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Petroleum downstream industry processes and key performance

indicators: Welcome
Table of contents

Welcome page Basics page

It is important to understand how companies in the petroleum industry conduct their business. This learning offering is for any IBM employee who needs up-to-date information about the petroleum industry, whether in sales, marketing, delivery, or support. No prior knowledge of the industry is required. Click any of the topics in the table of contents to learn more. Did you know? Some interesting facts about the petroleum industry include:
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Properties of crude oil What do refineries do?

Processes page Regional planning Plant operations Asset management Supply, distribution, and trading

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Almost half of a 42-gallon barrel of crude oil ultimately becomes gasoline; almost half the cost of a gallon of gasoline is the price of the crude. Up to 10% of crude oil coming into a refinery is burned to create the energy necessary for the refining process. A recent IBM project in the petroleum industry defined 880 key performance indicators for a single client.

Measurements page Key performance indicators

Stakeholders page

Petroleum downstream industry processes and key performance indicators: Basics

The basic raw material for refineries is crude oil (or petroleumthese are synonyms) that comes from wells drilled into the ground or the sea bed. In some cases "synthetic" crude oils from other sources such as tar sands are included in the refinery feedstocks. Even in those cases, however, all petroleum or tar sands feedstocks come from one basic source: organic, hydrocarbon-based matter that originally came from plants, compressed by layers of rock and sediment over tens to hundreds of millions of years. Over that time, the original plant-based hydrocarbons have been transformed into many thousands of complex hydrocarbon molecules that range from simple and light to complex, branched, and heavy.

Properties of crude oil

Although all crude oils are mostly hydrocarbons, they vary in their composition and physical properties depending on where they originated, because each reservoir might have started with different plant species and, more importantly, might have different compression histories and different ages. Crude oil typically contains many thousands of different molecules, so it is not practical to characterize them by simply listing these molecules. Simple characterizations have been developed to describe the bulk properties; these characterizations include:
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Density: A measurement has been developed called American Petroleum Institute (API) gravity. The API gravity scale is a reverse scale, meaning that the higher the crude oil density, the lower the API number, and vice-versa. API gravities for crude oils range from 3 to 5 for very heavy Mayan and Venezuelan crudes to 35 and 40 for very light Saudi Arabian and Iranian crudes. Density is an important measurement, as it is closely correlated to the amount of lighter, more valuable components in the crude and therefore to its average boiling point. The lighter the crude, the more propane, naphtha, gasoline, and jet fuel components it contains and the less energy it takes to boil and process the crude. The heavier the crude, the more heating oils, ship fuels, waxes, and asphalt it contains, and the higher the temperatures and energy it takes to boil and process. Although other factors affect the value, all else being equal, the lighter the crude, the more valuable it is. Sourness: Most crudes contain some sulfur, either as mercaptans or as hydrogen sulfide, that becomes associated with the crude from the rocks and sediments that buried the original plants. The higher the sulfur content, the more "sour" the crude is. Sulfur content ranges from less than 0.1% to more than 5% by weight. Sulfur content of over 0.5% typically requires special processing, called de-sulfurization, before the crude is boiled or the sulfur compounds will cause corrosion in containment vessels and contamination of products. Therefore, high sulfur content degrades the value of the crude oil. Other contaminants include salt or metals. r Salt contents vary a hundred-fold from 1 to 100 pounds per 1000 barrels. Any salt over 10 pounds per 1000 barrels must be removed in desalters or it will react with other compounds in the oil, form acids, and cause severe corrosion. Therefore, salt content degrades the value of a crude oil. r Metals content in crudes can vary a hundred-fold from 10 parts per million to more than 1000 parts per million. Despite their low concentration, metals can be a very negative factor because they affect the activities of the many catalysts involved in refinery processes and they contribute to severe corrosion. Therefore, metals must be removed using expensive processes, affecting crude oil value.

Other compositional parameters

Another way of characterizing crude oil is related to its composition. While it is not feasible or practical to list all the molecules in a crude oil, it is possible to lump these molecules into broad families and then determine the rough

percentages of each family in the crude. The crude can then be described in terms of the family that predominates in the crude, and refiners will have a rough idea of what kind of products the crude is best suited for. Typically, crude is described as one of the following:
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Paraffinic Naphthenic Aromatic Asphaltenic

What do refineries do?

