understanding refinery profitability
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Understanding Refinery ProfitabilityTRANSCRIPT
Understanding Refinery Profitability
Prepared for
OPERA
30 November 2010
About this presentation
This presentation has been prepared for the benefit of the presentation attendees. Any party in possession of this presentation may not rely upon its conclusions. Possession of the presentation does not carry with it the right of publication.Purvin & Gertz conducted this analysis and prepared this presentation utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events orcombinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY
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Purvin & Gertz background
Founded in 1947 – in business for 63 yearsIndependent firm owned by active consultantsProvides commercial, technical and strategic advice in the oil, natural gas, gas liquids, chemical and power generation industriesWorldwide operation – Houston, Calgary, London, Dubai, Singapore, Buenos Aires, MoscowMost consulting activity relates to projects for individual clientsProvide subscription studies targeting issues of topical interestRegular market analysis services for oil, gas and gas liquids
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What is unique about Purvin & Gertz consultants?
Technical background, knowledge of process
technology, past experience of process
engineering
Access to market forecasts and global analyses, global
perspective, long term vision
Worked in refineries, know how they operate, know
how they solve their problems and how they
plan, organize and control their activities
Knowledge of the commercial aspects of
refining, vision of refining as a business
Our skills and experience allows us to interface refining organizations at all levels and across disciplines
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Understanding refinery profitability - Topics
The importance of refinery configuration
The importance of location and logistics
How to make an initial assessment
How to use benchmarks
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The processes used by refineries can be classified into four categories
SEPARATIONCrude oil distillationVacuum distillationSolvent extraction
CONVERSIONVisbreakingThermal crackingCatalytic crackingHydrocrackingCoking
TREATING (Quality Improvement)ReformingIsomerisationHydrotreating
TRANSFORMATIONAlkylationEtherification (e.g. MTBE)
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The “hydroskimming” refinery upgrades distillation fractions to a few finished products
HYDROTREATER
Hydrogen
REFORMER
Gasoline
Heavy Fuel Oils
Diesel / heating oil
ATMO SPHERIC
DISTIL LATION Jet / Kerosene
Crude Oil
ISOMERISATIONNaphtha
Gasoil
Heavy
Light
Hydrogen
TREATER
GAS PLANT
Kerosene
LPG
Refinery Fuel
Refinery fuel7
Refineries need to convert some residue to light products in order to keep markets supplied
Crude Oil Market
Residue
Diesel/ Gasoil
Kerosene
NaphthaNaphtha & Gasoline
Jet/Kerosene
Diesel / Gasoil
Fuel Oil
21%
7%
24%
45%
38%
11%
33%
18%
The average yield obtained from crude oil distillation does not match the proportion of products demanded by the market
To rectify this refiners use different combinations of conversion and treating processes to produce more lighter products from residue
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A “VGO” cracking refinery recovers VGO by vacuum distillation and feeds it to a conversion unit where it is upgraded
VACUUMDISTILLATION
DIS
TILL
ATI
ON
HYDROTREATERS
VGO CRACKING
ISOMERIZATION/REFORMER
Gasoline
Middle distillates
Crude Oil
Refinery Fuel and LPGHYDROSKIMMING BLOCK
Naphtha
Kero/gasoil
VGO CRACKING BLOCK 9
Heavy fuel oil blending
A “Deep Conversion” refinery has process units that convert vacuum residue to lighter products
VACUUMDISTILLATION
DIS
TILL
ATI
ON
HYDROTREATERS
VGO CRACKING
ISOMERIZATION/REFORMER
DEEP CONVERSION
Gasoline
Residue
Middle distillates
Crude Oil
Refinery Fuel and LPGTOPPING/HYDROSKIMMING
Naphtha
Kero/gasoil
VGO CRACKING10
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Representative yields of common conversion processes
0%
20%
40%
60%
80%
100%
FCC HydroCrack.
ThermalCrack.
