented a downward cycle and although
by the end of 2012 there were some signs of recovery, we expect the
market to remain difficult in 2013 as further Chinese capacity additions
enter the market.
By contrast, competitors who have significant production of ethylene,
olefins, and derivatives in the US have seen advantage through the low
cost of natural gas. This has resulted in many ethylene crackers being
converted from ‘heavy’ feeds (liquids priced with crude oil) to ‘light’ feeds
(gas, priced against US natural gas) resulting in strong margins for these
players.
2012 performance
Safety performance
Safe, reliable and compliant operations remain the top priority within
Downstream. This is underpinned by the systematic implementation of
BP’s operating management system (OMS) by all entities. (See Safety on
pages 46-50 for further information on safety and OMS.)
In 2012 the Downstream segment continued the journey to enhance local
systems and processes at our sites in response to OMS. For example, in
2012, a programme designed to improve the capability of the workforce
to identify and mitigate risks within their local OMS was rolled out. This
brings specialist coaches and entity teams together to improve safety
and performance by systematically closing gaps between local work
processes and OMS standards and then embeds these improvements