Refinery Economics for non engineering and non financial background.
I'd like to take this opportunity to educate you on some basic concepts, practices and market scenarios that dictate and control the entire Refinery Business all over the world. Be it Ambani's Reliance or TIPER refinery in Tanzania, whatever I have tried to convey to you is applicable for all refineries.
Lets go stage by stage.
First, understand the "haunting" jargon used in the Oil and Gas Sector.
"Stream" refers to a region where crude or its derived products (petrol, diesel etc) flows in a pipe. "Upstream" is the region where crude is brought out of the ground. Upstream is devided into 2 zones, Off shore and On shore. Off shore (Gulf of Mixico) is where oil is dug out from the middle of the sea and On shore is from land (CAIRN Energy in Rajasthan, unless you though Rajasthan had a sea). Off shore and On shore has nothing to do with beaches.
"Mid Stream", the pipeline through which crude oil is brought from Upstream (yes, both off shore and on shore) to a terminal (where it is mixed with other crude oils to meet required specifications) and then to the refinery gate.
"Downstream" is the refinery, where the required products are derived out of the Crude oil.
Now, a refinery is supposed to derive the various different products out of the crude. It does so by employing complex technological machines/instruments and devices. They all come at a cost.
Crude oil flow is generally measured with two units of measurement namely, Barrels per Day and Metric Tonne per annum, the former is a volumetric measure and the latter is mass based. The general thumb rule which i'd like you to remember is that 1 Million Metric Tonnes per annum of Crude is equal to 20,000 Barrels of crude processed. A Barrel is 160 liters.
1 MMTPA = 20,000 BPD.
A 400,000 BPD refinery can process 20 MMTPA of crude.
Now, just because a refinery has a 20 MMTPA it doesn't mean that it is going to help extinguish the fuel demand in the market to which it supplies. It all depends on the nature of crude it handles.
Classification of Crude Oils: Heavy, Light, Sweet and Sour.
Plainly put Heavy is heavy, its got a density of about 900 Kg/m3. Light is a less heavy 750 - 900 Kg/m3. Sweet and Sour are measures of the Sulphur levels in the crude oil. More the sulphur, its sour. History says that a few morons in Pennsylvania actually tasted the crude oil as it came out and apparently crude with high sulfur content tasted 'sour', hence the name. The same story goes for Sweet crude. Crudes are labelled in combination of the 2 categories, Example : Heavy Sour crude, Light Sweet crude etc.
Out of Light crude, comes a lot of Distillates. Distillates are the useful fuels that come out of the crude. The major Distillates produced are LPG, Naphtha, Gasoline, Kerosene, Diesel and Fuel Oil. Now remember that order, my boss throws whatever he gets at me if make a mistake in the sequence, it is in the order of their boiling point. Heavy crudes have less distillate yield, they give a lot of Fuel Oil and not Petrol/Diesel.
Now there are a lotta useless streams also, like Heavy Naphtha, Off-Gases, Cracked gas, VGO etc. The refinery has special equipment to convert these useless streams into useful ones, just like how you pack your sandwich with left over veggies from yesterday, pretty much the same logic.
This ability of the refinery is attributed with a terminology called "Complexity" and it was invented by a genius called Nelson, I still refer to his book printed in 1954, that guy is just amazing. Reliance Refinery at Jamnagar is the Asia's most complex refinery. Its got a Nelson Complexity Index of 14.6.
It just means that no matter what you throw into those machines, you get gasoline or diesel.
Now, given a green chilli in your hand, you can eat it, you can sell it for Re.1 or you can chop it up and add it to normal fried rice and make chilli fried rice and sell it for Rs 10/- more, the difference is the chilli . I know this is the worst possible example one can give, this was just to emphasize the need to make more money.
Refineries did not open up for charity. They need to make their money too. They can only do it by selling the products and producing products that sell at a higher price (Gasoline and Diesel in today's global scenario) and as I have mentioned earlier, they do so by employing special equipments.
Now, the actual economics. The yield pattern in a refinery is as follows.
Gas and LPG = 5 %
Naphtha = 30 % (Gasoline is part of Naphtha)
Kerosene = 10% (Depends on Crude) its also called ATF - Aircraft Turbine Fuel.
Diesel = 30 %
Fuel Oil = 20%
Yeah I know it did not total up to a 100. The remaining is considered as F & L . Fuel and Losses.
Fuel ? why ? All processes in the refinery requires a lotta heat, so fuel is required to heat em up. Why would you buy fuel from somewhere else, when you yourself are producing it.
