Downstream Market

Report
CAPEX and OPEX Cost Trends for the
Downstream Industry

January 2021

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Overview and Executive Summary
Overview

The following market report includes PowerAdvocate’s forecasted change in the overall cost of key downstream
expenditures from January 2021 to December 2021. These insights consider several refinery utilization scenarios to
help operators prepare for 2021 expenditures under a range of market outcomes and levels of economic activity. The
forecast includes a point-to-point projection, meaning that the forecast is indicative of where we believe prices will
be in December 2021 relative to where they are today.
Each of these categories can be broken down further to more specifically estimate individual company forecasts
based on project, refinery, and region, though that detail is not provided here. Our clients typically use this data to
aid in budgeting and forecasting CAPEX and OPEX for the year, and as a data source when engaging in negotiations
with suppliers.

Key Takeaways & Executive Summary

— From January 2020 to December 2020 the net change in almost all CAPEX and OPEX categories, other than
Caustic Soda, was moderately stable or declining which should have led to lower rates for operators.
— Throughout 2020, market costs for many downstream items declined substantially after the market crash, but
many had re-stabilized to January 2020 levels by the end of the year.
— Overall CAPEX rates in December 2021 are projected to be ~1.5%-3.5% higher than in January 2021.
— Overall OPEX rates in December 2021 are projected to be ~0.5%-3.3% higher than in January 2021.
— OPEX categories, including Fuel Additives (+3%-8%), Caustic Soda (+3%-6%), and Specialty Chemicals
(+9%-14%), will experience the most significant increase in prices driven by broader industrial recovery,
higher demand across a larger range of end markets, and bullish market estimates on crude.
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Forecast Methodology
Market Forecast Methodology
— The cost trends included are point-to-point forecasts, i.e., forecasts on how costs should move in relation to a
specified point in time. This report includes both a historical look-back at how costs had moved in December
2020 relative to costs in January 2020 as well as forecasts on how costs will change by the end of 2021, based
on where costs were in January 2021.
— Cost trends should be interpreted as the change in overall should-cost to operators based on changes in
underlying production costs, commodity costs, supply and demand, and underlying market inflation.
— Market costs for key downstream items and services (“categories”) are impacted by refining activity and
consequential supply and demand pressures. The following forecasts summarize expected market inflation or
deflation under four separate refinery utilization rate scenarios (75%, 85%, 88%, and 95%) to capture
expectations under a range of downstream industry activity levels in 2021. Categories are selected based on
their relative importance to annual third-party expenditures by volume of spend for a typical downstream
firm.
— While the selected categories will be most relevant to downstream firms, the cost trends in this report apply
broadly to the O&G industry. For example, forecasts for pump costs are equally applicable for midstream and
upstream firms.
— Categories are designated as CAPEX if the majority of spend for that category for a typical downstream firm is
accounted for as CAPEX dollars. Similarly, categories are designated as OPEX if the majority of spend for that
category for a typical downstream firm is accounted for as OPEX dollars.
— PowerAdvocate’s perspective on typical downstream expenditures is based on our proprietary database of
$6T+ in energy spend data.
— Following the CAPEX and OPEX downstream expenditure forecasts, additional details are provided detailing
some of the historic and future drivers.

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Key Forecast Assumptions
PowerAdvocate Forecast Assumptions:

— Market forecasts include market rate changes as well as inflation.

— 2021 Global GDP growth is expected to reach 5% in 2021, compared to -5.4% in 2020.
— Refinery utilization rates are projected to reach 88% by the end of 2021, levels not seen since before the
pandemic. Rates fell below 70% at the height of the pandemic, their lowest since 2008.
— US Gulf Coast WTI 3-2-1 crack spreads are forecasted to exceed $10/bbl by the end of 2021.
— Metals prices bottomed out at the height of the pandemic and are projected to enter bull market territory as
China and the global economy slowly recovers from the pandemic.
— COVID-19 vaccines are expected to be fully distributed to the public by Q2 2021 resulting in stronger global
economic recovery and higher oil, fuel, and metals prices.

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Market Trend Forecasts by CAPEX Category and Refinery Utilization Rates
Market Forecast Based on Potential Downstream Utilization Scenarios
(Jan ‘21 – Dec ‘21)
Historical Base
Top Categories Should-Cost (Utilization Rates Utilization Rates 95% Utilization Rates 85% Utilization Rates 75%
(Jan ‘20 – Dec ‘20) 88%)

Construction Services -0.50% 2.50% 3.10% 2.30% 0.50%

Piping 1.70% 3.50% 3.90% 3.30% 2.50%

Pumps 0.80% 4.10% 4.50% 3.80% 2.00%

FCC Catalysts -2.50% 4.20% 4.90% 3.60% 1.20%

Instrumentation and Controls 1.10% 3.40% 3.70% 2.70% 2.20%

Valves 0.80% 3.30% 3.60% 3.20% 2.90%

Control Systems 1.00% 2.10% 2.50% 1.90% 1.60%

Centrifugal Compressors 0.90% 2.60% 3.10% 2.20% 1.60%

Heat Exchangers 0.80% 4.00% 4.40% 3.60% 2.30%

Hydrocracker Catalysts -11.30% 0.80% 1.30% 0.50% -0.50%

Overall Weighted Trend: 0.30% 3.00% 3.50% 2.80% 1.50%

Market forecast indicates Market forecast indicates

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Market Trend Forecasts by OPEX Category and Refinery Utilization Rates
Market Forecast Based on Potential Downstream Utilization Scenarios
(Jan ‘21 – Dec ‘21)
Historical Base
Top Categories Should-Cost (Utilization Rates Utilization Rates 95% Utilization Rates 85% Utilization Rates 75%
(Jan ‘20 – Dec ‘20) 88%)

