Refinery Economics. Table of Contents 1.Refinery Margin 2.Global Scenario 3.Indian Scenario 4.Key factors affecting Refinery Margins Crude Processing

Refinery EconomicsRefinery Economics

Table of ContentsTable of Contents

1. Refinery Margin

2. Global Scenario

3. Indian Scenario

4. Key factors affecting Refinery Margins

Crude

Processing options

Product mix

Refinery Location

5. Road for the Future

OIL WELLOIL WELL

PRODUCTSCRUDE CRUDE STORAGESTORAGE

JETTYJETTY

REFINERYREFINERY

TERMINALTERMINAL

CRUDE OIL

RETAIL RETAIL OUTLETOUTLET

Refinery Envelope Refinery Envelope Refinery Envelope Refinery Envelope

End Consumer

Refinery MarginsRefinery Margins

Refinery conversionRefinery conversion

Crude

LPG

MS

Naphtha

Petrochemical Feed stocks

HSD

ATF

SKO

Lube Base oils

Bitumen

Fuel Oil

Specialties

Refinery MarginsRefinery Margins

Refinery Economics Refinery Economics

What are the price trends?

Which crude to be maximized?

Which products to be pushed/ go slow?

What is the Refinery margin?

What are the +ve /-ve influences?

What pricing strategy to be adopted?

Which products to be exported in what quantities?

Crude cut Vs Exports/ discounted sales?

Refinery EconomicsRefinery Economics

What is Refinery Margin ?

1. Gross Refinery Margin (GRM)

2. Net Refinery Margin (NRM)

GRM = Value of Products – Cost of crude

NRM = GRM – Operating Cost

Crude cost

Processing options

Product mix

Refinery Location

Product specifications

Key Components affecting GRMKey Components affecting GRM

Source: IEA for Singapore/USGC/Europe: Indian margins are for Dubai crude basis Singapore product FOB prices adjusted for Mumbai with duties

Global Scenario

Refining margins: India & International

Global Scenario

Refining margins: India & International

Refining margins

-101

23456

789

$/bbl

Singapore Indian west coast US Gulf coast Europe

• Inline with the light product demand the demand for lighter

and sweet crude is increasing

• The gap between Dubai and WTI/Brent is increasing

Global ScenarioGlobal Scenario

Lighter & Heavier crude differential

0

2

4

6

8

$/bbl

Brent-Dub WTI-Dub.

• The crack spreads of Gasoline/Gas Oil over Dubai crude is widening and so is the crack spread of Fuel oil

Global ScenarioGlobal Scenario

Singapore Gasoline/Gas Oil & Fuel Oil crack spreads

-8

-4

0

4

8

12

16

20

$/bbl

Gasoline-Dubai Gas Oil - Dubai Fuel Oil - Dubai

Indian Oil ScenarioIndian Oil Scenario

* MUMBAI 2 Nos.

* KOYALI

* MATHURA

*HALDIA

* VISHAKAHAPATNAM

* CHENNAICOCHIN *

* MRPL

BARAUNI *

* PANIPAT

JAMNAGAR *

* BONGAIGAON

* DIGBOI

* NUMALIGARH

* GUWAHATI

Indian Oil Scenario

Refining capacities in India

Indian Oil Scenario

Refining capacities in India

HPCL – Mumbai 5.50 CPCL – Chennai 6.50HPCL – Visakh 7.50 CRL – Narimanam 0.50 HPCL – Total 13.00 CPCL – Total 7.00

IOC – Guwahati 1.00 NRL – Numaligarh 3.00IOC – Barauni 4.20 BPCL – Mumbai 6.90IOC – Koyali 12.50 MRPL – Mangalore 9.69IOC – Haldia 3.75 RPL – Jamnagar 27.00IOC – Mathura 7.50 CRL – Cochin 7.50IOC – Panipat 6.00 BRPL – Bogaingaon 2.35

