Understanding Refinery Profitability

Prepared for

OPERA
30 November 2010

About this presentation

This presentation has been prepared for the benefit of the
presentation attendees. Any party in possession of this
presentation may not rely upon its conclusions. Possession of the
presentation does not carry with it the right of publication.
Purvin & Gertz conducted this analysis and prepared this
presentation utilizing reasonable care and skill in applying
methods of analysis consistent with normal industry practice. All
results are based on information available at the time of review.
Changes in factors upon which the review is based could affect the
results. Forecasts are inherently uncertain because of events or
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including the actions of government, individuals, third parties and
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FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY

Purvin & Gertz background

Founded in 1947 in business for 63 years

Independent firm owned by active consultants
Provides commercial, technical and strategic
advice in the oil, natural gas, gas liquids, chemical
and power generation industries
Worldwide operation Houston, Calgary, London,
Dubai, Singapore, Buenos Aires, Moscow
Most consulting activity relates to projects for
individual clients
Provide subscription studies targeting issues of
topical interest
Regular market analysis services for oil, gas and
gas liquids

What is unique about Purvin & Gertz consultants?

Technical background,
knowledge of process
technology, past
experience of process
engineering

Worked in refineries, know

how they operate, know
how they solve their
problems and how they
plan, organize and control
their activities

Access to market forecasts

and global analyses, global
perspective, long term
vision

Knowledge of the
commercial aspects of
refining, vision of refining
as a business

Our skills and experience allows us to interface refining

organizations at all levels and across disciplines

Understanding refinery profitability - Topics

The importance of refinery configuration

The importance of location and logistics
How to make an initial assessment
How to use benchmarks

The processes used by refineries can be classified

into four categories
SEPARATION
Crude oil distillation
Vacuum distillation
Solvent extraction
TREATING (Quality Improvement)
Reforming
Isomerisation
Hydrotreating
CONVERSION
Visbreaking
Thermal cracking
Catalytic cracking
Hydrocracking
Coking
TRANSFORMATION
Alkylation
Etherification (e.g. MTBE)
6

The hydroskimming refinery upgrades distillation

fractions to a few finished products
Refinery Fuel
GAS PLANT
Light

LPG
ISOMERISATION

Naphtha

Hydrogen
Heavy

REFORMER

ATMO
SPHERIC
DISTIL
LATION

Hydrogen

TREATER

Kerosene
Gasoil

Crude Oil

Gasoline

HYDROTREATER

Jet / Kerosene

Diesel / heating oil

Heavy Fuel Oils

Refinery fuel
7

Refineries need to convert some residue to light

products in order to keep markets supplied
21%

Naphtha

7%

Kerosene

24%

Diesel/
Gasoil

45%

Naphtha &
Gasoline

38%

Jet/Kerosene

11%

Diesel /
Gasoil

33%

Fuel Oil

18%

Residue

Crude Oil

Market

The average yield obtained from crude oil distillation does not match the
proportion of products demanded by the market
To rectify this refiners use different combinations of conversion and treating
processes to produce more lighter products from residue
8

A VGO cracking refinery recovers VGO by vacuum distillation

and feeds it to a conversion unit where it is upgraded

Crude
Oil

DISTILLATION

HYDROSKIMMING BLOCK

Refinery Fuel and LPG

Naphtha ISOMERIZATION/
REFORMER

Gasoline

HYDROTREATERS
Kero/gasoil

VGO
CRACKING
VACUUM
DISTILLATION
Heavy fuel oil blending

VGO CRACKING BLOCK

9

Middle distillates

A Deep Conversion refinery has process units that

convert vacuum residue to lighter products

Crude
Oil

DISTILLATION

TOPPING/HYDROSKIMMING

Refinery Fuel and LPG

Naphtha ISOMERIZATION/
REFORMER

Gasoline

HYDROTREATERS

Middle distillates

Kero/gasoil

VGO
CRACKING
VACUUM
DISTILLATION
DEEP
CONVERSION

VGO CRACKING
10

Residue

Representative yields of common conversion

processes
Feed type

Vacuum gasoil

Vacuum residue

Indicative value,2009

400-450 $/tonne

200-250$/tonne

Fuel gas

100%

LPG

80%

Gasoline

60%

Naphtha
Middle
Distillate

40%

20%

VGO
0%
Residue

FCC

Hydro
Crack.

