Fahim M.A., Sahhaf T.A., Elkilani A.S. Fundamentals of Petroleum Refining
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infrastructure. Table 16.2 gives a cost breakdown of a typical European
refinery with conversion units to maximize motor gasoline production.
16.3.2. Operating Costs
The operation of the refinery requires several operating cost which are
broken into variable and fixed costs.
16.3.2.1. Variable Cost
Variable cost items are directly proportional to the refinery crude oil feed
rate. They include chemicals which are added during processing for corro-
sion prevention, oxygenates for octane number improvement, cetane num-
ber improvers, pour point depressants for gas oil, and any other additives.
Catalysts are used in hydrotreating, hydroconversion, catalytic conver-
sion and other processing units. Some of these catalysts are very expensive
since they contain noble or rare earth metals. They have a certain catalyst life
and when they cannot be regenerated, they are replaced by a fresh catalyst.
Average catalyst cost is a few U.S. dollars per ton of crude oil processed.
Fuel cost is a very important operating cost in the refinery. Refineries
use fuel oil, natural gas and refinery waste gas as fuel sources. Converted to
its energy equivalence in barrels of crude oil, fuel and other energy costs
amount to between 6% and 8% of crude input, depending on the refinery
size and complexity. Fuel is needed in process furnaces and for boilers in
steam generation. Natural gas is needed for hydrogen production. Electrical
power, if produced onsite, also requires fuel. Usually, electricity is bought
from an outside utility company.
Working capital charges relate to the cost of keeping a certain level of
stocks of crude oil to ensure that refinery crude feed is maintained and to meet
customer demand of finished products. It amounts to $2–3 per ton of crude oil.
16.3.2.2. Fixed Cost
Manpower. The number of technical and administrative staff needed to
run a refinery depends on refinery complexity, location and the level
of automation incorporated in the design.
Table 16.2 Breakdown of capital cost of a typical European refinery (Favennec
and Pegyre, 2001)
Cost item Percent of total capital cost
Process units 45
Utilities 15
Security and environmental facilities 7
Storage and handling facilities 25
Civil works, buildings and other infrastructure 8
Refinery Economics 405
Maintenance. The cost of maintenance is proportional to the capital
cost. It depends on several factors, including the design of the units, the
quality and reliability of the equipment, the operation practices, and
preventive maintenance practices. The cost can amount to 3–4% of the
initial capital cost.
Overhead costs. This includes administrative costs, taxes, insurance,
quality control costs, community service, advertisement, etc.
Cost of capital. When a new refinery is built, it is financed totally or
partially by loans from banks or financial institutions. Loans have to be
repaid according to a loan plan in the form of annual capital cost
repayment, which includes the interest and loan repayment. Even if
the refinery is built from the refining company’s own financial
resources, the capital with interest has to be recovered. This constitutes
the return on investment, which has to be greater than the interest paid
by the banks, otherwise there would be no justification for the invest-
ment of the company’s own money in building a refinery.
The breakdown for the operating cost of a refinery with deep conversion is
shown in Table 16.3.
16.3.3. Factors Affecting Refinery Costs
Refining costs greatly depend on several factors:
Refinery complexity. Refineries can have a simple configuration with
crude distillation, catalytic reforming and product hydrotreating units
or complex configuration with vacuum distillation and cracking units.
Complex refineries require more capital cost and operating costs.
However, they generate more profit. More details on refinery com-
plexity will be discussed in Section 16.5.
Capacity utilization or stream factor. Refineries should operate at their
design throughput rate for both the crude distillation units and the
downstream processing and conversion units. However, depending on
product demand and prices, refineries are forced to operate at less than
Table 16.3 Typical breakdown of operating costs of a
deep conversion refinery
Operating cost Cost in $ per ton of crude feed
Variable cost 4
Fixed cost 15
Cost of capital 25
Total 44
406 Chapter 16
100% stream factor. Refining capacity utilization in 2005 was around
90% in the United States and the Asia-Pacific region and around 82%
in Europe. As the demand for refined products increases, the level of
capacity utilization will increase. Also, the closure of old refineries in
Europe and the United States has increased capacity utilization. In the
future, additional refinery capacity is needed, especially in countries
with developing economies like China and India.
Refinery size. The capital cost of refineries is obviously dependent on its
size. The most common relationship between the capital cost and
capacity of process equipment, refinery units or whole refineries is
given by
I
a
I
b
¼
C
a
C
b
n
; ð16:1Þ
where I and C refer to capital cost and unit capacity of units a and b,
respectively. The exponent n is 0.67 for refineries but can range from
0.48 to 0.84 for different process equipment or units (Favennec and
Pegyre, 2001). However, operating costs per barrel decrease with
increasing refinery size. This is due to the fact that fixed costs
(manpower, administrative and other overhead) are independent of
the size of the refinery. Furthermore, both capital and maintenance
costs which depend on size, do not increase with size to the same extent
that the actual rate of size increases. Therefore, there is a decrease of
these costs per barrel processed.
Quality of the crude. The crude oils processed in refineries are becoming
heavier and contain more sulphur. If we take the USA as an example,
The API gravity has decreased from an average of 33 in 1981 to around
30 in 2001, coupled with an average sulphur content increase from 0.8
to 1.4 wt%. As crude oils become heavy, additional investment have to
be made in conversion and heavy oil processing units. Without these
additional costs, simple or typical refineries would not be profitable.
Location. The cost of building a refinery depends on its location.