Losses? yup. Everything in the refinery was invented and manufactured by men, so its not all that great. there are losses.
GRM - Gross Refinery Margin.
I am giving you a scenario here. DO NOT QUESTION THE ASSUMPTIONS. This is just to help you understand.
A Refinery makes money by selling its products. Rewind 40 days in time and read along.
The price of crude is 100$ a Barrel.
Gasoline and Diesel at 125$, Kerosene at 115$ and Fuel Oil at 100$. LPG varies with respect to geography. Now multiply these prices with their yields specified above.
Gasoline and Diesel has together fetched you $75/Barrel , kerosene $11.5 /Barrel and FO another $20/Barrel and some $3/Barrel from LPG. Total them and you get $109.5/Barrel. This additional $9.5/Barrel is what is called as the GRM or Gross Refinery Margin.
The average processing cost is about $2 a Barrel. Processing cost includes the cost of energy, maintenance, labour, repairs, catalysts and other consumables required. Then there are other deductions like depreciation, financial expenses (debt and equity) which totals to about $1.5/ Barrel. Now deduct 30% taxes. So, a refinery hardly makes hardly $5/Barrel of Crude it processes.
It costs about $6 Billion for a 10 MMTPA refinery which can process 200,000 BPD. So it makes a million dollars per day. That is 365 Million a year profits annually. To break even, it takes 17 years.
Will you invest in something that gives you a ROI in 17 years??????? Not unless you were in the 19th century. Then why do people build refineries? Figure it yourself.
Lets move over, what do you think determines the Refineries economics now ??? Or how much of engineering skills is affecting the refinery. Only that $2 a Barrel of processing cost. It cant become zero, you need to spend some energy. It is crude and product prices that determine 98% of the refinery economics.
Now, there is something called RTP - Refiney Transfer Price. The product prices discussed above were Refinery Transfer Prices. The price you pay for your fuel on the road is the retail price. Refineries have no control over these. It is the fuel marketing companies that sell the fuel on the road at the bunks. To the RTP, taxes and duties are added. Then transportation/distribution cost and the Oil Marketing company's margin.
Hope it helped.
I'd like to take this opportunity to educate you on some basic concepts, practices and market scenarios that dictate and control the entire Refinery Business all over the world. Be it Ambani's Reliance or TIPER refinery in Tanzania, whatever I have tried to convey to you is applicable for all refineries.
Lets go stage by stage.
First, understand the "haunting" jargon used in the Oil and Gas Sector.
"Stream" refers to a region where crude or its derived products (petrol, diesel etc) flows in a pipe. "Upstream" is the region where crude is brought out of the ground. Upstream is devided into 2 zones, Off shore and On shore. Off shore (Gulf of Mixico) is where oil is dug out from the middle of the sea and On shore is from land (CAIRN Energy in Rajasthan, unless you though Rajasthan had a sea). Off shore and On shore has nothing to do with beaches.
"Mid Stream", the pipeline through which crude oil is brought from Upstream (yes, both off shore and on shore) to a terminal (where it is mixed with other crude oils to meet required specifications) and then to the refinery gate.
"Downstream" is the refinery, where the required products are derived out of the Crude oil.
Now, a refinery is supposed to derive the various different products out of the crude. It does so by employing complex technological machines/instruments and devices. They all come at a cost.
Crude oil flow is generally measured with two units of measurement namely, Barrels per Day and Metric Tonne per annum, the former is a volumetric measure and the latter is mass based. The general thumb rule which i'd like you to remember is that 1 Million Metric Tonnes per annum of Crude is equal to 20,000 Barrels of crude processed. A Barrel is 160 liters.
1 MMTPA = 20,000 BPD.
A 400,000 BPD refinery can process 20 MMTPA of crude.
Now, just because a refinery has a 20 MMTPA it doesn't mean that it is going to help extinguish the fuel demand in the market to which it supplies. It all depends on the nature of crude it handles.
Classification of Crude Oils: Heavy, Light, Sweet and Sour.
Plainly put Heavy is heavy, its got a density of about 900 Kg/m3. Light is a less heavy 750 - 900 Kg/m3. Sweet and Sour are measures of the Sulphur levels in the crude oil. More the sulphur, its sour. History says that a few morons in Pennsylvania actually tasted the crude oil as it came out and apparently crude with high sulfur content tasted 'sour', hence the name. The same story goes for Sweet crude. Crudes are labelled in combination of the 2 categories, Example : Heavy Sour crude, Light Sweet crude etc.