Refineries basically perform these processes:
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Receive crude oils of various types Boil the crudes to 600-800 degrees in huge distillation columns Distill the resulting vapors and liquids into several separate
streams of different densities and properties
Purify and blend the streams into a range of industrial and
consumer products
Chemically transform some of these streams into more valuable
materials

The illustration below indicates the major products produced by oil refineries. The figure shows the crude oil feedstock coming into the refinery, some of the major and typical process steps that take place in most refineries, and most of the major products produced. It also indicates the increase in density of the products as you move down the list; for example, gasoline is less dense, or lighter, than asphalts. Refinery products, in order of increasing density, include: The refinery processes the crude by: Crude oil
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Distillation Cracking Reforming Alkylation Blending

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Fuel gas (commonly called natural gas) Liquid propane Gasoline Aviation fuels Diesel fuels Heating oil Lube oils and greases Asphalts Ship fuels Coke

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Petroleum downstream industry processes and key performance indicators: Processes

Business processes vary, depending on the segment. Business processes might have the same titles in the upstream and downstream petroleum segments, but the processes have different focus areas. For example, the human resources function is company-wide, but it is split across the segments. Some people work for both the upstream and downstream sectors, but job applicants apply specifically to the refining, marketing, or exploration areas. The research and development (R&D) process differs by segment also. For example, the oil exploration segment is focused on geology because each company wants to be the first to find the next major oil and gas reserve. Minimal R&D is required in refining because most of the chemical processes are well known and are licensed by other companies. Lastly, in the marketing segment, R&D involves the research of customer buying habits rather than the particular components that make up gasoline. Refining companies purchase crude oil, which does not have to come from their own exploration activity. The processed petroleum products, such as gasoline, diesel, liquified propane gas, kerosene, and fuel oil, have a set of regional markets. There is a daily gasoline price for the United States in the U.S. Gulf Coast, New York Harbor, and Chicago. There are also market quotes for the rest of the world in Rotterdam, Geneva, Singapore, Asia, and Korea. Finally, in the retail market segment, products are bought by and sold to the end consumer for the highest possible price, depending on the gasoline taxes for that region. The major business processes in refining are:
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Regional planning Plant operations Asset management Supply, distribution, and trading Fuels marketing

This offering briefly describes the business processes listed in the first four categories. Fuels marketing will be covered in another offering.

Regional planning
Regional planning includes planning for demand, feedstock, facilities, and distribution. Multi-refinery planningdemand management
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Demand forecasting refers to the process of forecasting demand for various refinery products. This sounds simple, but it can be complicated by various factors including: the number of refineries the demand forecast is covering; their regional locations; long-term contracts with various customers; seasonal factors (more gasoline in summer, more heating oil in winter); and the impact of current inventories, trades, and swaps. In price forecasting, prices must be forecast for each product over several planning horizons, for example monthly, quarterly, and yearly. As almost all the products are commodities, prices are mostly not under the control of the refiner but must reflect the open market. Forecasting product prices, therefore, is an exercise that takes into

account supply and demand balances locally, regionally, nationally, internationally, and seasonally. Forecasted prices become one of the major inputs for overall planning economics.

Multi-refinery planningfeedstock planning

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Feedstock supply outlook is the process of determining and listing all of the
crudes available to the refineries over the planning horizon. Availability must
take into account long-term contracts, possible trades and swaps, production
forecasts, and what is available on the open market.

Feedstock price forecasts are for those crudes not "locked up" via long-term contracts. Prices must be forecast for all of the different crudes available over the planning horizon, and like the forecast of product prices, these must take into account supply and demand balances, seasonal variations, and many other factors. To prioritize refinery feedstocks, refiners must determine and prioritize those available crudes that would be best suited to achieve overall plans. This is based on the product demand forecast and the capabilities of each refinery, as each refinery has different process configurations, different capacities, and different abilities as to which crudes they can process and which product and how much of each product they can produce. The prioritization of these available crudes is one step in determining the range of prices the traders should bid for those crudes. Some crudes might be inexpensive but do not fit the companys plans, while other crudes might be expensive but offer a strong fit between the crude characteristics, refinery capabilities, and production plans. Obviously, the refiner would be willing to win a bidding contest for those crudes.

