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A business cannot continue to run without a self-sustaining mechanism for long. To achieve sustainability, they have to look within and outside the business environment and understand the way of analyzing the situation. Once this is done, then the need arises to take all possible measures to improve the profitability on a sustainable basis. The issues related to improving the profitability of a refinery start from improving its Gross Refining Margin (GRM).
The downstream oil industries, i.e. refining and marketing, are expected to be the most attractive growth markets in the world. The Hydrocarbon Vision 2025 formulated by the MOPNG in 1999 emphasized 90% self-sufficiency in middle distillate, i.e. Diesel/Kerosene group, in the sector with and appropriate mix of national oil companies, foreign players and private players so as to develop a globally competitive industry. According to this report, the country would require 277 MMTPA petroleum products and 358 MMT refining capacity is to be build up in order to achieve 90% self-sufficiency. Along with this, pipeline and marketing infrastructure would also be required. Vast network of dealers and distributors has developed, backed by storage points all across India including remote and far-flung areas.
Indian refineries were earlier under APM system, which gave them assured profit margins without facing any competition among themselves. Eventually, the Government of India deregulated APM completely and market was freed from April 1, 2002 under the influence of global free economies and the high imported crude oil price. This brought a revolutionary change in the oil refining business in India and as a result the Indian oil refineries have to compete among themselves and with the private sector for their survival and growth.
Against this backdrop, this paper would analyze the various innovation strategies undertaken by the Indian refineries to improve their GRM.
Keywords: refineries, GRM, APM, innovation strategies, national oil companies, refining & marketing, petroleum products, MOPNG
The rational utilization of the fractions that compose petroleum has influenced the development of refining processes as well as their arrangement in refining flow sheets ever since the discovery of petroleum. In the late 1960's, oil refining has significantly transformed being linked to the continuous increase in the need of oil light products at the expense of heavy products. (J.P.Wauquier, 1995).
The refining industry being flexible, has proven its ability to adapt and capable to meet the changes in demand and quality, in the light of introducing new anti-pollution standards as well as preset limitations for theÂ chemical compositionÂ of finished products. Thus it is seen that current refinery flow sheets, especially beyond the year 2000 would be more restricted to the new specifications using new processes.
Refining processes are basically divided into two main categories: Separation and Conversion. Separation processes include primary distillation of crude oil, secondary distillation or Vacuum Distillation absorption processes, extraction processes, crystallization processes and adsorption processes. Conversion processes include processes for the improvement of properties by: molecular rearrangement, using co-reactants, thermal cracking, catalytic processes, finishing processes and environmental protection processes (J.P.Wauquier, Separation Process, 2000).
Petroleum refining has evolved continuously in response to the always changing consumer demand of energy starting with the whale oil to the development of the internal combustion engine led to the production of gasoline and diesel fuels. Present-day refineries produce a variety of products including many required as feedstock for the petrochemical industry (R.A.Meyers, 2003) (R.Prasad, 2002).
Studies were always searching and will continue to search for the optimum working conditions for optimizing the output of production processes (T.S.Lan, 2008) (T.S.Lan C. C., 2008) (Udofia, 2009).
Gross Refining Margins
Refining industry is under immense pressure to produce cleaner products that may lower their economic margins because of stricter environmental regulations. In this situation, refinery planning becomes very important as it can exploit all potential opportunities to push the economic margins to the maximum limit. The problem of optimizing refinery activities is very complex in its own right.Â
The Refinery LP model is such a complex and sophisticated model that relates crude purchases to operation parameters and used technologies together with cost and availability of purchased crudes in conjunction with product sales, taking into account the main aim of achieving minimum cost to maximum profitability with lots of fixed and variable costs to take into consideration regarding assisting units and operation costs including cooling water, steam, hydrogen, natural gas, chemicals , catalysts, laboratory examinations, inspection work, maintenance activities, spare parts, labor, asset depreciation, downtimes and etc. (M.K. Hassan, 2011).
Economics of a refinery consists of calculating its Gross Refinery Margin (GRM). Simply stated, GRM is the difference between crude oil price and total value of petroleum products produced by the refinery. The difference in dollars per barrel between its product revenue i.e. the sum of barrels of each product multiplied by the price of each product and the cost of raw materials constituting primarily crude and some additives like butane and ethanol.