IOC – Digboi 0.65 IOC – Total 35.60

Total Refining capacity 112.04

All Figures are in Million tons per annum


Product demand-Past

5.8

5.3

20.7

8.7

25.9

22.4

11.1

LPG Naphtha Gasoline Jet/Kero

Gasoil Fuel Oil Others

Product demand-Present

9.2

7.4

20.4

8.230

15.8

9

LPG Naphtha Gasoline Jet/Kero

Gasoil Fuel Oil Others

Demand for lighter & cleaner products increasing,

calling for more complex and stringent processes,

increase processing cost

Impact of APM and the regulated market

Oil companies were guaranteed fixed return on investments

• Regulations didn’t encourage innovation

• Cost-plus formula encouraged private sector, entering in

to Refining, ‘gold plating’ their plants

– Oil companies were compensated for actual costs

• Cost control system needed improvement

– Refineries adjusted products mix as per prevailing demand

• Lower complexity of refineries


Impact of APM and the regulated market• Significant contribution of APM to Indian Oil industry

– Ensured stability of prices

– Uneconomical and remote areas were well served

– Contributed to the growth of Indian industries

– Market prices were insulated from International price fluctuations

• Companies didn’t face severe competition

– LPG/ Kero were cross subsidized through Crude/MS/ATF

• Created higher demand for certain products like HSD/SKO due

to lower prices


Dismantling APM• Increasing Oil pool deficit due to

• Increasing crude oil prices

• Rupee devaluation

• Strong international prices

• Increased product imports

• Efficiency of resources can be enhanced by shifting to competitive

market

• Operating efficiency and Demand/Supply dynamics decide the

profitability of oil companies

• APM dismantled in phases during 1998 to 2002


• Entry barriers to refining sector withdrawn

• Only few players entered fuel sector due to high

investments and conditional marketing

• Degree of competition is expected to be severe in future

• Refineries free to decide on capacity utilization and yield pattern

to suit their marketing needs

Indian Oil Scenario

Deregulated market scenario

Indian Oil Scenario


• Crude imports de-canalized

– Imports of crude oil can be tailored to specific refinery needs

– Domestic crude cost can be fixed with mutual agreements

Product prices are governed by import parity prices

– Import parity prices can only set the upper limit for prices

– Market prices determined by degree of competition

Indian Oil Scenario


Indian Oil Scenario


• Refiners to re-evaluate strategies to add value to the crude barrels

– Reduction in operating cost

– Increase refinery complexity

– Focus on margin improvement areas

• Competitive market ensures self regulation

– Regulatory body required to ensure level playing field

Indian Oil Scenario Deregulated market scenarioIndian Oil Scenario Deregulated market scenario

Indian Scenario

Refinery Margins

Indian Scenario

Refinery Margins

• Non-Revision of RTP of controlled products further reduced margins • Discounts on IFO. RPO etc. making the situation worse• Refinery Margins getting squeezed due to change in custom duty

structure

-2

-1

0

1

2

3

4

5

6

7

8

9

%

Arab Lt Singapore Dubai

Crude Pricing consists of:

– Free on Board (FOB) price

– Crude Transportation

– Customs & Local duties

Key Components-CrudeKey Components-Crude

Landed cost of crude for Refinery

FOBFOB

Lighter & Heavier crude differential

02468

1012141618

$/bbl

Brent-Dub WTI-Dub.

Key Components - CrudeKey Components - Crude

Refineries gear up to process heavier/HS crudes there by increasing the conversion cost

Crude Transportation Crude Transportation


Crude freight on increase due to international tanker market

Freight

0.274

0.429

0.613

0.505

0.708

0.88

2002-03 2003-04 2004-05

$/bbl

VLCC LR-II

• Local duties like Octroi forms the major cost element

(around 3% on crude), with very little recoveries from

product sales

• The customs duty on crude has come down from 27% in

1997 to 5% in 2005


Customs duty gradually reduced to 5% current.

