ECONOMICS OF OIL REFINING PRICING OF INDIGENOUS CRUDE OIL & DELIVERED COST OF IMPORTED CRUDE OIL ONGC CRUDE OIL Import Parity Price from 2002-03 inclusive of following: FOB Price of Marker Crude adjusted for GPW Ocean Freight Ocean Loss Insurance Custom Duty Port Charges Marker Crudes : High Sulphur - Oman & Dubai Low Sulphur - Brent OIL INDIA CRUDE OIL Following components are considered while determining price of Oil India’s crude oil Monthly average of high & low on FOB price of Marker Crude adjusted for GPW Discount towards BS&W ( Bottom Sludge and Water) 50% of Pipeline transportation charges to refineries Marker Crude : Nigerian Bonny Light Note: LPG, Naphtha, Gas Oil and Fuel Oil fractions are used for GPW adjustment Delivered Cost of Imported Cost at The Refinery Crude Oil Cost Elements • • • • • • • FOB Crude Cost Ocean Freight Customs duty Insurance Ocean loss Port Charges Transportation cost (from port to refinery) NET BACK MARGIN Sample Calculation Net Back Margin is calculated using the following data/information: • GPW of the Crude Oil • Amount of energy consumed in processing the Crude Oil • Cost of Crude Oil (FOB) • Freight Charges for the Crude Oil Gross Product Worth (GPW) • Based on the crude oil assay and/or actual operating experience, the refinery configuration, etc., it is possible to estimate the yield of different products that are obtainable on processing any particular crude oil. • The Gross Product Worth (GPW) of crude oil is the price of each petroleum product multiplied by its yield from the crude oil. Prices include freight, insurance & ocean loss. GPW = yi pI where yI is the yield of the individual product and pI s the price of each product. Evaluation of Net Back Margin A. Gross Product worth (Value of Products) B. Energy Cost (8% Fuel, @ FO cost) C. Refinery Gate Value [A-B] D. Crude Freight Cost @ 0.5$/BBL or Rs. 3.7 / Tonne for 100 Tonnes E. Net Back Value [C-D] F. Crude Cost @ $28.2 /BBL or $207 /MT for 100 Tonnes G. Net Back Margin [E-F] $ / MT $ / BBL $ 25129 $ 1336 $ 23793 $ 370 $ 23423 $ $ $ $ 20700 2723 27.23 3.71 Net Back Margin An Economic Tool for Refiners • Benchmark for Profitability of Refining Operations • Guide for incentive to refine more Crude into Products, to achieve optimum Capacity utilization • Used for optimum selection of Crude for a Refinery visà-vis available Refinery Hardware • Trigger for future investment decisions for Capacity Expansion, Yield Optimization, Bottoms Up-gradation, Energy Optimization, Product Quality Improvements etc. for enhancing the bottom line of the refinery • Used as performance indicator for comparing relative performance for various refineries Measures to Enhance Refinery Profitability A. Optimizing Existing Operations, including proper selection of Crude mix and its scheduling and planning blending operations in line with desired product slate B. Technological Up gradation C. Planning for Economies of Scale D. Optimization of Refinery Configuration E. Backward and Forward Integration F. Human Resource up gradation & Manpower Empowerment A. Optimizing Existing Operations [i] Optimizing Crude FOB Cost [ii] Reduction in Shipping Costs [iii] Reduction in Refinery Energy & Losses [iv] Reduction in Refinery Operating Costs [ i ] Optimizing Crude FOB Cost Process begins with proper selection of Crude basket for a given refinery. Once Crude basket is identified, sourcing Crude is the next important economic activity. Sourcing of Crude is a very dynamic and market sensitive activity in the whole value chain of refining. Crude Oil market is evolving into a highly knowledge based area of operation. One such emerging area is Risk Management, which requires both individual skill and organizational policy to operate in the sensitive field of International Oil Exchanges. [ ii ] Reduction in Shipping Costs Planning transportation of Crude Oil in large parcel sizes (in VLCC) saves transportation costs. Under given constraints, proper chartering of vessels is a very important economic activity. Given the policy framework, substantial optimization can be obtained with proper scheduling and planning with the Supplier of Crude on the one hand and the Shipping Company on the other. [ iii ] Reduction in Refinery Energy & Losses Modern refineries are highly energy intensive with energy and losses constituting 7 to 8% on crude intake. Constant efforts such as regular monitoring of energy efficiencies of refinery furnaces and boilers, heat integration, implementation of various energy conservation schemes as well as efforts to reduce refinery losses has direct impact in improving refinery margins. [ iv ] Reduction in Refinery Operating Costs Refinery operating cost other than energy and losses is in the range of $1 per barrel. Accordingly optimizing operating cost results in significant improvement in refinery profitability. Benchmarking, target setting, rigorous monitoring of chemicals and catalyst consumption, predictive and preventive maintenance of process equipments result in higher on - stream factor and higher run lengths between successive planned shutdowns. Avoidance of unscheduled outages means lower repair and maintenance cost which reduce operating cost significantly. Refining Operations Cost Elements • • • • • • • Chemicals and catalysts Fuels and Utilities Consumables Salaries and wages Repairs and maintenance Overhead Depreciation B. Technological up gradation Technologies need to be constantly scanned to evaluate appropriate cost effective options for reducing the bottom of the barrel and increasing production of useful high value products thereby enhancing refinery margins. C. Economies of Scale Refinery crude and secondary processing capacities as well as other related facilities have to be planned or upgraded to economic sizes to bring down the operating cost with resultant improvement in refinery bottom line, keeping in view the comfort level of disposal of products in view of surplus refining capacity. D. Optimization of Refinery Configuration Continuous efforts need to be made for evaluating the existing refinery configuration using simulation / modeling techniques to identify investment needs for upgrading the configuration to the most optimum level for enhancing the yield from the barrel of crude processed. An optimum configuration thus results in improving the refinery profitability. The ultimate aim is to maximize distillate yield and reduce heavy ends. E. Backward and Forward Integration Backward Integration by investing in upstream exploration and production activities either directly or through equity participation with reputed Crude Oil producers. Backward integration ensures crude supply security as well as lowers crude inputs costs. Forward integration could be by way of diversification to production of Petrochemicals and Power Generation from low value refinery products such as heavy residues and petroleum coke. Forward integration helps in value addition to refinery product slate. The above integrations are long-term capital-intensive strategies, which result in transforming a refinery to a fully integrated oil and utility company with immense value addition to its operating margins. F. Human Resource Up gradation and Manpower Empowerment Manpower has to be exposed to latest technologies on an ongoing basis, best industry practices, latest simulation / modeling and cost optimization techniques etc and appropriately motivated and empowered to take effective and quick decisions related to day to day operational management issues.