The GRM of a refinery is determined by its Nelson Complexity. Higher Nelson Complexity of a refinery enables it to process sour crude which gives a better GRM due to price differential of crude between sweet crude and sour crude. Sweet and sour depend on sulphur content of crude oil and sweet has less than 0.5 per cent sulphur while sour crude has more than 0.5 per cent. Higher the GRM's higher is the Profit Yield.
The factors that contribute to high GRMs are cost of sourcing crude oil, manufacturing reliability and efficiency, ability to produce quality transportation fuels, flexibility of crude oil receipt and product evacuation infrastructure, Demand-Supply mismatch of the products etc. The duty structure for crude & petroleum products Crude Mix (API & Sulfur) processed in the refinery depends on Refinery Complexity i.e. Nelson Complexity Fuel & the Losses incurred in the production process. The stand alone domestic oil refineries are paid import parity price, which is the international price of the product plus insurance, freight and custom duty.
Innovation Strategies Undertaken by the Indian Refineries to Improve their GRM
Refining industry is characterized by stiff competition, stricter environmental regulations, and heavier, sourer and costlier crude oil, accompanied by possible disruptions caused by various factors that companies cannot control. Therefore, to maintain the profit margins in this ever-changing market environment, refiners need to have smarter strategies for flexible and adoptive operations. Also the refining industry deals with one of the world's longest and most complex supply chains, beginning at a natural resource in the ground and continuing all the way through to the end-users.
There are so many decisions involved to achieve the optimal operation for a refinery. All decisions are highly interrelated and the interactions have a substantial impact on overall refinery profit. Optimization of individual department or decision does not guarantee the optimal performance of the overall refinery. Here automation and technology infusion must focus on automated workflow and integration of processes such that there is reliable information availability and visibility across the enterprise.
In April 2012, Reliance IndustriesÂ Â (RIL) surprised the market by posting better-than-expected gross refining margins (GRMs) at $7.6/bbl for Q4 versus $6.5 what brokerages had estimated. Market did not expect GRM to cross $ 7bbl as crude cost went up. Between January and March 2012, the price of Brent crude rose 15.6% to $122.88 each barrel. Dealing a double blow, the rupee strengthened against the dollar by around 5%, which made crude more expensive. But despite better-than-expected GRM, the net profit was short of the expectation, that indicates that probably the petchem has taken more hit than what it was expected.
The reasons for this could be the sources of crude and also finding better markets where they were able to actually get better price for petroleum products such as the United States and also certain markets in the Middle East. RIL's refinery at Jamnagar is one of the most complex plants in the world and can process heavier (impurer and cheaper) crude to yield a product slate of the same quality that other refiners produce using lighter (purer and more expensive) crude. Soaring international prices of crude, lead to the price differential between light and heavy crude narrowing, since demand for the latter rises as it is cheaper.
Due to the complex nature of its Jamnagar refinery, RIL'sÂ refining margins are benchmarked with the Singapore refinery which is also a testimony for other Asian refiners. RIL has always highlighted the premium to the Singapore benchmark, but of late the premium has shrunk due to inventory losses. Though, RIL's GRMs in the sequential quarters have enhanced on improvement in LPG and naphtha spreads, business environment for refining companies continues to be tough the world over due to weakness in demand and capacity additions globally.
RIL's GRMs, a key source of income for its core business, was expected to be between USD 9-9.5/bbl in comparison to SingaporeÂ refinery which is estimated to average at USD 9.13/bbl during the last quarter of 2012.