Customs & Local duties Customs & Local duties


Crude Oil classification:

• Based on napthenes, aromatics etc

• Based on yield structure

• Based on sulphur levels

• Based on API (American Petroleum Institute)

Key Components – Crude

Crudes Processed in India

Key Components – Crude

Crudes Processed in India

High SulfurHigh Sulfur Low SulfurLow Sulfur

Arab Light (Saudi Arabia)Arab Light (Saudi Arabia) Bonny Light (Nigeria)Bonny Light (Nigeria)

Arab Mix (Saudi Arabia)Arab Mix (Saudi Arabia) Cieba (Equ. Guinea)Cieba (Equ. Guinea)

Basrah (Iraq)Basrah (Iraq) Escravos (Nigeria)Escravos (Nigeria)

DubaiDubai Farcados (Nigeria)Farcados (Nigeria)

KuwaitKuwait Essider (Libya)Essider (Libya)

Iran MixIran Mix Labuan (Malaysia)Labuan (Malaysia)

Murban (UAE)Murban (UAE) Masila (Yemen)Masila (Yemen)

OmanOman Miri Light (Malaysia)Miri Light (Malaysia)

Suez Mix (Egypt)Suez Mix (Egypt) Tapis (Malaysia)Tapis (Malaysia)

Umm Shaif (UAE)Umm Shaif (UAE) RavvaRavva (KGB India) (KGB India)

Upper Zakum (UAE)Upper Zakum (UAE) Mumbai HighMumbai High


Total 43 crudes processed so far in Mumbai RefineryTotal 43 crudes processed so far in Mumbai Refinery

Gulf Region (28)Gulf Region (28) Far East (5)Far East (5) Africa (5)Africa (5)

– Arab Mix Arab Mix - Labuan - Labuan - Qua Iboe- Qua Iboe

– Arab LightArab Light - Miri - Miri - Bonny Light- Bonny Light

– BasrahBasrah - Tapis- Tapis - Forcados- Forcados

– OmanOman - Badin- Badin - Escravos- Escravos

– Upper ZakumUpper Zakum - Lirik- Lirik - Seuz Mix- Seuz Mix

– Iran (LT & Hy)Iran (LT & Hy) Australia (2)Australia (2)

– DubaiDubai - Gippsland - Gippsland

– KuwaitKuwait - Harriet - Harriet

India (2)India (2)

– Mumbai High Mumbai High USSR (1)USSR (1)

– AnkaleshwarAnkaleshwar - Soviet Ex. Blend - Soviet Ex. Blend


High SulfurHigh Sulfur Low SulfurLow Sulfur

BasrahBasrah AXLAXL Mum High Qua IboeMum High Qua Iboe

APIAPI 33.233.2 37.937.9 40.5 40.5 37.2 37.2

LPGLPG 1.61.6 1.81.8 4.2 4.2 4.2 4.2

MSMS 1.81.8 2.32.3 12.9 12.9 14.0 14.0

NaphthaNaphtha 9.69.6 10.410.4 15.6 15.6 12.1 12.1

ATF/SKOATF/SKO 15.215.2 9.39.3 11.5 11.5 11.5 11.5

HSDHSD 15.715.7 38.438.4 41.5 41.5 30.6 30.6

LDOLDO 8.68.6 6.56.5 - - - -

LubesLubes 8.08.0 8.0 8.0 - - - -

IFO/LSHSIFO/LSHS 24.224.2 8.08.0 8.3 8.3 21.6 21.6

BitumenBitumen 7.57.5 7.57.5 - - - -

F&LF&L 7.57.5 7.57.5 6.0 6.0 6.0 6.0

GRM $/bblGRM $/bbl 4.914.91 3.143.14 6.04 6.04 (2.52) (2.52)

• Product mix plays vital role in Refinery’s profitability

• In PSU refineries product mix, heavy end generation

dropped from 25.1% in 1990 to 20.8 % in 2003

• The new private sector refinery with modern technology

generates about 11.4% heavy ends

Key Components - Product Key Components - Product

PSU product mix 2003-04

23

56.2

20.8

Private refinery product mix 2003-04

42.8

45.5

11.4

• During the period 1997 to 2002 Hydro skimming margins became negative forcing capacity reductions

• Post 2002-03 both hydro skimming and cracking margins are on the rise giving scope for full capacity utilization

Key Components-ProductKey Components-Product

Singapore Cracking & Hydroskimming margins

-2

0

2

4

6

8

10

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Jan

'04

Feb

'04

Mar

'04

Ap

r'04

$/bbl

Hyd. Crck

Key Components-Product Typical Product Mix of Mumbai Refinery

Key Components-Product Typical Product Mix of Mumbai Refinery

Product Mix % on Crude

LPG 2.9

MS

4

Naphtha 12

ATF/SKO 14

HSD 26

LDO 2.5

Lubes 4

IFO/LSHS 22

Bitumen 5

F&L 6.7

Mumbai Refinery Process unitsMumbai Refinery Process unitsMumbai Refinery Process unitsMumbai Refinery Process unitsLPG

