Hendrik Muilerman – Managing Director, BP, Netherlands
The Managing of Director of BP Netherlands discusses current regulatory and operational challenges faced by the downstream industry and various strategic initiatives that companies such as BP have employed to overcome demand fluctuations in the market.
You have now worked with BP for close to three decades in various roles, including Managing Director for close to eight years. What been your main initiatives in the Netherlands in the past five years?
The main challenge when initially assuming the role of Managing Director was figuring out how to survive in a market with decreasing demand and margins constantly under pressure. In light of such conditions, BP and other majors have been focusing on optimizing efficiency in marketing and refining activities. With marketing, we focus on bringing the product to the customers at the lowest possible cost—competing on all elements of the value chain and creating a more transparent market. In refining, it’s more about being able to continue producing the product in an increasingly stringent regulatory environment. More and more legislation gets approved everyday on behalf of regulatory bodies such as the European Commission and International Maritime Organization (IMO), collectively stressing our bottom line. Although an ongoing effort, successfully navigating through regulatory compliance, while streamlining operations has been the principal directive of my leadership over the past few years.
The Netherlands Rotterdam Refinery has been 100 percent owned by BP since 2007, when BP acquired Chevron’s 31 percent minority shareholding. Located in one of the world’s busiest ports and major trading hubs, what strategic importance does the refinery mean to BP globally?
We always see our refineries as part of a value chain; we do not believe in standalone operations. In principle, we only establish standalone refineries if we believe we can build out a value chain to the customer. In countries where we have missing parts of the value chain, we either acquire partial stakes in certain elements such as the case with Chevron or we sell like we did in the UK. The Netherlands, however, is the best place for a refinery because this is where most of the innovative capabilities, and subsequent upgrades exist—not to mention the country’s status as a regional energy hub. In contrast, neighbouring countries like Germany or France require more hands-on support from the government to help downstream companies stay afloat.
In January of this year, BP Netherlands released a statement stating that it was putting its Amsterdam Oil Terminal up for sale. How will this divestment affect your Dutch operations, particularly in terms of trading?
Hardly. We announced the sale early this year after having a hard look at the terminal. Ownership of the terminal was less of a strategic decision and more of an inheritance after taking over Mobil’s old refinery back in 2001. Since then, we saw opportunities in using Amsterdam as a trading terminal—mainly with the US. With that said, however, trade flows have changed over the last few years and our core competencies do not focus on storage. So, we ultimately reasoned that the terminal would bring more value for another company other than BP, especially considering the extensive amount of storage space for rent in the Netherlands.
In a recent interview, Margaret Hill told Focus Reports that 60 percent of refinery products produced here in the Netherlands are destined for export. What portion of your production is allocated for export versus local markets?
The BP Rotterdam refinery serves primarily as an export refinery. It’s a fuel oil refinery producing more heavy products and located in one of maybe four or five major fuel oil harbours in the world. From a cost efficiency perspective, it’s one of the best places to produce and export fuel oil. Furthermore, Rotterdam has a huge capacity for trade, with numerous cargo ships going in and out of the harbour every day—constituting our decision to establish our container business here. Approximately two-thirds of our refining will be exported to the EU and other parts of the world. But this is also the basis of pervasive concerns due to the sheer number of fuel oil refineries located in Rotterdam. The upcoming IMO MARPOL (International Convention for the Prevention of Pollution from Ships) regulation caps the level of sulphur composition in fuel oil—forcing downstream companies such as BP to invest significant capital in desulfurizing its products before export. Considering BP’s opinion on compliance sooner rather than later, MARPOL’s flexible 2020 target has created its own set of delays from an investment standpoint.
What sort of market fluctuations does this export-central model expose the company to?
Europe is interconnected by an expansive network of rivers and pipelines, unlike places like the US or UK, which means the regional markets are very liquid. You can very easily transport crude oil across foreign borders, which adds to an increasingly competitive landscape. Coupled with an increase in Russian crude and the dieselization of Europe, there’s likely to be trading issues with fuel products around the region. Decreasing European production volumes and declining utilization rates have forced companies like BP to decommission underperforming refineries out of non-strategic geographies. Consequently, only the best performing refineries will stay in the business, unless government intervention constitutes otherwise.
What are the advantages of maintaining downstream refining operations in a country?