Strategic planningfacility planning

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A process in strategic planning is to create inputs to the planning systems. All modern refiners have elaborate planning systems called linear programs (LPs). These are big computer programs that determine economic optimum production plans. That is, given various economic trade-off information and constraints, and the capabilities of the individual refinery, for any given feedstock or blend of feedstocks, the LPs will calculate the product slate that represents the economic optimum. This represents the plan for refinery management that tells them what products to produce for any given timeframe. The process discussed here prepares the inputs for the LP computer runs. That is, the staff collects and prepares all the data described in the paragraphs above, namely, the demand forecasts, product prices, refinery capabilities, refinery processing economics, feedstock characteristics and prices, and so on. These inputs are then fed into the computer programs. Then the staff runs the LPs and creates the plans; the outputs are, after being checked for correctness, relevance, and internal consistency, collected into plans for different time frames, mostly monthly, eight-week, and quarterly plans.

Strategic planningdistribution planning Products must be distributed to various markets. This process determines the economically optimum way to do that, given all the variables that must be considered. Among these variables are:
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Pipelines: Many companies share gasoline pipelines. It therefore needs to be determined when a particular companys flow begins and ends in order to get the payments right. Transportation options: These include pipeline, ships, barges, and trucks. The right option to choose depends on customer as well as relative transport economics. Blend or sell decisions: Certain products can be re-blended back into gasolines or other fuels or sold as is, depending on relative economics and market opportunities. Optimization of transportation and storage costs: Holding inventory costs money; so does demurrage, that is the costs associated with ships having to wait in dock while waiting for product. These costs must be balanced with the cost of running out of product, which can be much higher in terms of lost opportunity costs.

Typically, optimization programs help the staff in these processes find the right balances to come as close to overall economic optimum as possible. Nevertheless, there are always opportunities for better business processes to make more products and save more money through more effective product distribution. Back to top

Plant operations
Plant operations includes planning, scheduling, tracking, process control, power management, and utilities management. Planning and scheduling
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Production in the refinery must be scheduled. This process creates operations plans on an eight-hour, or shift, basis, that tells the operations crews what to do, such as how much of each product they should make, and how components are to be blended to create various fuels for customers. Many refiners now utilize scheduling software that takes into account all variables and creates a schedule that is economically optimized as well as matched to overall refining plans. Oil movements must be tracked and scheduled. Refinery products are "lifted" onto trucks, rail cars, pipelines, or storage tanks. These product movements are scheduled and taken into account.

Operations tracking As the schedule and operations plans are executed, the production and movement of products both inside and outside the refinery are tracked and taken into account. Also, product qualities are recorded and adjustments are made as necessary. Process control The various chemical and distillation processes in the refinery must be controlled. Typically, this takes the form of automated, or advanced process, control, in which computer software adjusts various parameters such as temperature, pressures, and flow rates of various heating and cooling streams in order to keep the process lined out. This is analogous to autopilots on airplanes that control wing flaps, rudders, and so on to keep the plane flying smooth and level. Power and utilities management Refineries use a huge amount of electric power and fuel to provide the energy for boiling the crudes, heating various other feedstocks, and for pumping and compression.

The utilities in refineries burn some of the fuel products to create steam for overall refinery heating. Some refineries also generate their own electric power, sometimes selling electricity back into the main power grid. A typical 100,000 barrelper-day refinery will spend about $100,000,000 per year on energy. Therefore, optimizing utilities and power management is a very important process. Those refiners that do it well generate power and steam up to 5% more efficiently than their competitors, thereby saving $5,000,000 per year when compared to those competitors. This is very important in a narrow margin business. Back to top

Asset management
In the refining industry, most of the capital investment of the business is tied up in the refineries themselves, including plant, property, and equipment. This investment amounts to more than a billion dollars per refinery in replacement cost. Each refinery contains large numbers of:
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Steel structures such as distillation columns up to 100 feet high and

10 feet in diameter or more, liquid drums, and large heat exchangers

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Fired heaters, or furnaces, to boil water for steam and to heat crude Hundreds of miles of pipes up to four feet in diameter, often bundled together in pipe racks Dozens of storage tanks to hold raw materials and product inventory Hundreds of pumps and tens of gas compressors Electronic instruments and hundreds of miles of wire and cable Rail and truck loading facilities

