How Smart Refiners Value Crude | RefinerLink
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How Smart Refiners Value Crude

By Optimization Specialist Robert

Aug 23, 2018
 

Understanding how to evaluate crude economics

 
 

The best thing about a refinery LP model is that it will always give you an answer.  The second best thing about a refinery LP is that less than 5% of the refining industry employees really know how to interpret it.  This means that any flunkie can get behind the wheel of PIMS (or any other industry LP platform) and just pump out decisions that everyone inside the refinery follows blindly.

 

It’s truly amazing that with all of the money at stake, not many refiners truly invest in their economics and planning resources.  Imagine buying a VLCC crude cargo worth $200 Million dollars.  Improper case set-up or analysis can easily cost your refinery $2 Million dollars.  The sad thing is that no one would really know that you lost that money.

 

This article will cover some concepts about crude economics so that you (the refinery economist) can apply your skills more aptly, or you (the refinery manager) can ask more intelligent questions to your planning staff. 

 

 

Refinery Configuration

 

The first fundamental aspect of defining crude economics is to value each crude assay in respect to your refinery configuration.  To do this correctly, you’ll need to understand the concept of marginal economics.  Each incremental tier of crude processed at a refinery will differ than the last tier. 

 

The first 100 KBD of crude may have a different value than the next 10 KBD because different constraints will be activated.  The easiest example of demonstrating this concept

 

is through a deep conversion refinery with a crude capacity of 100 KBD and a coker capacity of 30 KBD. 

 

If the first 90 KBD of Maya crude fed to the refinery fills out the coker unit, the next 10 KBD of Maya fed to the refinery will surely have a lot lower incentive. 

 

It goes without saying that

the highest margin crude that a refinery processes is the first few barrels into the crude unit.  As crude throughput increase, the margin for each next barrel decreases.

 

Understanding this concept will be absolutely critical because refinery economics become extremely complex and there are often dozens of variables to optimize and not just one simple one.

 

Assay Valuation – Yields

 

After establishing your refinery configuration, understanding crude yields is the next important step.  If your job is to select crude for your refinery, you better know the yields of crudes inside and out.  I’m not impressed by those who know the sulfur content and API of crudes – that information is hardly useful in refinery economics.  What’s more important is to know the yields of each major cut.  If you do not know the naphtha, distillate, gasoil and resid yields for your refinery’s top 5 crudes, you need to hit the books harder.

 

    

 

 

People who sell crudes use this as the first guide of establishing the value of each crude.  While resid yields (Not API) define a good portion of how much a crude is worth, you cannot ignore the importance of valuing the other cuts.  A West African crude going to the U.S. will have a different value than that of the same WAF crude going to Europe.  It simply can result from the different market values of gasoline to distillates (G/D) in each of the regions and the yield of naphtha to distillate in that specific crude.


More subtle to understand is the relationship of crude yields to refinery configuration.  Often times the primary objective of crude optimization is to fill out each refinery throughput constraint without surpassing another.  For a 100 KBD refinery with a 30 KBD Coker and 25 KBD Distillate Hydrotreater, the optimal crude slate in this scenario may be one that fills out each of these units to the max.  It so can happen that in another part of the year the optimal crude slate is one that leaves the distillate hydrotreater short of feed while exceeding the coker. 

 

Understanding the refinery LP driver requires thorough understanding of crude yields to define where the break-even value of each crude is within different market scenarios. 

 


Assay Valuation - Qualities

 

Following the importance of crude yields, one should also get a good understanding of various crude qualities.  While bulk properties are good indicators, it’s more important to understand the quality of each crude by each cut. 

 

Many refineries may have a high level constraint such as sulfur recovery limits, but it’s also likely that each refinery has many other constraints that drive crude economics.  There are too many to cover properly in one blog, so I’ll just list a handful  qualities by cut to get your gears thinking, and I’ll cover the details in subsequent blogs.

 

 

Naphtha Cut:

  • Paraffin, Naphthalene, Aromatics (PNA) content

  • C6, C7, C8, C9 naphthalene distribution

  • Octane

  • Sulfur

  • Bromine Number

 

 

Jet Cut:

  • Smoke
  • Naphthalenes
  • Aromatics
  • Mercaptans
  • Freeze
  • Total Sulfur

 

 

Diesel Cut:

  • Sulfur
  • Cold Flow (Cloud, Pour, CPPI)
  • Aromatics
  • Cetane
  • Density
  • Viscosity

 

 

Gasoil Cut:

  • Sulfur
  • Nitrogen
  • Aniline
  • Conrad Carbon
  • Nickel
  • Vanadium
  • Sodium

 

 

Resid Cut:

  • Sulfur
  • Conrad Carbon
  • Viscosity
  • Hydrogen Content
  • Nitrogen
  • Ni  + V

 

 

 

Cargo Economics & Logistics

 

A good refinery economist understands that often times refinery optimization is more influenced by logistics than any other factor.  This is the “case set-up” aspect of LP modeling that many economists misconstrue.  It doesn’t matter that the break-even value for a crude grade is worth $95/bbl if you cannot discharge a whole cargo of crude into your storage tanks. 

 

If you do not factor in demurrage costs, dead-freight, transit time, commingling costs, time-value of money, or any other logistic factor into crude valuation, then you’ve simply got the wrong answer.  Any of the factors above can be the deciding factor between Selecting crude A or Crude B, or no crude at all.  This can be true whether you are purchasing crude by pipeline, ship, truck, or rail.

 

 

Conclusively, there are a basket of factors that need to be considered when properly valuing crude economics into a refinery.  The answer simply does not fall out just because you use a refinery LP.  It’s also not as straight forward as building in all the commercial factors.  To really get crude economics right, you need a refinery analyst that has commercial savviness and sound process engineering skills.

 
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  • Anna Popova :   Thank you for posting this. Very interesting... do you believe that for the additional feedstocks, say straight run resids one should use the same approach?

    Dec 03, 2012

  • Keith e bowers :   The optimization of a refinery is, as a class, the most complex and variable 'problem' in the science of Operations Research. It is not unusual to have 1500 simultaneous equations to solve to approximate the true economic optimum. In addition, the 'optimum' answer for today often IS NOT the long term(30 day?) optimum. This is why 'Multi-Period Optimization' is frequently used. Today's optimum blending solution for finished stocks without considering tomorrows needs usually fails to achieve the best results. Crude purchase commitments often have more than a 30 day lead time and sales commitments may be equally long term. 'Optimizing' for Today without including longer term fixed AND variable constraints is a foolish endeavor.

    Apr 20, 2016

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