Developing and embracing new technology isÂ aÂ crucial toÂ the continued success ofÂ every business. That isÂ why innovation isÂ part ofÂ the Indian refining sector. Indian Institute of Petroleum (IIP) is a centre of excellence for development of cutting edge 'solvent extraction' based technologies successfully operating in a number of Indian petroleum refineries. In 2010, IIP conceptualized an innovative approach to integrate solvent extraction unit of lube refinery and FCC unit of fuel refinery, a unique concept that demonstrates zero fuel oil production from FCC unit and enhanced refinery margins. To develop this technology, IIP carried out a systematic and in-depth science based study whichÂ Â included detailed physico-chemical characterization of clarified oil, design of liquid-liquid extraction runs in terms of temperature, solvent-to-feed ratios, water dosage in solvent, temperature gradient in continuous extraction column, interface position, interpretation of lab data, optimization of process conditions to achieve products (raffinate and extract) of desired quality etc. (Dr.M.O.Garg, 2010)
The lab study concluded that there was a tremendous potential to produce premium value products such as good quality feed stocks for Fluid Catalytic Cracking (FCC) and premium grade Carbon Black Feed Stock (CBFS) from fuel oil components (clarified oil) through solvent extraction. The study also established the optimum process conditions. This technology has since then been successfully commercialized at HPCL Mahul Refinery in Mumbai which is reaping the benefits of producing additional amount of good quality clean feed stock for FCC and also premium quality feed stock for carbon black production from clarified oil. (Dr.M.O.Garg, 2010)
Enhanced Refinery MarginsÂ Analysis showed that installation of the extraction facility on recycle loop had a fairly attractive economics due to production of very rich aromatics extract along with significant increase in FCC distillate products by 5-10percent. The estimates show that the integration of FCC unit with solvent extraction unit leads to enhanced Gross Refinery Margins (GRM) of Mahul Refinery of HPCL by USD 0.30 per barrel (~Rs10 cores per MT of crude processed) (Dr.M.O.Garg, 2010).
The Indian Oil's R&D Center's activities in refining technology are targeted in the areas of fluid catalytic cracking (FCC), hydroprocessing, catalysts, residue upgradation, distillation simulation and modelling, lube processing, crude evaluation, process optimization, material failure analysis and remaing life assessment and technical services to operating units. In FCC, apart from process optimization and catalyst evaluation, the accent is on the development of novel technologies aimed at value addition to various refinery streams. This Centre is fully equiped to provide technical support to commercial hydrocraker units in the eveluation of feedstocks and catalysts, optimization of operating parameters, evaluation of licensors'process technologies, development of novel processes and simulation models.
Indian Oil's R&D Centre provides highly specialized services like market failure analysis and remaining life assessment of refinery equipment and installations not just to Indian Oil refineries but also to other companies.
Indian Oil provides world-class technical support for refinery Turnaround Management system (TAMs). It has developed expertise in execution of shutdowns based on its experience of successfully carrying out TAMs for over 180 process units in its different refineries for over four decades. It has an exclusive experience of undertaking TAM of the entire refinery at one go, including all the process units, utilities, off-sites etc., all at the same time. This requires large resources in terms of manpower, material & equipment, with scientific way of execution, utilising advanced tools, user-friendly software packages in multi-user enviornment, effective ommunication facilities among the coordinators, stringent safety standards etc.
B.K. Datta, Director (Refineries), BPCLÂ has expressed his thoughts on maximizing value creation. According to him, highest reliability from the safety standpoint, minimizing the losses to optimize the operating cost and increasing yields for maximum value creation are the most critical factors towards leveraging efficiencies. From a single crude, BPCL makes around 30-40 products having each product priced differently. Product maximization is a challenge for the refinery, which is gives maximum delta value over the crude oil and to minimize the products, which are having less or negative value. BPCL follows the linear programming optimization decision tool to decide upon the best crude mix to get maximum yields.
It is critical for any refiner to identify the right crude mix in order to maximize product yield, which is a deciding factor for Gross Refining Margin (GRM), the indicator of refinery's profitability. There are over 1200 types of crudes available in the world with its own individual set of properties, which after processing yields products with different specifications, which is the deciding factor for pricing.Â The linear programming model enables BPCL to decide upon the right crude mix depending on the products required and derive maximum value from each processing cycle.Â
Hence one needs to understand crude mix fundamentals clearly before deciding upon the optimum crude mix to derive maximum optimization in terms of yields, reducing production cycle and increasing turnover.Â At Numaligarh refinery of BPCL in Assam, manufacture of value-added products which include microcrystalline and paraffin wax takes place which have a huge market in India and are currently being imported. Its Gross Refining Margin (GRM) during 2011-12 was $11.97 per bbl against previous year's GRM of $ 15.39.Â
Numaligarh refinery's location in close proximity to countries like Bangladesh, Bhutan and Myanmar presents opportunity of natural markets for its products. For such project activities an amount of Rs.8,955 crores have been provided in the 12th Five Year Plan Outlay. The Company is also pursuing a broad array of growth opportunities by way of implementing several value added projects. The Rs.577 crores Wax project envisages production of high value low volume Paraffin and Micro-Crystalline Wax utilizing inherent properties of North East Crude. The project is scheduled for completion by December 2013.