BH

PG

Stabilizer

TreatingNaphthaATF

DHDSHSDSKO/MTO

Sulfur

LDO

FR

CDU

VDUs

SEUs

PDA

IOH

PDU

FRE

CDU

VDU

FCC

Spindle Oil150 N500 N1300 NBright StockIO-100IO-1600

Bitumen

Gasoline

LSHS

HMU

IFO

Hexane Hexane /Solvent/Solvent

• Difference in margin exists between Lube and fuel refineries

• Lube refineries generate high value Lube base stocks along with higher Fuel oil, where as Fuel refineries generate LPG, MS & HSD

• Price differential between HSD/MS and LOBS along with FO governs the margin difference

• Low price differential between LOBS and HSD/MS indicates better margins for Fuels refineries

Key Components-Product Key Components-Product

– The margins of Fuels refinery are higher than the Lube

refineries except for the year 2001-02 where the LOBS prices

are very strong

– Lube prices are observed to be inelastic as compared to

Fuels

0

1000

2000

3000

4000

5000

6000

7000

Rs

/MT

99-00 00-01 '01-02 '02-03 '03-04

HSD/MS & LOBS price differentials

500 N-MS 500N-HSD

Fuels, Lube & Mixed refinery margins

0

1

2

3

4

99-00 00-01 '01-02 '02-03 '03-04

$/bb

l

FCC LOBS Mixed

Key Components-ProductKey Components-Product

Key Components-ProductsKey Components-Products

Shifting product mix by

• Flexibility in FCC and Lube Operations

• Optimize Product Mix by Blending

• New projects like GFEC ,Group-II Lubes

Key Components-ProductsKey Components-Products

Why Blending?

• Non compliance of individual streams to any product

specification.

• Non availability of matching secondary processing facilities

• Disposal problem for by-products like extract, wax.

• Up gradation of valuable surplus streams due to lack of

upliftment of specific product.

• Maximizes the Refinery profitability, by optimizing the overall

production slate

Key Components-Products

Examples of blend optimization

Key Components-Products

Examples of blend optimization

• Possible routing of High ‘S’ I SS is 150N, LDO & IFOValue of Iss realized in 150 N Rs 16850 / TValue realized in LDO Rs 15525 / TValue realized in IFO Rs 10060 / T

• Possible routing of VTBValue realized in Bitumen Rs 8400 / TValue realized in IFO Rs 4420 / T

• Refinery location plays a major role in deciding a refinery’s

margins

• The factors contributing to Refinery location impact are:

– Landed product price

– Landed crude cost

– Port restrictions & Local taxes like Octroi

Key Components-Refinery locationKey Components-Refinery location

• Landed crude cost:

– Coastal Refineries incur actual crude cost basis FOB

price (Free On Board) + Freight (Suez Max/ VLCC) +

Duties.

– Inland refineries incur pipeline charges over and above

the coastal price to receive the crude

– Port constraints & Local duties:

– In the west coast (Mumbai) only dead freighted suez max

tankers can be received, where as for inland

transportation through pipeline Suez max/VLCC tankers

can be received at places like Vadinar


– Inland & West coast margins net of location impact for

crudes sourced from 3 regions

4.6 4.4

3.32.4

1.71

0

1

23

4

5$/b

bl

Inland West coast

Indian Refining margins

Arab Light Bonny light Labuan


Advantages & Disadvantages:

• Inland refineries:

• Lower risk from imports

• Less competition from other locations

• Look for local market

• Coastal refineries:

• Easy exports

• Threat from imports


• EURO-III specifications for MS & HSD are in place by April’05

• Refineries have to bring down Sulfur (150 ppm), Olefins (21%) &

Aromatics (42%) and increase Octane of MS to 91

• HSD specifications are changing to reduce sulfur levels and also

making it lighter with increased recovery levels

• Refineries are making huge investments to meet these

specifications there by sustaining their operations

• The new transfer prices of EURO-III MS & HSD compliant

products and its impact on refinery margins is yet to be seen

Shift in Product specificationsShift in Product specifications

Product Specifications(Diesel)Product Specifications(Diesel)