All this equipment must be maintained to prevent breakdowns and to ensure that the equipment can be fixed quickly and effectively when it does break down. As refining capacity in the United States is currently at its limits, any loss of production has a direct impact on the bottom line for the refining company. Therefore, proactive and effective maintenance plays a large role. In addition, safety and compliance require that equipment has integrity and basic reliability. However, even though a refiner wants the equipment maintained properly, maintenance is expensive and therefore the refiner must balance the need to keep equipment running with the high cost of staff and equipment to accomplish the task. As an analogy, we all want our cars to run smoothly, but we do not bring them into the shop every day, as this would be impractical and too costly. This balancing act, only on a much largetr scale for the petroleum industry, means that managing the maintenance process is quite complex. There are several major elements in the overall process.
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Strategy: A refiner has options in the approach to maintenance, ranging from break and fix, in which the refiner simply waits for equipment to break and then fixes it, to preventive maintenance, in which equipment is serviced on a scheduled basis to keep it in good repair. These strategies can vary from refinery to refinery. Fix or replace? Equipment assets have to be replaced periodically as they wear, and refiners must establish

parameters as to how often this is done to balance reliability with cost. Fix or replace is a complex decision process all its own. Project management: Each maintenance event is a project, ranging from simple procedures that may take a few minutes to complex projects that may take weeks. In a complex refinery, there are literally dozens of projects taking place every day. These projects must all be managed for cost and effectiveness. In addition, new events take place every day that require changes and re-balancing of project schedules. Procure and manage spare parts and tools: Maintenance equipment must be managed, from spare parts to tools. This is a balancing act, as keeping a huge inventory of parts is costly. However, if parts are not available, waiting for parts to be shipped can cost precious downtime. Maintenance staff: These people can be full-time employees of the refinery; but, more typically, the refiner utilizes contract staff for most maintenance. These people and the contracts must be managed.

Modern refiners utilize large computer systems to help manage the complexity. These include SAP as well as various asset management applications such as IBMs own Maximo system from the recently acquired company, MRO. Project management tools are also used, such as Primavera or Microsoft Project. Back to top

Supply, distribution, and trading

Supply, distribution, and trading processes are a set of linked and interrelated processes that are performed to manage trading margins as well as crude and refined product movements to optimize the refining network. These tasks are accomplished by considering the following factors:
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Sales and production plans, projected crude inventory levels, and the development of the required crude requirements at each refinery location Market-specific product specifications for refined products

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Inventory management requirements across the supply chain, both at refineries and at product terminals Risk management requirements to ensure stated positions are understood Market conditions, refining margins, and freight economics Refining economics and crude value of each company's refineries Current and projected inventory levels at terminals, considered planned movements, and associated costs Efficiency, timeliness, and cost of the transport of crude into refinery locations Crude and product evaluations that value different crudes across each refining location

Supply

Supply is the set of processes through which the downstream company ensures it has the required crude and refined products across its network to ensure continuous and optimized performance. Within these processes, terms and conditions are created and negotiated for agreements to purchase crude oil. In addition, these processes also arrange for transportation to each refinery location. Similar arrangements for refined products, such as gasoline and diesel fuel at the terminal sites, are negotiated and finalized in a similar manner. Normally, a portion of the products supplied to these sites comes directly from a companys refinery. However, there are also exchange agreements that are negotiated with other oil companies to reduce distribution costs. The nature of these agreements is that each company agrees to supply the other company's terminals with products at agreed-to prices in order to reduce the transportation costs to get products to these locations.

Distribution
Refined products are typically moved using discrete scheduling and management through two distinct networks:
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From refinery sites to terminal racks for truck pick-up

From the rack to individual gas station sites (rack forward)

Typically, when the term distribution is used within the downstream industry, it is the first network in the list that is being referenced. Refined products can be delivered through multiple modes of transport to individual terminals. These products can be delivered via a pipeline, through marine (mostly barge) movements, by rail, or by truck. The following items are primary examples of some of the scheduling activities required.
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Berth scheduling: This process involves the scheduling of a berth at a refinery dock in a manner that ensures effective dock utilization and timely delivery and receipt of the product. The common integrated berth scheduling process and marine scheduling process will have a single source of information updated electronically on a near real-time basis. Marine scheduling: Processes and supporting systems are developed to aid in the tracking and calculation of demurrage costs by product movement. This process includes the scheduling of marine shipments to and from a refinery in a manner that ensures timely delivery and receipt of product and effective dock utilization. Pipeline scheduling: The nomination (movement) of pipeline shipments to and from various facilities occurs in a manner that ensures timely delivery and receipt of product and effective pipeline utilization. A common integrated pipeline scheduling process usually has a single source of nomination and scheduling information updated electronically on a near real-time basis.