The Naphtha Splitter Project involves a project cost Rs.87 crores has been taken up for production of 160 TMT annually of petrochemical grade Naphtha, which would be supplied as feedstock to the Assam Gas Cracker Project. The project was targeted for completion in third quarter of 2012-13. Besides these, NRL has 10 % equity participation in the joint venture company Brahmaputra Cracker and Polymer Ltd. which is implementing the Assam Gas Cracker Project and 26 % equity participation in DNP Limited which has commissioned a pipeline from Duliajan to Numaligarh.
In its pursuit to be a technology savvy company, NRL has successfully implemented B2B (Business to Business) process with Oil India Limited for purchase of crude oil and sale of products. This initiative has resulted in savings in time, effort and money. This is the first event of B2B implementation between an upstream company and a downstream company in the oil industry. Product exchange process between NRL and Other Oil Marketing Companies viz. HPCL and IOCL has also been successfully automated through B2B transactions over ERP systems during 2011-12.
In its quest for environmental excellence and continual improvement, the refinery has taken up several initiatives employing state-of-art technologies. During 2011-12 NRL was re-certified against ISO 14001 under environment management systems. During the year, 100% treated effluents were reused ensuring zero discharge of effluents from the refinery as well as from the township- thereby ensuring a cleaner, greener environment. NRL's commitment towards the environment has been aptly rewarded when the Company received the Greentech Environment Award 2011 under gold category. Also, the CIDC Viswakarma Award 2011 under best project category was received by NRL for implementation of the Diesel Quality Upgradation Project.
While NRL continues to move ahead towards progress and growth, its commitment for promoting socio-economic development of the region has been growing stronger with time. The Company continues to implement definitive measures for improving the lives of the people in neighboring areas of the refinery as well as in North East through innovative and people friendly programmes.
During the past year, uncertainty about oil supply from Iran, a weak refining market and heavy foreign exchange losses has been an overhang on the Mangalore Refinery and Petrochemicals Limited (MRPL). The completion of its Phase III refinery project by the end of the calendar may provide a positive trigger for MRPL. The project is in an advanced stage, with around 95 per cent of the work complete. A major part, including the crude distillation and vacuum distillation units, was commissioned in March 2012. The balance portion is expected to be completed by October this year.
After the expansion, the MRPL's capacity would increase from around 12 mtpa to 15 mtpa, and its complexity will rise from around 6 to 10. This would enable MRPL to process cheaper, heavier crude to produce more value-added products, and improve its gross refining margin (GRM) by around $2-$3 per barrel. This will reduce its freight costs. The polypropylene unit will give the company a foothold in the petrochemicals space. MRPL will also benefit from the incentive package announced by the Karnataka government for the Phase III project. Concessions include soft loans, and exemption from entry tax and central sales tax. This should further aid the company's margins.
The price of crude has been fluctuating in recent times. In such an unpredictable environment, making investments is difficult and a need arises to leverage better technology to meet the demand. The oil and gas industry needs to manage its costs and cash flows in a better way by finding ways for value addition, given the tightening of environmental pollution norms. Refineries have been devising strategies to improve their GRMs. These refineries face pressure from various factors ranging from economic downtown, changing energy policies and the expansion pattern of global refining capacity. The need for efficiency and optimization will continue to help refineries maintain their profitability. Refineries have to focus on operational aspects and need to improve the bottom line by improved operational efficiencies (Wipro Thought Leadership Intelligent Manufacturing, 2009).