EURO-I EURO-II EURO-III EURO IV

(Apr. 2005) (Apr. 2010)

Density Kg/m3. Max 837.6 837.6 845845

Cetane No. Min. 48 48 5151/53

Sulphur wppm Max 2500 500 350 50

Flash Point C Min. 35 35 35 35

Distillation vol% - 370 360360

T-95, Max

Commissioned DHDS Phase-II Project in June’2004

Product Specifications(Gasoline)Product Specifications(Gasoline)

EURO-I EURO-II EURO III EURO IV

(Apr. 2005) (Apr. 2010)

RON Min. 89 89 95 Prem 95 Prem

91 Reg. 91 Reg

MON Min. 80 80 85 Prem 85 Prem

81 Reg. 81 Reg.

Sulphur wppm Max 1000 500 150 50

Benzene Vol% Max 3.0 1.0 1.0 1.0

Olefins Vol% Max - - 18 Prem 18 Prem

21 Reg 21 Reg

Aromatics Vol % Max - - 42 35

Green Fuels & Emission Control ProjectGreen Fuels & Emission Control Project

Naphtha

SPLITTER

ISOM

Naphtha Naphtha HydrotreaterHydrotreater

& Isomerization& Isomerization

GASOLINE

POOL

HydrotreaterHydrotreater

IsomerateIsomerate

ReformateReformate

SHU

Selective HydrogenationSelective Hydrogenation& Splitter& Splitter

PRIME G+

Light FCC GasolineLight FCC Gasoline

Heavy FCC GasolineHeavy FCC Gasoline

FCCU CrackedNaphtha

H2

H2

H2

CCR

ReformerReformer

NHT Make up HMake up H22

Light NaphthaLight Naphtha

Heavy NaphthaHeavy Naphtha

LPGLPG

• The demand for lighter and cleaner products increasing

with the economic growth

• The incremental world crude oil supplies are increasingly

heavier

• Refineries future focus areas– Invest in bottom reduction facilities

– Conversion of surplus Naphtha to LPG

– Come up with complex facilities to meet the stringent product

specifications

– Facility additions or revamps to change the product mix for high

Gasoline & LPG

– Augmentation of cracking facilities/ Petrochemical feed stock to

meet the expected future demand

Road to the FutureRoad to the Future

Refinery Planning: Central PointRefinery Planning: Central Point

Crude procurement

MarketingRefinery Planning

Scheduling

Operations

Finance

Process analysis cell

Maintenance

Profitability Cell

Refinery planning works as a connecting department in refinery and aligns the refinery operations towards the common goal

Role of Planning Role of Planning

• Preparation of Production Plans

• Daily monitoring of Refinery Operations

• Economics

• Reporting & Presentations

• Preparation and Appropriation of NPCB

• Planning of crude processing and production slate of the refinery for a given period of time considering refinery configuration, oil prices, product demand, refinery operating constraints and planned shutdowns.

Objective:

Maximize margins of the refinery while meeting the market demand

• Planning tools– Process Industries Modeling system (PIMS) – LP based model– In-house developed planning model in MS Excel

Role of Planning Role of Planning

Types of PlansTypes of Plans

• Types of production Plans– Long Term Plans– Short Term Plans

• Long Term Plans:

These Plans are prepared for period of 1 year. – Memorandum Of Understanding (MoU) Targets– Industry Logistic Plan (ILP) Targets– Annual Plan for MoP&NG– Internal Target (Revenue Budget)

Long Term PlansLong Term Plans

• Input required

– Annual Product demand figures from Marketing

– Crude and Product prices from IT&S dept. (HQO) and Corporate

Pricing group (HQO)

– Commissioning schedule of new projects during the year, if any,

from Projects Dept.

– Shutdown plans of processing units from Maintenance Dept.

