Appraising a local oil refinery: More on the capacity and capability variables

My last column had introduced what is often deemed in the literature as the most fundamental observation related to oil refineries in energy economics. As Math Pro, 2011 noted: “Each oil refinery has a unique physical configuration, as well as unique operating characteristics and economies.” That article goes on to observe the configuration and performance of oil refineries are algebraic functions of their location; vintage; capital availability; crude oil availability; market specification and requirements; environmental provisions; and, “other” regulatory standards. The literature indicates two primary variables determine a refinery’s capability. Those are its complexity and size/capacity.

Today’s column extends last week’s discussion of these two variables.

Refinery complexity
While I believe that last week’s column captured the key essentials of oil refinery complexity adequately, specifically as developed by W Nelson in the 1960s, today’s discussion extends this portrayal by taking into account an excellent recent study: Review of refinery complexity applications, published by a fellow academic/researcher at the Center for Energy Studies, Louisiana State University (M Kaiser, January 2017).

This very recent review is helpful for non-petroleum specialists like myself, as it aims at 1) elaborating on recent industry applications of refinery complexity indicators and related extensions, and 2) providing a unifying framework for assessing complexity applications, and identifying areas for future research.

The Nelson Complexity Index, which was discussed last week, is more carefully described in Kaiser’s review as an effort to quantify the sophistication (technological and otherwise) of a refinery, along with its capital intensity. Kaiser confirms the truth in last week’s observations, namely, complexity, is used in the industry to classify refineries hierarchically, and to estimate refinery construction costs. The study also provides a basis for modelling sales price and costs.

An example of the extension in measuring oil refinery complexity will illustrate the significance of this work. Consider that, if a refinery wishes to expand its capacity, it can do so through 1) an incremental addition to existing facilities; 2) by adding an entirely new unit (termed grassroot expansion); or 3) by some combination of both. Clearly, each of these options will likely have differing consequences for its integral secondary facilities, such as storage, movement of feedstock, distribution of end products and so on. The basic consideration, however, is that the Nelson complexity index is measured primarily on the basis of the fixed assets of the refinery. That is, it’s processing units, which are specified in terms of processing capacity, technology applied and capital cost. The presence or absence of particular units is used to classify refineries as I have been doing so far.

Kaiser’s review also offers useful updated data on world oil refinery complexity. Thus it observes that at end 2014, 35 per cent of global refineries were coking refineries (level 4 from last week). Ten and five per cent respectively, were hydroskimmers and topping plants (levels 2 and 1 from last week). In the USA 70 per cent of its oil refineries had a complexity index between 6 and 12. At the extremes, only three per cent of USA refineries had a complexity index less than 2 while 13 per cent of its refineries correspondingly had a complexity index greater than 12.

Last week’s discussion of the size/capacity variable added little to the previous week’s illustration of the significant variance in oil refinery sizes even among the world’s top ten leading refineries, and refinery countries. Further, refineries located in the world’s largest refining market ‒ the United States also revealed great variance in sizes. I did also indicate that discussions so far on a Guyana refinery had an upper limit of around 100,000 to 125,000 barrels per day (bpd), which is the US Government definition of a small oil refinery.

At the global, regional, and even local level there has been increasing focus on oil mini-refineries. The discussion in this section centres on that segment of the market.

Very small oil refineries are termed variously: “mini-oil refineries”, or “modular oil refineries”. These typically have the descriptor “skid-mounted” as a prefix. The prefix indicates that such oil refineries are pre-fabricated in a controlled factory environment, mounted on skids, and then shipped/delivered to the refinery site, where it will be located. This fabrication is done in the form of modules.

There are several specialist engineering/construction firms, which boast of “extensive experience in the design and manufacture of refining equipment and the construction and operation of crude oil refineries in modules, which are shipped to the designated location.” In practice, modular oil refineries have typically ranged in size from as small as 500 bpd to 30,000 bpd. Proposals are circulating to build local refineries at between 1,500 and 3,000 bpd modular units for Guyana. Today’s modular oil refinery firms offer to contract for the production of feasibility studies, soil testing, site selection, foundation design, process design, detailed engineering as well as required specification documentation.

Obviously, it would be infeasible to build a truly large oil refinery and assemble it through skid mounts as is done for modular mini-refineries, which come complete with accessories such as vessels, pumps, exchangers, major piping, electricals and full instrumentation. Modular oil refineries have grown in popularity since the 2000s, particularly as poor returns from petroleum investment have been occurring. Mini-refineries are seen as a ‘flexible and cost-effective’ response to petroleum market volatility and significant pressures on refinery margins.

Energy economists posit that, empirical evidence convincingly indicates that the overall viable/sustainable economics of oil refineries are mainly a function of four factors namely 1) the type of crude oil, which it refines (the primary input into the process); 2) the complexity of the refinery; 3) the type of products produced; and 4) the prices of crude and the products it refines. Indeed, this applies to modular as well as conventional refineries. Parenthetically, it should be noted that the configuration of modular mini-refineries is not suitable to some refined products (for example, lubricating oils, waxes and asphalt).

Items 1 and 4 above, will be discussed after completion of this extended commentary on recent developments in oil refinery complexity and capacity. Before that, next week’s column will address the economic pros and cons of mini-refineries.


The economic perspective

Introduction Last week’s column addressed two of five topics singled out earlier for comment in order to highlight their significance from an economic perspective; namely 1) Government take/developmental benefits/economic profit; and 2) accounting for costs.

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The economic perspective… Government take, profit, and accounting for costs

Introduction Today’s column along with the next portrays selected aspects of my recent discussion of the fiscal regime in Guyana’s 2016 Production Sharing Agreement (PSA), from the perspective of basic economic principles.

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Combining government take and other benefits

Introduction Today’s column expands on last week’s discussion of the government take, as it relates to Guyana’s 2016, Production Sharing Agreement (PSA).

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Government take and the 2016 PSA: Misleading metric

Rational incentive Based on the economics Nobel Prize winning theory of “incomplete markets”, my previous column posited that, the Parties to Guyana’s 2016 PSA have a rational incentive to re-negotiate the contract, if underlying conditions of the country’s petroleum sector drastically change.

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