Delivering product from the terminal rack out to gas stations is done via trucks that then deliver the product to the gas stations. Typically these movements are made by monitoring the inventory levels at the gas stations. When inventory is lower than the defined threshold, a truck delivery is arranged to deliver more product.

Trading

The trading processes include the exchange, purchase, or sale of crude and refined products in the market place. Sometimes these arrangements are paid out in various currencies; other times these agreements are an exchange of commodities. This activity is performed both to support the supply processes as well as to take advantage of market conditions, where profits may be increased without putting at risk the operating plan. Oil-related trades are typically priced off of one of the major market indices, such as the price of West Texas Intermediate or Brent Sea crude. Other activities within the trading process include hedging a companys commodity position from a trading standpoint. Terms of these arrangements range from 1 month to more than 10 years. These trading strategies are developed to limit exposure to fluctuating oil prices. Arrangements vary from basic swaps to complex derivatives and include:
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Outright swaps, options, and collars Crack swaps and options Calendar spread options

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Petroleum downstream industry processes and key performance indicators: Measurements

Key performance indicators (KPIs) are metrics used to evaluate an enterprise's performance. Companies use these metrics to measure themselves against other companies in the industry and to report shareholder value. One key decision that affects an oil company's measurements is whether to treat refining as a profit center or a cost center. Major categories of key performance indicators for companies in the petroleum industry (including examples) are: Financial
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Cost per barrel of output Cash cost per barrel of output

Sweet or sour crude realizations

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Return on capital employed Debt to cash flow Debt to earnings before interest, taxes, depreciation, and amortization

Marketing and distribution

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Total product sold by Petroleum Administration for Defense Districts region Margin versus New York Harbor Crude supply cost per barrel Gross margin performance Actual spot price relative to term price

Human Resources and work force

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Absenteeism Overtime Average time to fill vacant positions Turnover rate

Environmental

Water use

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Greenhouse gas intensity Permit compliance

Health and safety

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Lost time incidents Recordable events Action item closure

Stakeholder relations
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Hours worked in community service Timeliness of regulatory approvals

Engineering, procurement, and construction vendor performance

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Forecasted deviance to cost Forecasted deviance to schedule Success of test runs

Planning
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Variance between sales production plans and sold volume by location or region Variance between sales and production plans versus actual output

Operations
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Number of unplanned outages Percentage of planned versus unplanned maintenance outages Lost profit opportunity Percentage of variance between production plan and output

Many key performance indicators are available for companies in the petroleum industry. Click the following link for a list of the indicators for one process: Petroleum, Downstream Inventory: Production and Store Operations. Back to top

Petroleum downstream industry processes and key performance indicators: Stakeholders

The petroleum industry is a highly competitive, rapidly changing, and ever-evolving multinational, multi-layered, lowmargin, legislatively and environmentally challenged arena. Because it is racked with challenges, industry leaders are constantly searching for ways to streamline their operations, cut their costs, and improve their margins. Although knowing who the decision makers are is not an exact science, IBMers can achieve greater success when they are involved in the multilevel and the multifunction of an oil company. The ultimate sponsor is someone in one of the business units or on the corporate level where the initiatives are sponsored. Organizational structures in the petroleum refining industry vary depending on the company, but most companies organize their management executives with some combination of three major groupings: Major revenue-generating or major expense-line parts of the supply chain
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Supply and trading (crude oil supply) Refining Transportation and logistics Marketing

Geographies
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North America Latin America Europe and the Middle East

Asia Pacific

Shared service leaders

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Purchasing Engineering and technology Maintenance and asset integrity Information technology Human resources Finance and tax Environment, health, and safety Security Public relations Legal

In addition, these organizations may be duplicated within each refinery (except for the geographical organization), as each refinery requires its own information technology, engineering, human resources, public relations, legal, and accounting functions. One characteristic of refining organizations is that they tend to be distributed and fairly autonomous. Most refinery managers have budget authority and can purchase services unique for the refinery. Having said this, successful selling is multi-level and satisfies the needs of both the corporation and the individual refineries. Back to top

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