Thermal
Crack.

Visbreaking

Note: Rotterdam price of diesel in 2009 was 543$/tonne

11

Coking

Residue
HDC

Conversion units use some of the most sophisticated and

expensive equipment that are found in refineries
FCC

Hydrocracking Reactors

Delayed Coker

Coke drums

12

Configuration has a significant impact on the refinery

yields
Refinery yields from different crude types, weight %
100

80

22

22

25

31

38

60
39
57
40

20

45

56

13

FCC North
Sea Crude

HDC North
Sea Crude

64

33

0
HSK North
Sea Crude

Fuel oil/coke

Middle distillates

19
HDC
Russian
Crude

Naphtha+gasoline

13

12
Coking
Arabian
Heavy
LPG

Hydroskimming capacity barely breaks even. All of the

margin is earned by the conversion units
PGI benchmark, high sulphur crude refining
margins for sales at CIF ARA prices
(Dollars per Barrel)

A conversion refinery can be

seen as the sum of two parts:

12

an hydroskimming block

10

the conversion units

The hydroskimming block

does not earn any margin. Its
main function is to feed the
conversion units

6
4
2
0

Most of the margin is made

by the conversion units

-2
-4
1990

1995

Hydroskimming

2000
FCC

2005
Hydrocracking

14

Topics of this presentation

The importance of configuration

The importance of location and logistics
How to make an initial assessment
How to use benchmarks

15

The competitive position of a refinery improves with

access to supplies of crude and to markets for products

Value of products increases

Cost of delivery of crude oil reduces

Linked to oil
fields by
pipeline

Inland refinery selling

into the local inland
market
Coastal refinery selling
into the local market

Coastal
refinery with
deep water
port

Inland
refinery with
pipeline
connection
to a deep
water port

No pipeline,
no deep
water port

Most
Competitive

Refinery supplying into

a market best served by
another refinery

Least
Competitive

Export from a coastal

location
Export from an inland
location

16

Export refining is less profitable

CIF - FOB MARGINS
(Dollars per Barrel)

Export refining (e.g. at FOB prices)

makes about $1.00-2.00 per barrel
less than refining for a local market
(e.g. at CIF prices)
When margins drop, export FCC
capacity can become marginal

5
4

High exposure to the export market

never a good feature for a refinery

3
2

Export refineries need to make up

this competitive disadvantage in
other ways

1
0

Export refineries tend to be large

and complex!

FCC, Azeri, CIF Med

-1

FCC, Azeri, FOB Med

-2
2002

2004

2006

2008

17

There is little stand alone hydroskimming capacity. The next

tier of marginal capacity is lower quality conversion capacity
DIFFERENT KINDS OF FCC CAPACITY

State-of-the-art FCC refinery:

200,000 B/D refinery
Able to run 100% sour slate

(Dollars per Barrel)

All prices are CIF

Marginal FCC refinery

6

100,000 B/D refinery

Sweet crude slate

FOB products, except middle distillate

Marginal FCC capacity currently

unable to cover fixed costs

0
-2

State-of-the-Art FCC
Marginal FCC
Marginal FCC, variable costs

20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09

-4

Explains a lot of what you have seen

in recent months in terms of
refineries for sale, idled, closed, etc.

18

Topics of this presentation

The importance of configuration

The importance of location and logistics
How to make an initial assessment
How to use benchmarks

19

Useful information needed to make an initial opinion

about a risk

Process capacities
Types of crude oil processed
Any information on refinery yields
Logistics associated with the refinery
Price differentials are much more revealing
than the absolute level of prices

