Refiners are driven by the need to find cheaper crudes that the refinery can process profitably. Eric Petela reports.
Before the economic downturn, most refiners focused on consistency and continuity of operations as a means to achieve maximum output and guaranteed margins with a set basket of products. Most organisations were comfortable with this traditional ‘supply push’ model. The refinery manager’s principal goal was to maximise throughput and the refinery typically worked with trading groups charged with buying crude oils on long-term contacts and selling products into the marketplace. This model worked well when margins were established. There was little market volatility and channels were available to sell surplus products.
Everything changed when the economy deteriorated and margins dropped. Refiners realised they needed to drive margins up again. Instead of focusing on boosting production, they started to concentrate on gauging the volumes they needed to sell to be profitable, before using the information gleaned to feedback to decision-makers. In short, they were moving from a ‘supply push’ model towards a ‘demand pull’ one. Today, refiners are driven by the need to find cheaper crudes that the refinery can process profitably. Also, planning models are changing from monthly to weekly time scales to ensure that short-term market opportunities - a key element of the demand pull mix - are identified and acted upon swiftly.
Agreeing with the rationale behind the move to demand pull is one thing, putting this approach into practice to drive operational benefits is another challenge. In making the transition, there are several barriers that refiners need to overcome. Adopting a demand pull approach will not work equally well for every downstream oil company. The success of such a move will typically be driven by two factors – specific location and the flexibility or complexity of the refinery itself. Due to challenges with transportation and logistics, most inland refineries will be making products primarily to satisfy local markets. Coastal refineries are better placed to look further afield as they will have more opportunities to ship out products to different areas and to buy in crudes from different places and receive them quickly.
Equally, the simplest refineries may struggle to adopt a comprehensive market-led approach because there will be limits to the flexibility they have in varying the product mix or the crudes they can buy. Their options will be narrower than those of a complex refinery, which may be able to process almost anything it receives to then produce a wide range of products to suit market demands. In summary, complex coastal refineries will be best placed to capitalise on trading opportunities and simpler inland refineries least well placed.
Refiners are also hampered in their response to trading opportunities by a ‘silo approach’. Historically, there has often been little interaction between different groups in the refinery. In some instances, refinery planning was done at headquarters by planners operating away from the refinery itself. Once the optimal plan was complete, it would be sent to schedulers working at the refinery. If the schedulers regarded the plan as unrealistic, they would discard it and continue working as before.
Another potential barrier is the fast speed of response required by the new demand pull model. Traditionally, refiners have been slow to respond to market changes. Flexibility is also an issue. Not all refiners are agile enough to change the way they operate to meet short-term market opportunities. There are also issues around personnel. Today most refineries are looking to reduce costs. One way of doing this is to reduce staff numbers, another to reduce the overall experience level of existing staff - an approach that may save money in the short-term, but will ultimately drain productivity.
So, how can refiners best address their challenges in moving to a demand pull model and take advantage of the resulting market opportunities? This is where modern software-based business systems are crucial. AspenTech’s industry leading solution aspenONE is a suite that contains applications to help refiners integrate their operations. Aspen PIMS refinery planning software, for example, allows planners to ‘value’ different crudes and figure out which of these will make money for the refinery, the prices that crude is worth and suitable amounts of each to buy. Armed with this information, traders working with the refinery can assess which products are likely to achieve the best deal.
Planning is a steady-state and relatively long-term activity. Most refiners carry out planning on a monthly basis. Scheduling is the activity that translates the monthly steady-state plan into an hour-by-hour sequence of events from within the refinery. With the need to be more reactive to the market comes a corresponding need to be more flexible and responsive. The scheduler should be in a position to engage with traders and make quick decisions about oil coming into or finished products out of the refinery, whether the capacity is available to accept opportunity crude supplies or whether products can be made available to be shipped out to meet a newly-identified demand.
So, while the planning tool works out the economics, scheduling tools inform the schedulers within the plant whether the proposed course of action is feasible. Other tools can help optimise the distribution of products from the refinery to customer locations. This information will be important for traders in understanding the window in which they can operate. With this in mind, one issue that is becoming increasingly vital is the cost of inventory. With the current high crude oil prices and corresponding high prices of finished products, refiners are sitting on a huge amount of working capital in terms of inventory, at a time when product margins are small. Software applications are now available, which help provide greater visibility about the amount and location of the oil company’s inventory. This is a key benefit because refineries need to balance the requirement to supply the market and ensure that they do not tie up too much working capital in their storage tanks. This links in with refiners wanting to know what level of demand exists for their products. After all, if they can achieve a more accurate insight, they will be able to manage their inventory better.
A decade ago, it was rare to find a refiner who was interested in carrying out an accurate demand forecast. Today, collaborative demand forecasting is increasingly being used in the refining industry to enable a company’s sales force to predict likely demand in their region. That information can then be pulled back to one central location, where it can be collated, analysed and used to predict demand as part of the planning process. Refiners can then also look at how much of that demand they can satisfy profitably. [Page Break]
Features and benefits
These considerations are some of the core business areas that need to be addressed to help overcome challenges refiners face in transitioning to a demand pull approach to refining. However, what are the core features and benefits of software tools that most effectively drive business advantage in these areas?
Generally, refiners are looking for tools that are easier to use and allow them to do their job more quickly. New and inexperienced staff, in particular, needs software that is intuitive. They expect it to be user-friendly, so that they get up-to-speed simply by trying out a few key features. High-quality visualisation is an important part of this drive for ease-of-use. So, if a refiner is evaluating a hundred different crude oils and wants to see which is likely to be most profitable, they may well prefer a highly visual 3D representation as opposed to a difficult-to-read spreadsheet. The feature applications from the aspenONE software suite provide enormous value.
Today, it is unusual to find a refinery that does not perform refinery planning without using a commercial software product. It is becoming a mandatory requirement to support the commercial optimisation of the plant. The one area where refiners are increasingly focused on today in adopting new software is refinery scheduling. In the past, most people used a spreadsheet. There are tremendous benefits for oil companies looking to implement improved scheduling systems. Aspen Petroleum Scheduler, for example, is an integrated system that supports comprehensive scheduling of refinery activities, including crude receipts, shared assay data, process operations, product blending and product shipping. This enables refiners to achieve fast, accurate and collaborative creation of the operations schedule while integrating the scheduling and planning process. As a standard rule, they can expect return on investment in less than six months.
Looking to the future
Recent years have seen a revolution in the world of refineries. The protracted downturn has hit the industry hard, but has brought a radical shift in the operating model of many refiners - from supply push to demand pull. This has ushered in a healthier business model – one based on understanding and reacting to the market and customers rather than simply focusing on driving throughput. New markets can be developed and optimal sourcing and pricing established to meet these market demands and drive increased profits.
In making this journey to a more demand-driven approach, refiners have needed to overcome a host of challenges from cultural issues around silo mentality to logistical concerns around location and the cost of inventory. Armed with the latest software tools, refiners are now well prepared to complete the transition to demand pull and use applications as a platform to launch a more transaction-oriented and commercially astute approach to their business operations.
Eric Petela is director, business consulting, AspenTech. www.aspentech.com