Out of Light crude, comes a lot of Distillates. Distillates are the useful fuels that come out of the crude. The major Distillates produced are LPG, Naphtha, Gasoline, Kerosene, Diesel and Fuel Oil. Now remember that order, my boss throws whatever he gets at me if make a mistake in the sequence, it is in the order of their boiling point. Heavy crudes have less distillate yield, they give a lot of Fuel Oil and not Petrol/Diesel.
Now there are a lotta useless streams also, like Heavy Naphtha, Off-Gases, Cracked gas, VGO etc. The refinery has special equipment to convert these useless streams into useful ones, just like how you pack your sandwich with left over veggies from yesterday, pretty much the same logic.
This ability of the refinery is attributed with a terminology called "Complexity" and it was invented by a genius called Nelson, I still refer to his book printed in 1954, that guy is just amazing. Reliance Refinery at Jamnagar is the Asia's most complex refinery. Its got a Nelson Complexity Index of 14.6.
It just means that no matter what you throw into those machines, you get gasoline or diesel.
Now, given a green chilli in your hand, you can eat it, you can sell it for Re.1 or you can chop it up and add it to normal fried rice and make chilli fried rice and sell it for Rs 10/- more, the difference is the chilli . I know this is the worst possible example one can give, this was just to emphasize the need to make more money.
Refineries did not open up for charity. They need to make their money too. They can only do it by selling the products and producing products that sell at a higher price (Gasoline and Diesel in today's global scenario) and as I have mentioned earlier, they do so by employing special equipments.
Now, the actual economics. The yield pattern in a refinery is as follows.
Gas and LPG = 5 %
Naphtha = 30 % (Gasoline is part of Naphtha)
Kerosene = 10% (Depends on Crude) its also called ATF - Aircraft Turbine Fuel.
Diesel = 30 %
Fuel Oil = 20%
Yeah I know it did not total up to a 100. The remaining is considered as F & L . Fuel and Losses.
Fuel ? why ? All processes in the refinery requires a lotta heat, so fuel is required to heat em up. Why would you buy fuel from somewhere else, when you yourself are producing it.
Losses? yup. Everything in the refinery was invented and manufactured by men, so its not all that great. there are losses.
GRM - Gross Refinery Margin.
I am giving you a scenario here. DO NOT QUESTION THE ASSUMPTIONS. This is just to help you understand.
A Refinery makes money by selling its products. Rewind 40 days in time and read along.
The price of crude is 100$ a Barrel.
Gasoline and Diesel at 125$, Kerosene at 115$ and Fuel Oil at 100$. LPG varies with respect to geography. Now multiply these prices with their yields specified above.
Gasoline and Diesel has together fetched you $75/Barrel , kerosene $11.5 /Barrel and FO another $20/Barrel and some $3/Barrel from LPG. Total them and you get $109.5/Barrel. This additional $9.5/Barrel is what is called as the GRM or Gross Refinery Margin.
The average processing cost is about $2 a Barrel. Processing cost includes the cost of energy, maintenance, labour, repairs, catalysts and other consumables required. Then there are other deductions like depreciation, financial expenses (debt and equity) which totals to about $1.5/ Barrel. Now deduct 30% taxes. So, a refinery hardly makes hardly $5/Barrel of Crude it processes.
It costs about $6 Billion for a 10 MMTPA refinery which can process 200,000 BPD. So it makes a million dollars per day. That is 365 Million a year profits annually. To break even, it takes 17 years.
Will you invest in something that gives you a ROI in 17 years??????? Not unless you were in the 19th century. Then why do people build refineries? Figure it yourself.
Lets move over, what do you think determines the Refineries economics now ??? Or how much of engineering skills is affecting the refinery. Only that $2 a Barrel of processing cost. It cant become zero, you need to spend some energy. It is crude and product prices that determine 98% of the refinery economics.
Now, there is something called RTP - Refiney Transfer Price. The product prices discussed above were Refinery Transfer Prices. The price you pay for your fuel on the road is the retail price. Refineries have no control over these. It is the fuel marketing companies that sell the fuel on the road at the bunks. To the RTP, taxes and duties are added. Then transportation/distribution cost and the Oil Marketing company's margin.
Hope it helped.
Nice one da. . And do you have any idea about same on Aspenhysys coz I neeed few doubts to clarified on design of crude distillation column.
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