The legacy of Communist rule and Marxist economic planning has left the refining industry of the Commonwealth of Independent States (C.I.S.) poorly prepared for a competitive future.
Authority to macromanage refinery operations doesn't exist in the C.I.S. as it did in the central government of the former Soviet Union. But old ways die hard, especially in an industry configured to discourage competition and in which management objectives often deal as much with achieving social goals as operating efficiency.
Russian-American joint venture Petrocom is helping C.I.S. refineries evaluate their financial and organizational structures and build planning models that for the first time will guide refinery operations independent of central state planning.
Petrocom partners are the Institute of Control Sciences and Moscow Oil Refinery, both of Moscow, Bonner & Moore Associates Inc. (B&M), Houston, and Atlantic Simulation Inc., Shrewsbury, N.J. (OGJ, May 11, p. 31).
David J. Adams, manager of management sciences in B&M's Wiesbaden, Germany, office, said working with Russian upper tier refinery officials and middle managers to develop planning models has been easy from a technological point of view. Russian refinery officials quickly grasp whatever technical or scientific points arise in discussions "because they are all extremely well educated."
However, Adams said, "When we try to insert costs and prices in a planning model, we have huge problems."
PERFORMANCE OBJECTIVES
B&M Pres. Joe Moore said Russian refinery officials today have trouble dealing with profit motivated management ideas because refineries in the former U.S.S.R. did not focus on profit or performance objectives. Instead, refinery planning under the Soviet system basically involved satisfying edicts of the central government.
Adams said C.I.S. refinery managers are not commercially oriented because they usually are required to achieve diverse social goals. Directors at each plant are charged with managing activities that have nothing to do with refining, such as managing farms or building hospitals or schools.
In an economic system trying to privatize rapidly, such conflicting managerial responsibilities cause organizational turmoil when allocating operating capital among the alternatives, Moore said.
"And can you imagine a private investor risking a large investment in a refinery with large capital budgets for apartments or schools or hospitals?"
Under the Soviet system, Moore said, the government allocated operating capital to refineries and tended to penalize efficiency by giving relatively more to less efficient plants. "As a result, there's no concept of return on investment or stewardship of capital."
In addition, Soviet central planners apportioned feedstock to each refinery and decreed each plant's product slate.
"The state ordered a refinery to produce so many tons of any of several broad product categories," Moore said. "If it produced all its gasoline requirement as low octane grade, that was interesting but irrelevant."
Because of Soviet socialist thinking, C.I.S. refiners place low values on capital, labor, and feedstocks. Yet C.I.S. refining costs are high when the costs of providing social services are included in costs of doing business, Moore said.
ACCOUNTING FUNCTIONS
Moore said most refinery accounting functions in the U.S.S.R. were performed to provide statistics for authorities in Moscow. Gosplan, the Soviet central planning agency developed a 5 year plan for each plant. Refinery planning departments simply resolved the 5 year plan into smaller units to set weekly, monthly, and yearly goals.
Even as part of the C.I.S., Russian refinery managers still rely little on reports to track plant performance, he said. "The one report we have seen being used by management is a payables and receivables report-a cash report-and they've never had that until recently."
Accounting reports used in Russian refineries don't include balance sheets. In addition, maintenance costs are estimated on the basis of standard job costs.
"But nowhere at the end of the year does the Russian accounting system reconcile actual costs with pro forma costs." Moore said. "So they don't know what it costs to maintain their plants. It's all based on standardized job costs produced by engineering institutes with no feedback from job experience."
Moore said Soviet state regulation formerly kept oil, gas, and electricity prices very low, so little was spent to reduce energy use or minimize process losses.
While computerized process control systems and modern distributed control systems are common, little effort is spent accounting for an overall refinery material balance. Crude oil charge must be reconciled with pipeline receipts. But measurements are poor, so an official figure is sometimes negotiated from widely varying estimates.
As a result, plant management is accustomed to operating without rudimentary balances that could reveal major losses from operations or theft.
Adams said refinery managers accustomed to working under the old Soviet reporting and record keeping requirements have had no practice in real operations planning or cost control.
MARKET OVERSIGHT
Refineries in the former Soviet Union had little or no contact with end use customers because they transferred production to a state distribution agency. Product sales and marketing activities were limited to a small export business.
In the C.I.S., that is changing.
C.I.S. refineries have more customer contact. But because of their current organizations, contacts with customers can be isolated in different departments with little coordination.
"We have found cases in which a refinery's total product commitments can be learned only by getting the plant's traders in the same room to compare notes," Adams said. "This is not the usual practice."
Because there no longer is a central state organization to coordinate crude shipments, various refineries are beginning to negotiate deals with regional production associations for feedstock.
"Many are making deals to buy crude in almost a conventional way," Adams said.
A Moscow weekly publication reports details about crude oil and products trading volumes and approximate prices. But Adams said information channels are so limited there can be little confidence that the report publishes a true market price.
"On the other hand," he said, "there isn't any other market information."
With information about specific production capabilities derived from Petrocom planning models, Russian refinery managers "finally will be able to generate supply numbers to use in planning," Adams said.
Russian crude prices more and more are being determined by market factors. However, Moore said, oil price deregulation and currency shortages are resulting in rising amounts of unpaid bills.
On the product side, local markets are distorted by price controls.
ORGANIZATIONAL FACTORS
Moore and Adams said locations and configurations of Russian refineries also reflect the influence of Soviet Marxist planning. To a great extent, the refining industry has been organized as a series of regional monopolies.
"It's impossible to have real competition because each facility sells products only in its own region," Adams said.
Refineries don't try to sell products outside their regions because "everything they can put out is being absorbed" within their own regional markets.
Taken together, price controls, allocation of crude oil and product demand, and isolation from end use markets created an operating environment with few disturbances or uncertainties.
"C.I.S. refinery organizations embody textbook examples of how not to do it," Moore said. "In the Soviet Union, they had the luxury of avoiding risk and competition, so no premium has been placed on flexibility and quick decision making.
"C.I.S. managers today realize that change is mandatory. But tradition, culture, and expectations born of 74 years of Communist rule are huge impediments."
Typically, capacities of Russian refineries are large, with multiple processing trains that include two or more large vacuum distillation units, gas oil desulfurization units, and naphtha hydrotreating units.
As demand for refined products grew in the Soviet Union, central planners added process equipment but not infrastructure. Moore said it is common to find refineries in which capacities have increased by 300%, but no storage has been added. So Russian refiners today tend to run crude units off the pipeline with few or no intermediate storage tanks.
Lack of pipeline infrastructure forces C. I. S. refiners to rely heavily on rail transportation to move feedstock and products. Moore estimated that late deliveries by rail curb Russian refinery production by as much as 10%.
To be competitive in a free market, C.I.S. refining officials will have to encourage investment in transportation infrastructure, Moore said.
"But those kinds of things are easy to do to be competitive," he said. "It's not that the cat crackers don't work or the reformers are no good."
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