III.

REFINING ECONOMICS TECHNIQUES

301

Economics

Like many other terms, "economics" has more than one meaning. Webster's Dictionary
says that economics is "the science that deals with the production, distribution and consumption
of wealth." Exxon uses economics as a "tool to maximizethe profitability of our business."
301.1

Objectives

Exxon's definition of "economics" is a more focused version aimed at achieving the

corporation's overall goal: "to be the world's premier petroleum and petrochemical company."
Achieving sound financial results is a key part of realizing the overall goal. Each operation has a
specific objective aimed at increasing profit for the entire corporation. For refining, the objective
is to become the most profitable and efficientrefining competitor by producing maximum volumes
of high value products at minimumcost.
301.2

Economic Evaluation Procedure

Economic evaluations are step-by-step procedures used to identifYthe lowest cost/most

profitable alternative to reach an objective~some studies require considerably more depth and
detail than others. The general steps are:
I. State the purpose of the evaluation: what question(s) are to be answered?
2. Select the economic viewpoint to be used: the refinery's? the corporation's?
3. Choose the appropriate method of evaluation. Several economic "tools" for
evaluating refining options and making operating decisions will be presented in this
course.
4. Select the performance criteria: what minimum increase in profitability or rate of
return will be acceptable?
5. Determine and acquire the informationneeded. For example:

Supply and demand data and estimates

Costsandvalues

.
.

Investment requirements
Taxes

6. Define the base case: what are the conditions of normal or current operations? The
base case should be as realistic as possible and the operations should already be
reasonably optimized.
7. Define one or more alternative cases. The evaluation is a comparison of different
courses of action~an alternative is required so that a choice can be made.

8. Perform the calculations.

9. Test the results:

How much does changing a particular variable affect the results? (What is

the sensitivity?)

.
.
.

Are the assumptions and projected profit or rate of return reasonable?

What risks are likely?
What has been forgotten?

10. Choose the most profitable alternative, based on comparison of costs and benefits
(incentives). In some cases "no change" may be best.
302

Marginal Economics

Refining is an extremely complicated operation, especiallyin the case of large refineries

such as Exxon's. Maximum profit depends on consistently choosing the best alternatives for:

.
.

crude supply (and other raw materials)

operating conditions (feed rates, temperature, pressure, etc.)
processing options (at this time, which unit[s] can make the product at lowest cost?)

The difficulty of making the best choices is heightened by product demand that changes
considerably with the seasons. The options are always limited by availabilityof raw materials and
equipment, and operating conditions in the refinery.
302.1

Description

Generally speaking, most alternatives involve making relatively small changes to the
refinery's current or base operations, but even a small change can have large effects. Each
possible change should be evaluated in advance so that the most profitable alternative can be
selected.
One way to conduct such an evaluation would be to model and optimize the entire
refinery before and after the change, but this method would waste a lot of time. Instead, marginal
economics offers a much less complicated, and much faster, way to arrive at the same
conclusions. The difference is that, rather than looking at the entire refinery, marginal economics
considers only the result of making some incremental (marginal) change from the base case. This
technique relies on an assumption that the base case is reasonably well optimized, which is
generally true for Exxon's refineries.
To ensure maximum profit, marginal economics is used to find all the available options
whose costs are less than or equal to ("breakeven" with) the expected revenue. These are the
steps which can be taken to meet product demand; higher cost steps should be avoided.

302.2

Procedure

Marginal economics is a tool used to determine the economic effect of making a

relatively small change in a large operation. The overall procedure is similar to the general steps
given in No. 301.2.
302.2a

Terms
Value - What an item is worth to me.
For refiners, the value of a crude oil is determined by the value of the products
which a particular refinery can make ITomit.
Product or commodity value is determined by the lowest cost of replacement of
that commodity. If gasoline can be purchased for less than the cost of making
it, the lower cost establishesthe gasoline'svalue.
Price - The cost per unit of the item I want.
Cost - The resources (dollars or otherwise) which I am willing to give up to acquire an
item which has value to me.
Total cost is the unit price x the number of units, plus transportation charges if
any.
Incentive - Value minus cost, which in most cases is equal to profit.

Marginal value
The value assigned to any element in the marginal econOInlC
evaluation. (See "value determination"below.)
NOTE: Profit is calculated based on cost and price, but value is more significant when making
decisions.
302.2b

Value Determination

For a useful economic analysis, the values assigned to raw materials, streams and
prodJ.lctsmust be as realistic as possible. Values can be establishedby:

.
.

