understanding refinery profitability · purvin & gertz background ¾founded in 1947 – in...

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

2

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

3

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

4

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

5

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)

6

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

8

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

11

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

12

Configuration has a significant impact on the refinery yields

33

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 %

13

Hydroskimming capacity barely breaks even. All of the margin is earned by the conversion units

-4

-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

14

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

15

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

16

-2

-1

0

1

2

3

4

5

6

2002 2004 2006 2008

FCC, Azeri, CIF Med

FCC, Azeri, FOB Med


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

17

-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


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

18



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

19

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

20

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)

21

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

22

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

23

Possible to use some price data to make an initial opinion on the level of refinery profitability that is implied in a price scenario



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


24


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

25

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

28

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

29

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]

understanding refinery profitability · purvin & gertz background ¾founded in 1947 – in...

Documents