A Business Case for State-of-the-Art Crude Refinery

1 INTRODUCTION & BACKGROUND

For the last many years, refiners worldwide have been faced with market conditions that are overwhelmed with a focus on cleaner fuel usage, decarbonization, and recent demand uncertainties brought by the pandemic. According to S&P Global[1] 8.5 million bpd refining capacity will come online by 2026 while 3.6 million bpd ceases to exist. Further emphasized by IEA, in its medium-term oil report Oil 2021, is the fact that successfully managing the energy transition will be the most important challenge for refiners in the coming years. The writing on the wall is that producing clean fuels, reducing CO₂ footprint is the only feasible path for refiners to tread in the foreseeable future.

According to IEA’s forecast, global oil demand is expected, including biofuels, to be little over 100 bpd by 2026 with 70% of this increase in demand attributable to ethane, LPG and naphtha together with demand for feedstock for polymers and chemicals – petrochemicals. Total worldwide refining capacity today stands at 102 million bpd, which is currently in excess of global demand – due to old technologies that do not support production of cleaner fuels and, hence, the impending closures.

1.1 Definitions and Abbreviations:

• British Ton = Long Ton = 2240 lbs
• US Ton = Short Ton = 2000 lbs
• MT = Metric Ton = 1000 kg = 2205 lbs
• 1 MT of Motor Spirit = 1359 Liters ²
• 1 MT of HSD = 1195 Liters ³
• 1 US Gallon = 785411784 Liters
• 1 Imperial (UK) Gallon = 54609 Liters
• 1 Barrel = 42 US Gallon = 35 Imperial Gallon = 9873 Liters
• 1 MT of light crude roughly equals 7.5 barrels (this varies with API gravity)

1.2 Crude and Petroleum Products – Technical Info

• API Gravity: A specific gravity scale developed by the American Petroleum Institute (API) for measuring the relative density of various petroleum liquids, expressed in degrees. API gravity is gradated in degrees on a hydrometer instrument and was designed so that most values would fall between 10° and 70° API gravity. The arbitrary formula used to obtain this effect is: API gravity = (141.5/SG at 60°F) – 131.5, where SG is the specific gravity of the fluid.
• Crude Assay: A crude oil (condensate) assay is the chemical evaluation of crude oil feed-stock for refinery design by petroleum testing laboratories. Each crude oil type has unique molecular and chemical characteristics. No two crude oil types are identical and there are crucial differences in crude oil quality.
• Euro Standards: Air pollutant emissions from transport are a main contributor to air quality problems. Emissions of particulate matter (PM), nitrogen oxides (NOx), unburnt hydrocarbons (HC) and carbon monoxide (CO) are regulated in the EU. Emission regulations are adopted as part of the EU framework for the type approval of cars, vans trucks, buses and coaches. Successive “Euro” standards are designated by Arabic numerals for light-duty vehicles (cars and vans) and Roman numerals for heavy-duty vehicles (trucks, buses and coaches). The most widely adopted currently are Euro 5 and Euro 6 for light-duty, and Euro V and Euro VI for heavy-duty.

Euro 5 emission limits (petrol)

• CO– 1.0 g/km
• HC – 0.10 g/km
• NOx– 0.06 g/km
• PM– 0.005 g/km (direct injection only)

Euro 5 emission limits (diesel)

• CO– 0.50 g/km
• HC+ NOx– 0.23 g/km
• NOx– 0.18 g/km
• PM– 0.005 g/km
• PM– 6.0×10 ^11/km

Euro 6 emission limits (petrol)

• CO – 1.0 g/km
• HC – 0.10 g/km
• NOx – 0.06 g/km
• PM – 0.005 g/km (direct injection only)
• PM – 6.0×10 ^11/km (direct injection only)

Euro 6 emission limits (diesel)

• CO – 0.50 g/km
• HC+ NOx – 0.17 g/km
• NOx – 0.08 g/km
• PM – 0.005 g/km
• PM – 6.0×10 ^11/km