20

Nelson Complexity can be used as a metric of refinery

configuration, but is a blunt instrument
Complexity factor represents ratio between the cost of building a certain unit
and the cost of a crude distillation unit of identical capacity
It is important to develop NCX factors using a consistent approach
Conversion is what makes refineries profitable and conversion units have
high factors, so conversion refineries have higher complexitybut:
Some units have high NCX, but add little to profitability (naphtha reformers)
May not capture important features (e.g. degree of conversion in an HDC)
Process unit
Crude distillation
Vacuum distillation
FCC
Naphtha reforming
Naphtha isomerization
Naphtha hydrotreating
Kerosene/gasoil hydrotreating
FCC gasoline hydrotreating
Alkylation
Lubricants

Capacity

Complexity
factor

Complexitybarrels

300,000
160,000
75,000
35,000
6,000
50,000
78,000
27,000
12,000
8,700

1.0
1.5
6.0
5.0
3.5
2.0
3.0
3.0
7.5
44.0

300000
240000
450000
175000
21000
100000
234000
81000
90000
382800

6.91

2073800

Total complexity
21

Complexity provides an initial indication of where a

refinery might fall in terms of conversion
Refining capacity in Europe by complexity range
300

Distillation Capacity, MT/y

Topping/HSK

Deep Conversion, lubricants

VGO Cracking

200

Generally
Generallysimple
simple
and
andquite
quitemarginal
marginal
100

0
1-3

3-5

5-7

7-9

Complexity Factor

22

9-11

>11

Price differentials can be used to make an idea

about underlying conversion margins
Hydrocracking margins track the
diesel-fuel oil spread quite well
($/bbl)

while light-heavy crude differentials

also follow product spreads

($/tonne)

12

($/bbl)
600

600

Sour HDC margin, $/bbl

Brent - Urals, $/bbl

Diesel-Fuel spread, $/tonne

10

($/tonne)

6
Diesel-Fuel spread, $/tonne

500

400

400

300

300

200

200

100

100

2000

2002

2004

2006

2008

2000

2002

2004

2006

500

2008

Possible to use some price data to make an initial opinion on the level of refinery
profitability that is implied in a price scenario
23

Topics of this presentation

The importance of configuration

The importance of location and logistics
How to make an initial assessment
How to use benchmarks

24

How to use benchmarks

Purvin & Gertz uses models to track refining margins in key world
locations and for representative types of refining capacity
Simple factual information about a refinery can be used to
understand which benchmark is most likely to track its margins
Historical margins can be compared with the most appropriate
benchmark to measure out/under-performance
Sometimes there is an explanation, sometimes there is not

The forecast refining margin for the benchmark can be used to

derive the expect profitability of the refinery

25

Example: composite FOB Hydrocracking benchmark tracks

Saras margins very well
Dollars per Barrel
10
9

Difference
Saras

FOB Hydrocracking, composite slate

7
6
5
4
3
2
1
0
-1
2001

2003

2005

2007

2009

ISAB tracks FOB sour HDC and sweet FCC

Dollars per Barrel
9
8
7
6
5
4
3
2
1

ISAB

FOB Sour HDC

FOB Sweet FCC

0
2003

2004

2005

2006

2007

2008

2009

ISAB has a mix of thermal cracking, mild hydrocracking and

FCC conversion capacity

Main conclusions
Excluding performance related aspects, the most important
factors of refinery profitability are:
Refinery configuration
Prevailing prices in international markets
Impact of location and logistics on crude and product prices

It is not too difficult to make an initial assessment of the

competitive position of most refineries with the support of:
expert eyes
some simple research into basic features of the refinery
the support of appropriate pricing information

Historical margins can be compared to benchmarks to make

an indicative forecast of the profitability of refineries

28

Purvin & Gertz services related to the above

Market analysis with prices and margin outlook
Crude Oil & Refining Outlook (CORO) :
18 month outlook
GPMO: Long term outlook (20 years)

Seminars
Introduction to refining and refinery economics 1
day introduction

Bespoke training
Customized on clients needs
29

Roberto
Roberto Ulivieri
Ulivieri
+44
+44 20
20 7632
7632 1280
1280
rulivieri@purvingertz.com
rulivieri@purvingertz.com

Colin
Colin Birch
Birch
+44
+44 20
20 7632
7632 1280
1280
chbirch@purvingertz.com
chbirch@purvingertz.com