Market prices for purchases.

Replacement cost. If additional product volumes cannot be sold because market

demand is already satisfied, the output of some other operation will have to be cut
back by an equal amount. In this case the cost of the product ITomthe alternative
operation is the replacement cost.

Refinery netback. For product sales, the refinery's netback (also called refinery
realization value, or price fo.b. refinery) is the product's refinery billing price (RBP)
times the volume sold. (Transportation charges and marketing expenses and profit
are deducted ITomthe total revenue.)

302.2c

Alternative use value. If there is no direct market value for the stream, value is
established by its use in another product, or as feedstock to a process which makes
other products.

Base Case

The base case is a description of the current situation. For example, the refinery is
currently blending a stream of naphtha (one component of crude oil) into motor gasoline (mogas):

302.2d

Stream

Volume, BID
(barrels per dav)

Value, $/B
(dollars per barrel)

Naphtha

1,000

$14

Alternative Case

The alternative case states what would result if some change is made. What would
happen if the naphtha stream is used instead as feed for the catalytic reformer (powerformer)?
(See No. 601.2i.)
First, 100 barrels of butane would be required along with the 1,000 barrels of naphtha.
The alternative case would also incur higher operating costs of $900.
The output streams (yields)would be:
Stream

Volume. BID

Value. $/B

Fuel gas (FOEB*)

150

$12

Gasoline (mogas)

900

$14

* Fuel oil equivalent barrel (see No. 604.1)

NOTE: When the alternative under consideration is running an added volume of crude, the values
are usually based on the fuel products from that marginal crude, unless there is a possibility that
the crude might alternativelybe used for lubes.
302.2e

The Balance

The "balance" is the method used to combine information on volumes, values and costs
or revenues so that a net effect can be calculated. The balance can show net effects on volumes,
or qualities or profits resulting from the proposed change. The size of the total operation is
ignored: the powerformer may currently be running 20,000 barrels per day, or 30,000, but that is
not pertinent to the calculation.

Stream

BID

$/B

Value, Total $

Input

Naphtha
Butane

(1,000)
(100)

?
13

?
(1,300)

Output

Fuel gas
Mogas

(FOEB) 150
900

12
14

1,800
12,600
(900)

Operating cost debit (cost increase)

At this point, the total value of the naphtha stream used as powerformer feed is
calculated by adding the output values:
$1,800

fuel gas

12.600

mogas

14,400
-1,300

and subtracting the butane and

increased operating costs

butane
operating cost increase

\,~\,.
,1,,1.0\

-900
$12,200

remainder is the total value of the

naphtha stream in the alternative
case

$12,200 +1,000 barrels = $12.20 value of each naphtha barrel ifused for powerformer
feed.

Acquiring the information needed to develop the balance is often the most difficult part
of the evaluation process, particularly if the output streams go to intermediate units and not
directly to sales. Each output stream must be followed to the point where a value can be
determined.
302.2f

Cost/Benefit Comparison

Assuming that appropriate tests have been applied, now comes the key question: What
is the incentive (profit) for making this change?
Naphtha value as gasoline blendstock (base case)

$14.00Ibarrel

Naphtha value as powerformer feed (alternative case)

$ 12.201barrel

Incentive for change

(1.80)

No change should be made since the naphtha is worth $1.80 per barrel more as gasoline
blendstock.

3.5

302.2g

Other Options

Even if one alternative would have negative results, another option may exist which
would have a positive outcome. Marginal economics is equally useful in evaluating several
alternative cases.
Maximum profit requires an ongoing effort to find and implement the best disposition
for each refinery stream.
302.3

Applications

Marginal economics is a technique which can be applied in many ways. In fact, the
concept is incorporated in many other economic tools used in refinery evaluations (see Section
VII).
Marginal economics is used to find answers to questions such as:
What is the value of a feedstock (as determined by the value of the products which
can be made ITomit)?
Would this feedstock have greater value to another refinery with different
processing capabilities?
What is the cost of a particular product?
Where should this stream be used for maximumprofit?
What operating conditions will be optimum for this process unit?
Will the investment in this equipment (project) generate enough revenue for an
acceptable profit or rate of return?

3.6

REFINING ECONOMICS
TECHNIQUES
Section III

Exxon uses "economics" as a tool to

maximize profits.
Economics evaluations proceed step-by-step
to identify which available option is the
lowest cost I most profitable alternative to
reach a particular objective.