• Gas Oil: In the EU regulatory language, “gas oil” is the term used to describe a wide class of fuels, including diesel fuels for on-road vehicles, fuels for non-road vehicles, as well as other distillate fuels. Within the gas oil classification, fuels for on-road vehicles are referred to as “diesel fuels”, while fuels for non-road mobile machinery are referred to as “gas oils” intended for use by non-road mobile machinery, agricultural and forestry tractors, and recreational craft.
• Hi Octane: Hi octane has a higher octane rating (RON 97 & Above) & is used in high-performance gasoline engines that require higher compression ratios. They have good antiknock properties

Flash Point: -43 °C

Boiling Point: up to 184 °C

RON: 97 & above

• HSD: High Speed Diesel (HSD) Diesel Oil is a complex mixture of Hydro Carbons. It is a brown colored oily liquid with pungent smell. HSD is normally used as a fuel in medium and high-speed compression ignition engines (operating above 750 rpm) in commercial vehicles, stationary diesel engines, locomotives and pumps etc.

Flash Point: 50 °C

Boiling Point: up to 185 °C

• JP-8: is a kerosene-based jet fuel, it can be used in both turbine-powered aircraft and diesel-powered ground vehicles.

Flash Point: 38 °C

Boiling Point: 176 °C

• Kerosene: Kerosene is paraffin oil, flammable hydrocarbon liquid commonly used as a fuel. Kerosene is typically pale yellow or colorless and has a non-unpleasant characteristic odour. It is obtained from petroleum and is used for burning in kerosene lamps and domestic heaters or furnaces, as a fuel or fuel component for jet engines, and as a solvent for greases and insecticides.

Flash Point: 38 °C

Boiling Point: 300 °C

• LPG: Liquid petroleum gas is a combination of predominantly Propane with small quantities of Butane. The higher the %age of Propane the better is the quality of LPG. Based on assumption of pure Propane, following are the characteristics of LPG:

Flash Point: – 104 °C

Boiling Point: – 42 °C

• LSD & ULSD: Low sulfur diesel have a maximum sulfur content of 500 ppm while ultra-low sulfur diesel has a sulfur content of 15ppm. ULSD is aimed at lowering diesel engines harmful exhaust emissions and improving air quality.

Flash Point: 50 °C

Boiling Point: up to 185 °C

• Mogas: Motor gasoline is a volatile mixture of flammable liquid hydrocarbons mainly hexane, heptane, and octane used principally as a fuel for internal-combustion engines. They have octane number usually between 91 & 93.

Flash Point: -43 °C

Boiling Point: up to 184 °C

RON: 91-93

2 TRADITIONAL BUSINESS MODEL FOR REFINERIES

Traditionally, GRM (Gross Refining Margin) has been the financial evaluation model used for identifying the feasibility of a refinery project. GRM is the gross margin within which the refinery has to operate and includes operating expenses, financial expenses and expenses related to procurement of Crude Oil / Condensate – depending on API gravity. Refining margins are the difference in value between the products produced by a refinery and the costs, including value of the crude oil, incurred to produce them. Refining margins will thus vary from refinery to refinery and depend on the price and characteristics of the crude used.

GRM = Selling Price of Product/s – Input Price of Crude / Condensate

A basket of input and output is made. Weighted average price of all the inputs will create basket of input price and weighted average expected selling price of products will make the basket of selling price.

Difference of input basket price and sale basket price is GRM. It may be noted here that GRM does not cater for any other OPEX or CAPEX costs, as such is not the profit margin for the refinery.

Profit Margin of Refinery = GRM – CAPEX costs – financial costs – OPEX costs (HR, operational maintenance, etc.) – return to equity holders (if fixed) – any other costs.

Problem with this traditional model started as the world started refusing use of heavier distillates like fuel oil and worsened as Euro specification fuels started to get wider implementation. All this contributed significantly to GRM of obsolete refineries and thus their baseline tumbled. Low API gravity crudes (in the range of 10 – 20 API) also contributed to the problem. More valuable lighter petroleum products are best possibly extracted (as percentage quantity of crude oil per barrel) from crudes that are API 40 and above. This answers the question why the Bench Mark North Sea Brent (which is among the lightest crudes available) is always trading at a premium with WTI value per barrel. Heavier crudes give heavy distillates like FO and require more chemical processing (catalytic conversion) in refinery to break into lighter distillates. This requires special equipment and chemical dozing that increases the cost per barrel – reducing GRM.