• Submission period

– September to January every year based on HQO requirement

Short term PlansShort term Plans

• Short term Plans

– 3 Months rolling plans

– Monthly internal plan

• Inputs required

– Capacity and availability of all process units

– Type of crude oil to be processed. Term & Spot

– Yield pattern of crudes / secondary processing units

• Assays for trial crude

• Test run / established yield for others

– Product specifications – Special products like low ‘s’ FO, MS-93

– Prices of Crude and products

– Market Demand of LOBS and specialties

– Tankage capacity and ullage

Typical Solution with an LP ModelTypical Solution with an LP ModelSOLUTION STATUS: OPTIMUM

OBJECTIVE FUNCTION VALUE 432.256

FEEDSTOCK PURCHASES

Jul 1-31

BOM BOMBAY HIGH 267

ARL ARAB LIGHT 106

AXL ARAB XTRA LIGHT 95

MUR MURBAN 95

BSL BASRAH LIGHT 95

Total Crude 658

PRODUCT SALES

=============

LPG LPG 21.3

LPG Own Use 0.0

LAN LOW AROMATIC NAPHTHA 59.4

HAN HIGH AROMATIC NAPTHA 0.0

SCN SPECIAL CUT NAPHTHA 18.0

M87 MS 87 OCTANE 31.6

HEX TREATED HEXANE 8.0

SOL SOLVENT 1425 1.5

Performance monitoringPerformance monitoring

• Monitoring of the crude thruput and production on day to day basis

– Process unit status

– Daily crude thruput & Productions

– Stream disposals

– Tank inventories

– Product qualities

• Comparison of actual performance vis a vis prorated plan & reasons for variation

• Detailed factor analysis for yield variation and advising the same to Management

• Suggest corrective action plan for achieving the target production during balance period of the month

Crude planningCrude planning

• Crude requirement to C&S Dept. HQO

– Term crude based on annual targets

– Spot crude in view of fluctuating crude requirement on month

to month basis

– Trial crude based on crude evaluation of new crude

• Crude lay days planning based on crude inventories, unit

shutdowns etc.

• Reporting variation in crude quality like API, sulfur etc. to C&S for

claiming agreed quality discounts

Economics Economics

• Economic studies for improving overall profitability of the Refinery as

well as corporation

– Keeping track of international crude and product prices through

Platts Oilgram Report and based on the input from Crude &

Shipping (C&S) Dept HQO

– Evaluation of different crudes for their suitability of processing

based on the available assay data, assays provided by C&S dept.

or HP crude assays available in the Planning software PIMS

– Analysis of future product quality requirement like implementation

program for EURO-II & EURO-III Fuel standards

EconomicsEconomics

• Economics of producing new products based on the potential demand projected by Marketing or change in specifications

– Low ‘S’ LSHS (0.45% & 0.6 % ‘S’)

– Low ‘S’ IFO (2%)

– Upward revision in HSD flash point

• Backup economics for Loss of Profit claim for refinery in the event of fire, damage etc. Interaction with Finance on such claims and provide any backup information required by insurance agencies

• Export evaluation for export of products like Naphtha, IFO etc.

EconomicsEconomics

– Synergy with other Refineries• VGO processing at Visakh, MRPL & BPCL• Sour diesel processing at BPCL• SKO bridging by Visakh for ATF maximisation

– Refinery configurations studies on PIMS for bottom upgradation, de-bottlenecking the existing units and for new product specifications

– Blending new feed stocks for product upgradation • Reformate from MRPL• Toluene for MS-93

Reporting and presentationsReporting and presentations

• Various Refinery performance reports for Management information and for submitting to PPAC, RCD & other government agencies. This includes

Frequency

Unit status report Daily

Production and inventory report to PPAC Daily

Performance report to C&MD weekly

Refinery Operating Report Monthly

ILP datasheet Monthly

Quarterly performance review Quarterly

MoU evaluation report Quarterly

Draft director Report Annual

Reporting and presentationsReporting and presentations

• Preparation of various presentations on Refinery

performance and other specific areas like strategy etc. for– Refinery Management– C&MD /Dir (R)– Management Committee meetings– QPR meeting– AGM– Visits of VIPs like parliamentary committees, Press

representatives, Ministers and other Officials `

THANK YOU!!!THANK YOU!!!

Documents

Refinery Economics. Table of Contents 1.Refinery Margin 2.Global Scenario 3.Indian Scenario 4.Key factors affecting Refinery Margins Crude Processing