Damn You Budget! | RefinerLink

RL Blogs

Damn You Budget!

By Ralph Laurel

Dec 30, 2014

I had to guess, I say you’ve been frustrated by a refinery budget or two during your time.


Budget is a dirty word amongst most people who work at a refinery. They stop you from implementing good ideas, and they’re constantly getting in the way of getting work done.


A lot of times management place crazy rules around where you can spend that budget as well.



Like the one about you having to get 10 (or maybe 20) times the margin dollars back to spend one dollar of expense. “Come again?” or “WTF!” might be a typical reaction from an engineer trying to optimize around profitability for the refinery.


You ever have the discussion about how you’d be willing to spend your own money for that new idea if the company would give you all the profits resulting from that idea? Yeah, I think I’ve been involved in at least 25 of those. I’d say it’s a pretty common occurrence to constantly battle the loathsome budget.


I’m here to tell you that just like most other concepts, the refinery budget just needs to be utilized properly. Here are some key flaws that may be present in how your refinery utilizes a budget.



Budget Development


PROBLEM: Surprise! The budget is based on what you spent in the past or even worse it’s based on some number that a manager dreamed up.


If the budget is not based on any realistic scope of work, it’s hard to make the workload match up to the money spent. That’s when a refinery ends up making some terrible decisions on what to cut. Instead of scrutinizing where the money is being spent in a systematic manner, the focus usually turns to the large dollar items.


SOLUTION: It’s vital to understand the basis and document diligently when developing a budget. The extra effort up front can save lots of time and bad decisions in the future.


Know where the money is supposed to go and also document the justification for spending that money. That way if something needs to be cut during the budget year, you’ll know what is available to be cut and what you’re giving up.


Avoid budgets based on historical spend as you’ll never find opportunities to reduce spend in specific areas to free up money for other areas.



Budget Consistency Across the Refinery


PROBLEM: Typically, the refinery budget is split into various smaller budgets for different divisions and business teams. Each budget is controlled by a different person trying to hit his or her target.


It’s human nature to try to improve your area of responsibility; therefore, people will rarely come in way under budget.If one part of the budget is under-spent, that group will find a way to utilize that money somewhere else. This doesn’t allow for consistency in how the money is spent across the different groups within the refinery.


SOLUTION: From budget development to budget spending, some oversight is needed to make sure that the justification for a dollar spent in one group is similar to that in another group.


If one area of the refinery has some extra money left in their budget at year end, they shouldn’t spend it if another area has a project or activity with greater returns. The only way to ensure consistency is to have some external oversight on where the money is going.



Expense Hurdle Rates


PROBLEM: Many refineries have hurdle rates for spending expense dollars. For instance, an expense dollar shouldn’t be spent on making more margin dollars unless 



there is a 5x, 10x, or even 15x benefit to cost ratio.


Setting hurdle rates ensure that a dollar spent will still make you money with varying market conditions.


They also provide a margin of error for assumptions made in calculating the benefit. Unfortunately, many refineries set the number arbitrarily and never revisit it.

SOLUTION: Hurdles rates should be utilized to ensure consistency across the refinery. It’s a way to make sure one business team isn’t spending money on 2 to 1 benefit to cost activities while another is cutting activities making 10 to 1 returns.


This goes hand in hand with the previous topic of consistency across the refinery. The hurdle rate should be adjusted to find the right balance of spending on margin improvement, energy efficiency, expense reduction, and safety mitigation activities.


Spend in each of these areas, along with the respective opportunities and risk in these areas, should be revisited periodically to adjust the hurdle rate.



Budget Contingency


PROBLEM: If your refinery budget has a contingency, chances are that if no major events come up requiring the contingency to be spent, it will be held till the end of the year.


After all, it’s better to come in under budget than over budget. Many times, extra work will be initiated at the very end of the year to use of the contingency.


This sudden increase in work and the rushed manner in which it’s done can be very inefficient.


SOLUTION: Have a list of items developed at the start of the year that didn’t make the 


budget. Know the amount of time required to implement these items and release contingency ratably over the year. This will prevent the sudden surge in work at the end of the year.



So yes the refinery budget is a pain, but it can be much less painful if it’s utilized the right way. After all, no one can argue that a budget is not necessary. You wouldn’t run your household without a budget or spend without properly scrutinizing the justification… so you can’t blame companies for doing the same.

Enjoy this content? Join our Free Newsletter    
Do NOT follow this link or you will be banned from the site!