Engineering -1.50% 2.00% 2.90% 1.80% 0.60%

Turnaround Services -0.20% 2.00% 2.70% 1.70% 0.20%

Maintenance and Repair Services -0.70% 2.30% 3.00% 2.00% 0.40%

Hydrogen -0.20% 0.40% 0.60% -0.10% -1.40%

Equipment Rental -11.30% 3.30% 4.10% 2.40% -0.40%

Industrial Cleaning -0.10% 1.90% 3.50% 1.80% 0.90%

Nitrogen 0.40% 1.30% 2.10% 0.80% -0.50%

Fuel Additives -4.00% 7.00% 8.40% 6.40% 3.10%

Caustic Soda 10.40% 5.60% 6.10% 5.50% 3.10%

Specialty Chemicals -5.40% 13.10% 14.40% 12.90% 9.10%

Overall Weighted Trend: -1.30% 2.50% 3.30% 2.10% 0.50%

Market forecast indicates Market forecast indicates

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CAPEX Category-Specific Market Driver Perspectives
• Construction Services:
– Costs dipped as the COVID-19 pandemic delayed infrastructure projects, weakening demand, and resulted in record high
unemployment rates in the construction industry, limiting wage growth. Falling demand outweighed an increase in construction
wages, which are up only 2.9% YTD compared to 5.7% in 2019.
– Costs are expected to increase as previously delayed infrastructure projects start up and demand remains strong from other
industries, such as electric and power.
• Piping, Pumps, Compressors, Heat Exchangers, Valves and Other Equipment:
– Costs increased due to the sharp reversal in steel prices starting in August 2020 (up 43% since August), which resulted from
increased infrastructure investment from China, the world’s largest consumer of steel.
– Costs are expected to increase as steel prices surge due to continued supply chain disruptions brought on by the pandemic and
strong demand from end users like the construction industry.
• FCC Catalysts:
– Costs decreased due to falling rare earth oxide prices along with many operators halting FCC operations amid weak gasoline
demand. YTD rare earth oxide prices are down as much as 20% due to their usage in catalysts, magnets, alloys, and electronics,
which all have been hurt by the pandemic.
– Costs are expected to rebound as US transportation activity increases, increasing gasoline demand.
• Instrumentation and Control Systems:
– Costs increased as key input metal prices, copper, aluminum, and steel, are up 27%, 19%, and 43%, respectively, since their
summer lows. China, the largest consumer of these metals, is responsible for these rebounding prices as its economy recovers
strongly from the pandemic.
– Costs are expected to continue upwards as metal prices continue surging amid news of an effective vaccine, which will improve
industrial activity and increase demand for metals.
• Hydrocracking Catalysts:
– Costs fell drastically due to bearish molybdenum and cobalt markets as well as weak demand for catalysts resulting from poor
gasoline, diesel margins.
– Costs are expected to recover amid a strong recovery from molybdenum, cobalt, and nickel markets which is being driven by
positive vaccine news and a recovering global economy.

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OPEX Category-Specific Market Driver Perspectives
• Turnaround Services, Industrial Cleaning, Engineering, Maintenance and Repair Services:
– Costs for downstream OpEx services have fallen amid weak demand for key downstream services as refineries have reduced
throughput capacity amid weak fundamentals.
– Costs are expected to increase as the industry recovers to normal activity levels and unemployment figures decrease.
• Hydrogen:
– Costs declined as natural gas prices continued their downward trend since 2017 due to an oversupply brought on by the US shale
boom.
– Costs will continue to push downwards with new capacity coming to the market in 2021 as companies build green hydrogen
projects to achieve carbon reduction goals.
• Equipment Rental:
– Costs fell sharply due to low demand, highlighted by historically low refinery utilization rates. Utilization rates fell below 70%, levels
not seen since 2008.
– Costs will increase in 2021 but are expected to remain below 2019 levels as industry projects slowly resume in 2H 2021.
• Nitrogen:
– Costs rose slightly despite the fall in energy input costs as fertilizer demand, a key end-use sector, had stronger than expected
demand in 2H 2020.
– Minor cost inflation is expected as the supply-demand market remains closely balanced with 2021 capacity growing, expected to
match increasing global demand.

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OPEX Category-Specific Market Driver Perspectives
• Fuel Additives:
– Cost declines have been driven by falls in crude prices, as many cost inputs are crude derivatives. However, decreases have
been partially offset by increasing ammonia costs, which were buoyed by stronger fertilizer demand.
– Costs are forecasted to increase due to continued strong demand from the fertilizer industry and bullish crude expectations.
• Caustic Soda:
– Prices for caustic soda have been in freefall since the summer as weak demand from the aluminium processing industry
continues to pressure prices. Prices for caustic are still up YTD though, as chlorine supply shortages in Q2 severely reduced
caustic supply. Caustic is a coproduct of the chlorine production process.
– Costs should increase over the next year as a global economic recovery will spur industrial activity, driving demand across a
wide array of end use sectors.
• Specialty Chemicals:
– Naphtha, benzene, and other organic chemicals, all derivatives of crude, are key cost drivers for specialty chemicals, and a
depressed oil market has led to cost decreases.
– Costs will increase in the next year as crude prices are driven higher due to increased transportation and a global industrial
recovery.

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Downstream firms require visibility into cost trends to ensure CapEx and OpEx reflect
market rates. Backed by our unique data assets, we partner with downstream firms to
help systematically strengthen their cost management capabilities.

For more information on leveraging historic and future cost data visit us at
www.costinsights.com or reach out to us at costinsights@poweradvocate.com

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