What Key Challenges Are Reshaping the Downstream Industry?
In the ever-evolving landscape of the oil and gas industry, the downstream sector faces many challenges—from cost control barriers to workforce shortages to digitalization hurdles.
A recent survey of producers shows the breadth of their most significant barriers to success, including contractor and equipment costs, supply chain delays, lack of an experienced workforce, and, ultimately, digitalization and data analysis.
Let’s look at the survey findings and what’s ahead for the growing downstream market.
The Growing Demand for Petrochemicals
The downstream market encompasses the refining, processing, and marketing of petroleum products. Petrochemicals — specialized chemicals derived from petroleum and natural gas—are a vital component within this sector. These substances are foundational to our modern lifestyle, manifesting in everyday items such as clothing, detergents, and medical equipment, as well as in high-priority applications like digital devices and fertilizers.
The global petrochemical market was valued at $619.28 billion in 2023. Despite challenging conditions, the market is projected to expand at a compound annual growth rate (CAGR) of 7.3% from 2024 to 2030.
This growth underscores the increasing demand for petrochemical products, highlighting their significance in the downstream sector.
Insights from the Downstream Industry Survey
The annual Reuters Downstream event sheds light on industry trends, particularly through its North American Downstream Producer 2023 Trends Report. Surveying 200+ owner/operator CAPEX (capital expenditure) and OPEX (operating expenditure) decision-makers, the survey confirmed that petrochemical producers expect growth in their industry.
In response to the question, “What best statement describes your organization's budgets?,” the most common response (25%) was “they were cut during COVID, are back up to pre-COVID levels and expected to increase further.” About two-thirds of respondents said their organizational budgets are growing.
Now, let’s look at what producers face to ensure they are prepared to make the most of their growing budgets.
Challenges and Opportunities for Downstream Producers
While the downstream sector primarily deals with refining and marketing, downstream petrochemical producers face specific challenges. These include navigating global economic uncertainties, supply chain disruptions, and the imperative of cost-effective production.
For example, the Reuters report found that respondent concerns include:
- 14.86% - supply chain delays.
- 13.51% - labor challenges
- 13.5% - inventory management.
This highlights how overcoming barriers such as poor project management and embracing digitalization is critical to enhancing efficiency and profitability. Producers surveyed also raised concerns about barriers organizations can control related to successfully controlling costs.
Barriers include poor project management, poor project scope, and digitalization. It’s no surprise that the most cited priorities for 2023-2024 are cost-saving and value creation. Respondents (22.83%) said the biggest bulk material cost in 2022-23 was contractor fees, making them an obvious place to focus on.
Companies strive to be agile in their decision-making. Agility is predicated on having clear oversight of a situation and timely information. A delay in receiving crucial information often makes businesses hesitant to make far-reaching decisions because they don’t grasp the complete picture. Often, when a clear picture emerges, the eventual decision carries less impact because situations are fluid and negative effects have festered.
The Reuters survey confirms that companies often need more information to make timely decisions. Respondents, by far, said their organization’s key digitalization priority for 2024 is data analytics. By investing in data analytics and obtaining timely information, organizations can make quicker, more impactful decisions with greater confidence.
Overcoming Hurdles with Digitalization
Among the benefits of digitalization are cost savings, increased security, and improved efficiency. Respondents surveyed for the Reuters report recognize this but are still facing challenges with digitalization. Of those surveyed, 25% said their top challenge for impeding the success of digitalization was siloed decision-making/lack of alignment.
The impact of digital tools is limited when information remains siloed. If a manual transfer of data is required after gathering the data, the process is slowed and faces an increased chance of errors.
Survey respondents likely listed challenges around siloed information as their key organization data priority because of data accessibility/visibility issues. The other two top priorities listed were data collection and data analysis. The three priorities are interconnected.
The common challenge impeding the success of data accessibility, collection, and analysis in 2022-2023 was company budget constraints. Cost savings carried over as the second most common concern about data strategy in 2023-2024 (value creation and ROI are first and third).
In short, most downstream petrochemical producers are increasing their budgets. Despite this, they are concerned about costs.
Just as in past surveys, downstream producers said they want to prioritize digitalization to improve analytics and better manage costs and budgets. One of the challenges to making this a reality is siloed data. Recall that organizations spend the most on contractor fees.
Get Data Quicker and Reduce Contractor Fees
Contractor fees are one area of focus for the downstream market. According to McKinsey, “… we found that companies were paying 30%-50% more than they should for their contracted services.”
McKinsey cites inefficient contractor-management practices as the primary reason for the overspending of contractors. Poor contract management results in “… imprecise work specifications, over- or understaffing, and inaccurate invoices ….”
How can downstream producers better manage the contracts they have with contractors? Real-time data is the answer.
The myTrack Platform provides downstream producers with proprietary real-time insights. Instead of useless siloed data, myTrack provides visibility that helps downstream producers ensure contractors are working per contract stipulations.
By addressing these strategic areas, downstream producers can not only navigate current challenges but also position themselves for future success in the evolving global market.
