Middle East Downstream Week

Louis Besland, A.T.Kearney

Louis Besland, Partner, A.T.Kearney discusses how to address challenges facing the downstream sector

As part of the speaker interview series, MEDW 2012 recently spoke to Louis Besland, Partner, A.T.Kearney regarding the challenges facing companies in the downstream industry and how to address these, whether negative trade balances in manufactured goods in the Middle East will change and where the next 10 years will take the industry

MEDW 2012:  Which companies do you provide consulting services to in the refining, petrochemical and converting industries?

Louis Besland: A.T. Kearney is a global management consulting firm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s leading corporations across all major industries. A.T. Kearney’s offices are located in major business centers in 37 countries. From our Middle East offices in Abu Dhabi, Bahrain, Dubai and Riyadh, A.T. Kearney supports both private and public sector clients as well as nations to excel and prosper by combining our regional expertise and global business insights to achieve results.

Our Energy and Process Industry Practice has supported many of the major global oil & gas and chemical companies, as well as a number of regional players. We are proud to actively support the region’s economic development agenda through our role in assisting both the private and public sectors in the successful delivery of projects in the energy and utilities and petrochemical sectors.

MEDW 2012:  What are typical challenges faced by companies in the downstream industry? What can be done to address these challenges to ensure continued success and growth?

Louis Besland: We observe substantial restructuring of mature refining markets and expect this trend to continue, albeit at a slower pace. The dynamics of the global refining capacity slate are swinging from a stagnant West into a booming East, resulting in shifts in refineries’ ownership models and capacity shut downs.

Oil & gas downstream in the Gulf has a very bright future, driven by strong regional, proven oil and gas reserves and traditional ties with ever-energy hungry Eastern markets. Industry development will be characterized by building value throughout the entire value chain, to boost exports. Looking forward, successful refiners will achieve the right balance of integrating downstream petrochemicals, while maintaining close ties with oil products export markets, through appropriate JV strategy and partner selection.

The petrochemicals integration challenge is a particularly interesting one. It is a fact that most analysts agree the region can significantly benefit by leveraging feedstock availability and broadening product ranges to include downstream chemical products. But, for chemical players currently focused on export commodity markets this requires a paradigm shift. To successfully make this shift, acquisitions in new expertise and manufacturing is required to optimize supply chains and effectively manage distant customers requiring tighter compatibility integration with their technologies.

MEDW 2012: Most countries in the Middle East (excluding Oman and Bahrain) have negative trade balances (net imports) in manufactured goods. Do you expect this to change?

Louis Besland: Indeed, GCC economies face the challenge of negative net imports of manufacturing goods, propelled by the fact that the imported end-products are based on raw materials originally sourced from the region. We believe the region can expand its capability to reduce this existing imbalance (see our whitepaper in association with the GPCA “Breaking New Ground in The Downstream Petrochemicals Industry” for full analysis). One example of this is the potential to attract automotive OEM; there are numerous other existing niche opportunities. Through the supply of extended feedstock base downstream, oil & gas development can be converted into a broader range of chemical derivatives, providing additional incentives for manufacturing companies to extend their production base in the region.

Existing challenges are mainly linked to small regional markets and limited access to export markets, driven mainly by cost and barriers to entry. To address these, based on our analyses of the sector, we have developed the 4Is framework to provide a pathway for industry stakeholders to achieve sustainable economic development goals while securing commercial profitability targets. This framework aims to build the business ecosystem required to attract the key elements (from strategic partner investors) to enable the growth of new sectors, emerging from expanding the petrochemical value chain downstream; the natural progressive step for regional economies.

MEDW 2012: Where do you see the industry heading in the next 10 years? Why?

Louis Besland: The global uncertainty, local and global market imbalances, geo-political activities and the availability of crude slate for conversion will affect refiners, impacting profitability. The more agile and flexible business models are, the more resilient players will be in meeting these challenges; a re-evaluation of strategies and participation models will optimize their positions. Changes in participation models (upstream and / or downstream integration) can maximize profitability growth rates in uneven and regionally-fragmented refining playing fields with multiple environmental legislation, government-driven tax regimes and levels of skilled labor and technologies.

Western players will be particularly affected by this trend, faced with greater competition, continued volatility and tighter environmental legislation. All major players have restructured assets with some opting to sell individual or small groupings of assets; others opting to demerge the whole or major parts of their downstream business to liberate both working capital and long term investment capital back into upstream. We expect restructuring to continue with further refinery closure.

In 10 years, we expect Middle Eastern players to thrive, leveraging their access to feedstock. New capacity developments will be tightly linked to the petrochemical industry for further value add downstream and growth strategies will be linked to local economic development policies. We anticipate that Middle Eastern companies will build networks through strategic JVs to better leverage growing East Asia markets.

MEDW 2012: Could you please explain your participation at MEDW?

Louis Besland: We would like to share with MEDW participants our unique insights into the changing dynamics of the global refining market and as part of this, the potential benefits for Middle Eastern oil and gas players. We believe these market shifts open up opportunities for sovereign capital funds and the financial sector as well; the same opportunities for oil & gas players can be leveraged by global investors framing attractive opportunities with the regional economic development agenda.