The fundamentals of operating a refinery business are easy - maximize margin capture and minimize operating expenses.  Putting these fundamentals to practice, on the other hand, is extremely challenging.  Since margin capture if often a nebulous metric, many companies have focused efforts on disciplined opex management.

materialize until several years later, it’s truly difficult to determine whether the right decisions are made. 

Challenges aside, the following summary lists the Top 3 behavioral traits of refinery industry leaders who manage opex budgets with excellence.  These proven methods place organizations at the top of the pack on a sustainable basis.

Ground-Up Budget Development

Less than half of the refinery organizations utilize a ground-up approach when developing budgets, and less than half that claim this approach actually achieve it.  Most of the organizations out there either lack discipline, or do not have the organizational capability to manage this task. 

The easiest way to create an annual budget is to take past performance and just extrapolate future potential.  Many business units within a refinery take this approach, with one of two variants.  In one scenario a business unit may take historic performance and then add some fat to account for future unplanned expenditures.  We call these the sand-baggers.  In the other scenario a business unit may take historic performance and then make a nominal reduction without applying any fundamentals.  We call these the slash-and-gashers.

In either of these scenarios, no fundamentals are used to reasonably predict future spend.  These organizations do not understand past expenditures, and do not account for future operational changes that affect base performance.  Organizations that use this approach are often always missing their opex targets, and having to spend a lot of time reconciling performance deviations. 

So what does good look like?  Well, a disciplined organization will start from a clean sheet, and layer in each expenditure one line-item at a time.  Beyond utilizing discrete events, great refinery organizations build opex budgets based on fundamental business drivers.  Let’s see examples of what this may look like:

Energy Usage:

Catalyst and Chemicals:

Labor Costs:

Maintenance Costs:

Normalizing for Unit Throughputs

As emphasized above, a critical component of building a budget from the bottom-up requires the use of unit rate normalization.  Organizations that do not track budgets as a function of refinery utilization are only fooling themselves. 

I have seen many refinery leadership teams take credit for lower energy and catalyst consumption when units have been taken offline for planned or unplanned reasons.   Lower opex performance at the expense of refinery utilization simply exhibits poor management behavior.   As noted above, the whole point of operating a refinery is to make money.  Meeting an opex budget while giving up gross margin is just plain stupid. 

Prioritized Shed List to Manage Over-Usage

In my last statement I expressed the unjust action of trading off gross margin for opex.  While I believe this to be true for most scenarios, I also understand the need for discipline.  There will be times where leadership will have to make appropriate trade-offs to manage a refinery opex budget.

There will be situations where unpreventable situations may wreck an opex budget, and actions will be required to correct course.  For these situations, every refinery should have a pre-defined list of actions that trade off benefits in an attempt to manage opex.  Some organizations call this a “Shed List”, and it details a prioritized set of actions that an organization can take to shed costs. 

The main key to developing a Shed List is to put careful consideration in understanding the cost to benefit ratio of each action.  Every action taken to reduce opex will reduce overall profitability; however, the objective is to minimize how much overall profit is lost to manage opex.

Even though many refiners in North America currently benefit from discounted mid-continent crude prices, we all know that the high margin environment will not last for long.  When margins start to narrow, refiners with the most discipline around opex management will remain the most competitive.    

Opex management requires careful planning during budgeting cycles, as well as thorough stewardship while executing day to day business.  While the actual budget strategy will vary by facility, the method of managing the budget is very straight forward.