Mol prioritises petchems
CEE’s leading integrated oil and gas firm is putting petrochemicals at the centre of its near-term growth strategy
Progressing its refinery upgrade programme, investing in value chain extensions and diversifying into petrochemical products are at the core of Mol’s strategy for the near future, Ferenc Horvath, executive vice president for downstream, tells Petroleum Economist.
The Hungarian integrated oil company is also mindful of a challenging macro environment for refiners and stricter decarbonisation objectives throughout the industry as it builds on its long-term strategy.
“In 2011-12 we decided to focus on our internal performance in order to be more resilient towards the external macro environment,” he explains.
“We will strengthen our petchems business, and an increasing share of our downstream Ebitda will come from that [segment]” Horvath, MOL
While market conditions have been challenging in the past year, Mol’s integrated structure has helped it support profitability “independently from crude prices, petchem and refinery margins and demand”, Horvath argues.
The company closed 2019 with an Ebitda of $2.4bn, with the downstream division contributing $900mn “mainly driven by our refining business”, he says.
Mol operates four refineries: the Danube facility in Hungary, the Bratislava site in Slovakia, and the Rijeka and Sisak facilities in Croatia. These facilities account for a total of 20mn t/yr of refining capacity and service customers based in central and Eastern European (CEE) countries.
“We will strengthen our petchems business and, in the long run, an increasing share of our downstream Ebitda will come from that” segment, he says.
“We are still convinced that, in 20-25 years, fossil fuels will be a major contributor to our transportation and mobility mix.” Horvath, MOL
The core of Mol’s plans for restructuring its refining sector entail reducing overall capacity and improving capabilities to produce lighter, more valuable products.
Mol is planning to focus refining activities in Croatia at its Rijeka facility, where it is investing €500mn ($559.7mn) to construct a new delayed coker. A related strategic step is to convert its former Sisak refinery into an industrial site that would produce mostly bitumen and lubricants. A second generation biorefinery project is also under evaluation for the site.
“Efficiency improvement is an area where we plan to spend more resources. Last December we took the decision to invest in the delayed coker to be able to convert black products into light products,” he says, adding the new unit is expected to come into operation in the next three years.
A significant driver for the delayed coker investment was the introduction of the International Maritime Organization (IMO) regulation mandating vessels use bunker fuel with a sulphur content not exceeding 0.5pc, which came into effect on 1 January this year.
While Mol exports 0.5mn t/yr of high sulphur fuel oil (HSFO) to Mediterranean countries from its Rijeka refinery—with some of this going to the bunkering sector—it is aiming to completely stop production of this type of fuel.
“That is why we have been pushing the delayed coker investment. After that [comes into operation] Rijeka will not produce HSFO, so we will not be exposed to any bunker fuel selling,” he explains.
The company has already implemented strategies to reduce HSFO production, partly by switching away from Russian, Kurdish and Iraqi crudes towards lighter types of oil, and by importing vacuum gasoil (VGO).
Overall, due to the advanced yield structure of its refineries, “IMO has upside potential for us”, he says. “We implemented mitigation actions where necessary and we are ready to take advantage of opportunities.
“We very clearly saw that our complex refineries are in a very advantageous situation from an IMO perspective,” he adds, with the Hungary refinery not producing any HSFO and all volumes from the Slovakia site being used locally for power generation.
Mol’s investment strategy also contains a push towards “converting fuels into petchem feedstock, to reduce overall fuel production,” says Horvath, adding that Mol is upgrading its steam cracker at Tiszaujvaros to increase its capacity for fuel-to-chemicals conversion.
“We are also working on new technologies to convert more fossil fuel molecules into petchems,” he says, adding the company will disclose more detailed plans related to the specific technologies and solutions in the third quarter of the year.
A further area of expansion involves going “deeper in the petchem value chain”, he says. Instead of only producing commodities such as low-density and high-density polyethylene and polypropylene, “we [will] go into the value chains [of] butadiene and synthetic rubber, which is not increasing overall petchem exposure compared to fuels, but is rather based on refining products”, he says.
Another “big rock” in this area is the polyol investment, he adds. “We are already constructing our polyol plant, which will rely on our own propylene [production].” The new facility is expected to produce around 200,000t of polyols, to be sold mainly in Europe.
All these steps are a part of efforts to adapt to a challenging outlook for fossil fuels in Europe, with refiners facing overcapacity. The company has taken the decision to increase its petchems exposure ahead of the competition, but this does not mean Horvath believes demand for fossil fuels is destined to disappear in the coming years.
“We came out with this strategy back in 2016 when most companies were still seeing the fuel business grow. We forecasted that the monopolistic position of fossil fuels [in the refining business] will be over [at some point], as we do not see much growth compared to petchem products”.
While developments in electric and natural gas vehicles continue amid increasing adoption and technological progress, fossil fuels will still account for the biggest share of the mobility market for many years to come, he says.
“It does not mean that fossil fuels will be a bad business in 15-20 years. We are still convinced that, in 20-25 years, fossil fuels will be a major contributor to our transportation and mobility mix.”
The total number of cars worldwide is projected to double from the current 1bn to around 2bn in 15 years due to demand from emerging markets.
While the market share of electric vehicles and those fuelled by hydrogen, CNG, LPG and LNG is set to increase, the number of fossil fuel vehicles is also set to rise. Improved efficiency and technological advances in diesel and gasoline engines will mean fossil fuel vehicles retain a large share of the total mobility sector, Horvath says.
Nonetheless, regulation will play an important role in driving the adoption of greener transport alternatives, he adds.
“That will mean that less efficient and less competitive refineries will have to rethink their business models to maintain operations,” he says.
"On the other hand, we see more and more projects and investments to integrate and convert refinery products into petchem feedstocks, because that is the logical way to reduce exposure towards declining fuel demand and decarbonisation targets,” he says.
The decarbonisation challenge
Meeting increasingly challenging decarbonisation targets will be the biggest test for refiners, with many projects focusing on sustainability and climate strategy. “We have done many projects to
increase energy efficiency and to reduce CO₂ emissions,” Horvath says. However, “those projects were low hanging fruit—[ones] easy to decide”.
“I expect there will be more and more projects in refineries and petchem businesses that will be decided based on new sustainability and climate strategies, targeting much bigger CO₂ reductions than current ones. These kind of investments, and how oil companies can change and be more efficient in CO₂ and emissions” will be the main area in which businesses will compete, he says.
"This was not the case 5-10 years ago. In the future it will be a decisive factor for oil companies—how efficiently they can reduce CO₂ emissions. Sustainability and climate strategy projects were not financially positive in recent years because of non-mature technologies” and a less challenging “environment [in terms of] CO₂ price, targets and penalties for not reaching [those] targets”.
On the other hand, “we do see there will be changes in that area”, Horvath says. “CO₂ prices will be higher, targets will be more restrictive and technologies will be more mature. All those projects will be much stronger financially than today. I see that this is the direction, even if today the numbers on paper do not always prove that.”