Fuel gas
LPG
Gasoline
Naphtha
MiddleDistillate
VGO
Residue Vis-breaking
Coking ResidueHDC
Indicative value,2009 200-250$/tonne400-450 $/tonne
Feed type Vacuum residueVacuum gasoil
Note: Rotterdam price of diesel in 2009 was 543$/tonne
Conversion units use some of the most sophisticated and expensive equipment that are found in refineries
FCC Hydrocracking Reactors
Coke drums
Delayed Coker
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Configuration has a significant impact on the refinery yields
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13 919 12
39
45 56
57 64
2538 31
22 22
0
20
40
60
80
100
HSK NorthSea Crude
FCC NorthSea Crude
HDC NorthSea Crude
HDCRussianCrude
CokingArabianHeavy
Fuel oil/coke Middle distillates Naphtha+gasoline LPG
Refinery yields from different crude types, weight %
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Hydroskimming capacity barely breaks even. All of the margin is earned by the conversion units
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-2
0
2
4
6
8
10
12
1990 1995 2000 2005
Hydroskimming FCC Hydrocracking
(Dollars per Barrel)
A conversion refinery can be seen as the sum of two parts:
an hydroskimming block
the conversion units
The hydroskimming block does not earn any margin. Its main function is to feed the conversion units
Most of the margin is made by the conversion units
PGI benchmark, high sulphur crude refining margins for sales at CIF ARA prices
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Topics of this presentation
The importance of configurationThe importance of configurationThe importance of configuration
The importance of location and logistics
How to make an initial assessmentHow to make an initial assessmentHow to make an initial assessment
How to use benchmarksHow to use benchmarksHow to use benchmarks
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The competitive position of a refinery improves with access to supplies of crude and to markets for products
Linked to oil fields by pipeline
Coastal refinery with deep water
port
Inland refinery with
pipeline connection to a deep water port
No pipeline, no deep
water port
Inland refinery selling into the local inland market
Coastal refinery selling into the local market
Export from a coastal location
Refinery supplying into a market best served by another refinery
Export from an inland location
Most Competitive
Least Competitive
Cost of delivery of crude oil reduces
Valu
e of
pro
duct
s in
crea
ses
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-2
-1
0
1
2
3
4
5
6
2002 2004 2006 2008
FCC, Azeri, CIF Med
FCC, Azeri, FOB Med
(Dollars per Barrel)
Export refining (e.g. at FOB prices) makes about $1.00-2.00 per barrel less than refining for a local market (e.g. at CIF prices)When margins drop, export FCC capacity can become marginalHigh exposure to the export market never a good feature for a refineryExport refineries need to make up this competitive disadvantage in other ways
Export refineries tend to be large and complex!
Export refining is less profitable
CIF - FOB MARGINS
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-4
-2
0
2
4
6
8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
State-of-the-Art FCCMarginal FCCMarginal FCC, variable costs
(Dollars per Barrel)
State-of-the-art FCC refinery:200,000 B/D refinery Able to run 100% sour slateAll prices are CIF
Marginal FCC refinery 100,000 B/D refinerySweet crude slateFOB products, except middle distillate
Marginal FCC capacity currently unable to cover fixed costsExplains a lot of what you have seen in recent months in terms of refineries for sale, idled, closed, etc.
