Norman E. Duncan
NED & Associates Inc.
Houston
A refiner can locate his refinery competitively in relation to his neighbors by constructing a profitability profile.
Using this profile, the refiner can estimate the profitability of producing shifts in his relative conversion position.
BACKGROUND
The United States had 192 operating refineries as of Jan. 1, 1992 (OGJ, Dec. 23, 1991, p. 33). They are a diverse lot, as the following analysis indicates:
- Twelve have greater than 250,000 b/cd crude capacity.
- Forty-nine have less than 20,000 b/cd crude capacity.
- Twenty-six manufacture lubricating oil base stocks.
- The average U.S. refinery size is 80,000 b/cd.
Comparing the performance of diverse refineries is complicated. W.L. Nelson recognized this and used complexity factor as the correlating bridge in his famous Oil & Gas Journal process costimating series.1
The key element in any refinery's complexity is, of course, conversion capability. It is available for every U.S. refinery in the OGJ annual refining survey (OGJ, Dec. 23, 1991, p. 33).
Conversion index (C.I.) is defined as follows.
C.I. = (S Conversion unit capacities, b/d Crude capacity, b/d) x 100 where conversion units comprise catalytic cracking units, hydrocracking units, and cokers.
When U.S. refining capacity is arrayed against this somewhat arbitrary C.I., a picture of further diversity in U.S. refining develops (Fig. 1). As can be seen, half of U.S. capacity has a C.I. greater than 56, and about 15% have a C.I. greater than 80.
Indeed, some refineries at the high end of the conversion spectrum produce only gasoline and other light fuels.
Refineries with a low C.I. produce mostly residual fuel oil and asphalt. Many of the 49 smaller refineries fit the latter description.
C.I. is the principal determiner of refining margin.
Accordingly, a profile of refining margins would be expected to follow the same general shape as the C.I. profile, for any given population of refineries.
For example, if a refining margin of, say, $1.50/bbl were calculated for that "average" U.S. refinery with a 56 C.I. and the appropriate crude and product prices, then a refining profitability profile similar to the one shown in Fig. 2 would result.
Such a profile is only of teaching interest, however, because, as is well-known from the pioneering work of Wright-Killen & Co., refining margins vary significantly over time and with refining region. 2
Average refining margins cycle between "relatively good" and "terrible," as can be seen in the historical Wright-Killen numbers for a Gulf Coast average refinery (Fig. 3).
Margins are good when U.S. refineries are taxed to meet U.S. gasoline demand, as they were in the early 1970s, the late 1970s, and the late 1980s.
On the other hand, when gasoline demand is weaker and manufacturing capability is in excess, margins are terrible, as they were in 1974-1977 and during most of the 1980s.
However, a yearly average masks much of the volatility that exists with refining margins. 2 Fig. 4 shows some averages for 3 months in the summer of 1991. August's margins were "relatively good" while September's were nearing "terrible."
The fact that margins also vary by region is evident in these Wright-Killen average margins for 1990: 3
East Coast- $2.52/bbl
Gulf Coast- $1.84/bbl
Midwest - $2.09/bbl
West Coast- $3.64/bbl.
Obviously, to know where one's refinery stands relative to a competitive neighbor, one must be able to properly locate his position on the profitability profile curve. In other words, "are margins relatively good or are they terrible?" In addition, one must take into account regional refining profiles.
REGIONAL PROFILES
Regional C.I. profiles are the straightforward part of this analysis, because the OGJ refining report for the U.S. is organized by state.
It is logical to construct these profiles by Petroleum Administration for Defense District (PADD), as shown in Fig. 5. This is because refineries within a district usually provide the most direct competition with one another.
Additionally, PADD 1 refiners run imported, largely Middle East crudes, whereas PADD 5 refiners almost all use California and North Slope crudes.
Finally, there are other similarities within PADDs, such as market forces and product prices.
C.I. profiles for each of the PADDs are presented in Figs. 6-10. Using these, any U.S. refiner can locate his refinery competitively.
A refiner can locate his position on the profitability profile straightforwardly. it simply requires that his refining margin be determined and that this value be entered on the profitability profile plot at the cumulative crude percent corresponding to the refinery's C.I. position, identified from the relevant PADD chart.
For example, if the refinery in question were a Gulf Coast (PADD 3) average conversion refinery (C.I. 57), then profitability profiles similar to those shown in Fig. 4 for July, August, and September 1991 would be constructed. The shape of these profitability profile curves will parrot that of the PADD 3 C.I. profile curve.
Each profile is anchored at the determined refining margin (in these cases, the Wright-Killen Gulf Coast averages) at the refinery position on the C.I. profile. (In this case, average conversion corresponds to the 50% cumulative capacity point of PADD 3, as shown in Fig. 8.)
No refiner is ever particularly happy with his position on the profile curve. Broadly speaking, there are three things that, can be done to improve this position:
- Optimize crude choice, and thus product outturn
- Optimize refinery operations
- Invest in conversion capacity.
A brief discussion of each of these options is assisted by reconstruction of the $1.35/bbl refining margin for the average Gulf Coast refinery in September 1991 (see Table 1, and OGJ, Jan. 20, p. 72). These values would hold true if the crude were mainly West Texas Intermediate.
CRUDE CHOICE
Most refiners use a set of linear yield programs, fitted to match their units' performance by test runs, as the means to select from available crudes.
Avoid crude switching, however, to make small improvements in calculated refining margin. Steady operation is worth a lot.
OPTIMIZE OPERATIONS
A worthwhile first audit is to determine that you are, indeed, where you think you are. Check residual products make for a week to find out whether these lower-value products are being made in larger amount than the indicated operating plan.
Check own-produced fuel as well. Almost always, refineries are making more than they had planned.
Other points to check:
- Are conversion units being run at their maximum (not necessarily their maximum throughput, but at some maximum all the time)?
- Check own-produced fuel at critical locations to determine if H, is being burned. Hz should be consumed.
- Are catalyst changes (catalytic cracking units and reformers, especially) frequent enough? (All fixed costs are known to the penny; yield loss is less frequently found.)
Finally, remember that a 1% improvement in white product yield is worth approximately 10/bbl in refining margin.
Mountains have to be moved to achieve that kind of consistent lowering of fixed operating costs.
CONVERSION CAPITAL
Consider a conversion unit investment for a PADD 3 refinery with a present C.I. of 57 that would move it to a C.I. of 70. This would create a shift from the 50% cumulative crude point on the PADD 3 C.I. profile (Fig. 8) to about the 30% cumulative crude point.
Such an upward shift is worth 50-60/bbl in refining margin according to Fig. 4, irrespective of whether margins were terrible, as in September 1991, or good, as in August.
The overall profitability of the refinery is, of course, enormously impacted by these vertical shifts in margin profiles, but the profit gain achieved by moving up the conversion profile seems much less so.
These are but a sampling of the numerous insights that a refiner can gain by considering his position on the C.I. profile and how that position can be improved.
REFERENCES
- Process costimating. Approximately 170 articles by W.L. Nelson in various issues of OGJ in the 1950s and 1960s.
- "Refinery margin series will be featured each month in OGJ," OGJ, Nov. 19, 1984, p. 110 (and subsequent monthly refining margin statistics.
- Refining Margins, Octane Week, Dec. 23, 1991.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