3 COMPETITIVE BUSINESS MODEL FOR STATE-OF-THE-ART REFINERIES

NOTE: The figure below may have copyright restrictions and is included only for concept clearance. (Not to be published)

Today’s successful refinery projects are based on integration and enhancement of business processes, practices and technical developments across the entire HCVC (Hydrocarbon Value Chain) – Upstream, Midstream and Downstream. GRM for products refining operations, in this business model, is a subset of the margins that are spread over the HCVC. This approach, shown below as a simplified list of processes and equipment, is the model that is adopted by recently established large refineries in Middle East and other parts of the world like Malaysia, Canada and US.

• Crude Extraction and Processing

1. Identifying Crude / Condensate Reserves for allocation to refinery life
2. Processing requirements for Condensate (extracted with associated gas)
3. Pipelines for Crude / Condensate movement to refinery storages
4. Crude Storages

• Refining (Typical Modules for Euro 5 and above specifications)

1. Crude Assay analysis and design license technology
2. Crude distillation unit (CDU)
3. Naphtha hydro treater unit (NHTU)
4. Reformer unit (RFU) – (Euro-V, VI compliant fuel supply)
5. Isomerization unit (ISU)
6. Gas concentration unit (GCU)
7. Kerosene treating unit (KTU)
8. Diesel hydro treating unit (DHTU)
9. Vacuum distillation unit (VDU)
10. Thermal Cracker + Visbreaker

• Petrochemicals and Specialty Chemicals

Varies based on crude specification, refining process, market demand

• Logistics

1. Intermediate Storages
2. Product Storages
3. Pipelines
4. Tanker movements

• Financials and Marketing – includes bulk trades and retail business

1. Petroleum Products movement
2. Bulk customers’ sales package
3. Retail customers” sales package
4. Sensitivity Analysis
5. Digitalization – Real time Operations Feedback and Decision Making

Despite being part of a HCVC, refinery operations and their integration with the upstream and downstream value chain, remain the pivotal link that ensures success of the business model.

The competitive business model, suggested above for refining operations in the HCVC, necessarily require real-time monitoring of the entire process chain. Any disruption, that remains in the process chain for significantly long period, would hurt the entire value chain and the losses would rise exponentially. Fortunately, digital implementations are commercially available and implemented that provide following capabilities for real-time HCVC process management:

Managing the velocity of operations – Today’s competitive refinery operations as part of HCVC process management has its own velocity of operations. The management has to ensure that the velocity of HCVC is not disrupted at any link – rather every effort is made to increase the inherent velocity of product moving through the internal value chain (from crude to petroleum product delivery at consumer retail outlet). Every incremental increase in the velocity of the HCVC creates an opportunity to increase asset efficiency and improve the company’s bottom line.

Managing the variability of operations – From wellhead fluids to process temperatures, pressures and equipment performance under varying environments, there are many variables that act as a counter-force to reduce the velocity of the value chain. Managing variability requires timely decision making based on data that comes from efficient integration and processing of live process data.

An Agile work environment is required for coordination and efficiency of this new operations management system. The Enterprise / office level management layer needs to have real time visibility. In the traditional model the real-time visibility was left to Level 1-2 control managers and at times up to Operations Managers. This will not work for today’s competitive business model for HCVC process management.

Strategizing Process Execution to Improve Visibility – It is very important to prepare an execution strategy that appreciates the importance and criticality of individual process in the HCVC and improves visibility of the process managers to make timely operational and business decisions. A decision that affects upstream process, to start with, will disrupt downstream supply chain with a time lag and vice a versa.

Managing HCVC in totality is a challenging job requiring higher levels of Operational Excellence. However, it is generally accepted that with the reduction in refining margins for old business model, this new competitive business model is the future of petroleum industry – the key is to reduce the decision cycle with accompanying change of mindset accepting the importance of real time management.