There is little stand alone hydroskimming capacity. The next tier of marginal capacity is lower quality conversion capacity
DIFFERENT KINDS OF FCC CAPACITY
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Topics of this presentation
The importance of configurationThe importance of configurationThe importance of configuration
The importance of location and logisticsThe importance of location and logisticsThe importance of location and logistics
How to make an initial assessment
How to use benchmarksHow to use benchmarksHow to use benchmarks
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Useful information needed to make an initial opinion about a risk
Process capacities
Types of crude oil processed
Any information on refinery yields
Logistics associated with the refinery
Price differentials are much more revealing than the absolute level of prices
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Nelson Complexity can be used as a metric of refinery configuration, but is a blunt instrument
Complexity factor represents ratio between the cost of building a certain unit and the cost of a crude distillation unit of identical capacityIt is important to develop NCX factors using a consistent approachConversion is what makes refineries profitable and conversion units have high factors, so conversion refineries have higher complexity…but:
Some units have high NCX, but add little to profitability (naphtha reformers)May not capture important features (e.g. degree of conversion in an HDC)
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Process unit CapacityComplexity
factorComplexity-
barrels
Crude distillation 300,000 1.0 300000Vacuum distillation 160,000 1.5 240000FCC 75,000 6.0 450000Naphtha reforming 35,000 5.0 175000Naphtha isomerization 6,000 3.5 21000Naphtha hydrotreating 50,000 2.0 100000Kerosene/gasoil hydrotreating 78,000 3.0 234000FCC gasoline hydrotreating 27,000 3.0 81000Alkylation 12,000 7.5 90000Lubricants 8,700 44.0 382800
Total complexity 6.91 2073800
Complexity provides an initial indication of where a refinery might fall in terms of conversion
0
100
200
300
1-3 3-5 5-7 7-9 9-11 >11Complexity Factor
Distillation Capacity, MT/y
Topping/HSK VGO Cracking Deep Conversion, lubricants
Refining capacity in Europe by complexity range
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Generally simple and quite marginal
Generally simple and quite marginal
0
2
4
6
8
10
12
2000 2002 2004 2006 20080
100
200
300
400
500
600Sour HDC margin, $/bblDiesel-Fuel spread, $/tonne
($/bbl)
Price differentials can be used to make an idea about underlying conversion margins
Hydrocracking margins track the diesel-fuel oil spread quite well…
0
1
2
3
4
5
6
2000 2002 2004 2006 20080
100
200
300
400
500
600Brent - Urals, $/bblDiesel-Fuel spread, $/tonne
($/tonne) ($/bbl) ($/tonne)
…while light-heavy crude differentials also follow product spreads
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Possible to use some price data to make an initial opinion on the level of refinery profitability that is implied in a price scenario
Topics of this presentation
The importance of configurationThe importance of configurationThe importance of configuration
The importance of location and logisticsThe importance of location and logisticsThe importance of location and logistics
How to make an initial assessmentHow to make an initial assessmentHow to make an initial assessment
How to use benchmarks
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How to use benchmarks
Purvin & Gertz uses models to track refining margins in key world locations and for representative types of refining capacity
Simple factual information about a refinery can be used to understand which benchmark is most likely to track its margins
Historical margins can be compared with the most appropriate benchmark to measure out/under-performance
Sometimes there is an explanation, sometimes there is not
The forecast refining margin for the benchmark can be used to derive the expect profitability of the refinery
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Example: composite FOB Hydrocracking benchmark tracks Saras margins very well
Dollars per Barrel
-1
0
1
2
3
4
5
6
7
8
9
10
2001 2003 2005 2007 2009
Difference
Saras
FOB Hydrocracking, composite slate
ISAB tracks FOB sour HDC and sweet FCC
Dollars per Barrel
0
1
2
3
4
5
6
7
8
9
2003 2004 2005 2006 2007 2008 2009
ISAB FOB Sour HDC FOB Sweet FCC
ISAB has a mix of thermal cracking, mild hydrocracking and FCC conversion capacity
Main conclusions
Excluding performance related aspects, the most important factors of refinery profitability are:
Refinery configurationPrevailing prices in international marketsImpact of location and logistics on crude and product prices
It is not too difficult to make an initial assessment of the competitive position of most refineries with the support of:
expert eyessome simple research into basic features of the refinerythe support of appropriate pricing information
Historical margins can be compared to benchmarks to make an indicative forecast of the profitability of refineries
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Purvin & Gertz services related to the above
Market analysis with prices and margin outlookCrude Oil & Refining Outlook (CORO) :18 month outlookGPMO: Long term outlook (20 years)
SeminarsIntroduction to refining and refinery economics – 1 day introduction
Bespoke trainingCustomized on client’s needs
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Roberto Ulivieri+44 20 7632 [email protected]
Roberto Ulivieri+44 20 7632 [email protected]
Colin Birch+44 20 7632 [email protected]
Colin Birch+44 20 7632 [email protected]