Refineries are part of an integrated chain that spans from the petrochemical plants to the heavy manufacturing industries, leading the clusters of large industrial complexes in countries such as Germany, Italy, and France. As an integral part of the value chain, refineries are essential in keeping multiple sectors afloat. The standalone refineries on the other hand, are the ones taken out of the system. However, if you look at studies conducted, most of refineries that have closed so far were standalone.
Nonetheless, since the drop in oil prices, oil refineries have been generating reasonably healthy revenues for oil majors, offsetting losses from upstream businesses. How has BP in the Netherlands experienced this trend, and how far into future do you see these positive returns as continuing?
There is nothing as volatile as the oil price. Obviously the refinery system in the Netherlands has been benefiting from a very low oil price. If the crude price is lower, then refining margins are higher. From a percentage standpoint, within BP’s portfolio, downstream activities have contributed more to the company’s overall growth than what has traditionally been seen in the past. This not only applies to BP, but other players in the industry. Despite the favourable margins associated with declining oil prices, however, BP’s downstream business has not been without its own set of operating challenges. In the first quarter of this year, there have been multiple turnarounds in refineries, industry-wide strikes, and demand imbalances between the US and Europe. But collectively, the downstream industry has experienced more favourable margins than normal, especially when compared to upstream.
What opportunities do you see for BP in the Netherlands to participate in the country’s on-going energy transition? How is the company pairing the need for innovation and sustainability with the need for reasonable economic regulations that do not cause financial strain?
Energy, whether its fossil fuels or renewables, revolves around three elements—containment, storage, and transportation—with each element producing its own set of challenges and costs. BP has invested approximately USD 8 billion in alternative energies in the last 10 – 15 years ranging from solar to wind and electricity. That being said, however, we’ve exited most of those ventures due strictly to the lack of investment returns. Whether it was back in 2006 with our solar business in Spain and Germany, or our more recent activities in wind farms three years ago, we just couldn’t justify the economic viability. After investing an extensive amount of time and money in R&D, developing a sustainable and scalable method of delivery for an alternative energy source to the market in an cost-efficient manner is just not compatible with our current level of technology.
For the time being, alternative forms of energy like solar or wind can only survive through government subsidies. Unfortunately, subsidies eventually run out, especially for private companies without public stakes. In terms of Holland, the government has been subsidizing wind farms for quite some time now, particularly in the North Sea, to reach the 14 percent target of renewable energy utilization. The reality, however, is that without subsidies, such initiatives will not be sustainable. There are other reasons to do this, such as improving the living environment, which BP fully supports. Especially considering the reality of climate change, we believe the next step in reducing emissions is through hybrid vehicles. From an economic and technical standpoint, it complements our current infrastructure and capabilities quite well. In conjunction with the country’s own innovative capacities, BP looks forward to facilitating the transition.
That being said, however, the Dutch have a lot to lose if they kill fossil fuel industries. Six percent of exports is based on fossil fuels. With the best-in-class refineries, the Netherlands boasts reputable capabilities as the energy hub of Europe. If the government puts too much burden on the petroleum industry, whether it’s from a financial or regulatory standpoint, then the international companies will just relocate elsewhere to fulfill demand.
Where do you see BP Netherlands in five years from now?
In coming years, BP will continue playing a leading role in the Dutch oil industry. However, speaking of the typical Dutch consensus model in making policy, there could be more consensus in the energy field with all players of the value chain. Specifically, there needs to be more productive conversations with regulators. Although realization of the industry’s material affect on the country’s future sustainability has pushed energy higher on politicians’ agendas, supply security is still a very real concern. Now more than ever, especially with the Groningen’s dwindling supply, the industry needs to collectively band together as innovators and learners to cultivate best practices across the board.
What keeps you motivated?
Energy is a great field to work in because it is truly a dynamic industry. If you believe you understand it, you’re wrong. 10 years ago we thought renewables was where BP should move in to, but now it’s proved otherwise. Who would’ve ever forecasted the rise in shale oil and shale gas? Nobody. Energy is abundantly available, but increasingly more difficult to harvest from an accessibility standpoint—giving rise to more complex methods like deep water and arctic drilling. The bigger problem, however, is climate change. How will that one be solved? This is why I like this industry so much, there’s never a dull moment. BP has capitalized on this dynamism in the right ways at the right time, allowing the company to develop from a small national oil company into a massive oil major, with even further aspirations for growth.