Refineries are usually located close to a coastal line to transport the
products by tankers. Weather conditions at the location of the refinery
also affect the refining costs. Refineries are usually located in oil
consuming countries. Since the 1970s, oil-producing countries have
developed a strategy of building export refineries to acquire a share of
the refined product market in the consumer countries. The profitabil-
ity of export refineries is limited due to the fact that the construction
cost is higher than in consuming countries, and the cost of transporting
finished products is higher than transporting crude oil. However, the
majority of new refining facilities are being built in oil-producing
countries like Saudi Arabia, Iran and Venezuela.
Refinery Economics 407
Environmental constraints. Due to more strict environmental regulations
regarding air, water and soil pollution, refineries have to add units and
processes to make sure than the gas emissions are within the regula-
tions. This is also applied to water discharges into rivers and the marine
environment. Solid waste in the form of spent catalysts, sludge or coke
has to be disposed off without harming the environment. New fuel
quality specifications regarding sulphur and aromatic content require
investment into deep cracking and treating processes.
16.4. Refining Margins
The profitability of a refinery is determined by calculating the refining
margin. Two types of margins are defined. The gross margin is the differ-
ence between the composite value of the refined products at the refinery
gate and the cost of the crude oil delivered to the refinery:
Gross margin ¼
X
N
i
ðprice of product i yield of product i Þcrude price;
ð16:2Þ
where N represents all products produced. The price of product i is the spot
price per barrel of product i. The yield of product i is the volume percent of
product i per barrel of crude oil feed to the refinery. The crude price is the
price paid by the refiner for a barrel of delivered crude oil.
The net refining margin is the gross margin less the variable refining
costs, that is, chemicals, catalysts, fuel and working capital charges:
Net margin ¼ gross margin variable cost: ð16:3Þ
For a refinery to be profitable, the net margin has to be greater than the total
fixed costs per barrel of crude oil processed. The difference between the net
margin and the fixed cost per barrel of crude oil is called the cash margin and
represents the profit the refinery makes per barrel of processed crude oil:
Cash margin ¼ net margin fixed cost: ð16:4Þ
In addition, petroleum analysts use the spread as an indicator of refining
profitability. A product spread is the difference between the products price
and the price of crude oil. A multiple product spread is described by the
3–2–1 crack spread, which assumes that three barrels of crude can be refined
to produce two barrels of gasoline and one barrel of distillates. It is calculated
as follows (EIA, 1997):
321 Crack spreadð$ bbl
1
Þ¼ð2 gasoline price þ 1 distillate price
3 crude oil priceÞ=3:
ð16:5Þ
408 Chapter 16
Since the spread assumes that the crude oil can be completely converted into
gasoline and distillates and that it does not include all products or the
operating costs, it can be viewed as an indicator only.
Example E16.1
Calculate the gross and net margin for an average refinery in the United States
using the follow ing data:
Product yield% Price per barrel (US$)
Gasoline 52.3 71
Distillates 28.8 72
Other products 18.9 47.5
Crude price 57
Variable refining costs 6.4
Solution:
Gross margin ¼ð71 0:523 þ 72 0:288 þ 47:5 0:189Þ57 ¼ $9:84;
Net margin ¼ 9:84 6:4 ¼ $3:44:
16.5. Refinery Complexity
The following classification can be used to define the complexity of a
refinery:
Simple refinery. It has atmospheric crude distillation, a catalytic reformer to
produce high octane gasoline, and middle distillated hydrotreating units.
Complex refinery. It has in addition to the units of a simple refinery,
conversion units such as hydrocrackers and fluid catalytic cracking units.
Ultra-complex refinery. The refinery has all of the units above in addition
to deep conversion units which convert atmospheric or vacuum resi-
due into light products.
The complexity of a refinery can be assessed by calculating the com-
plexity factor. Each unit has a coefficient of complexity (CC
i
) defined as the
ratio of the capital cost of this unit per ton of feedstock to the capital cost of
the crude distillation unit (CDU) per ton of feedstock. The complexity
factor (CF
i
) of the whole refinery is then calculated from the coefficients of
complexity for the units in the refinery as follows:
CF ¼
X
N
i
F
i
F
CDU
CC
i
; ð16:6Þ
where F
i
and F
CDU
are the feed rate to unit i and CDU, respectively.
Refinery Economics 409
Example E16.2
Calculate the complexity factor for a refinery which has the following unit
data:
Unit
Complexity
coef ficient (CC
i
)
Percent capacity relative to CDU
capacity (F
i
/F
CDU
)
Vacuum
distillation unit
1.5 40
Fluid catalytic
cracking
725
Hydrocracking 7 15
Hydrotreating 5 50
Reforming 3.4 30
Alkylation 6 5
Solution:
CF ¼ 0:4 1:5 þ 0:25 7 þ 0:15 7 þ 0: 5 5 þ 0: 3 3:4 þ 0:05 6 ¼ 7:8:
16.6. Economic Analysis
The objective of building a new refinery is to make profit. Economic
analysis involves the comparison of the profit and cost of an investment
proposal to determine if it is economically attractive. This subject is covered
in great details in many engineering economy textbooks. Here, we will only
cover the fundamentals.
16.6.1. Cash Flow Diagram
The execution of an investment project, such as building a new refinery, is
viewed in terms of a timeline divided into time intervals, usually in years.
The end of the cash flow diagram (CFD) corresponds to the useful lifetime
of the project at which the refineries are shut down and the equipment sold
as scrap. Certain events pertaining to economic activity costs (capital,
operating, crude oil, chemicals, etc.) or revenues from product sales occur
along this timeline.
410 Chapter 16
16.6.2. Time Value of Money
When you invest money in a project, you expect that, after n periods of
time in the future, your money will generate profit. Therefore the value of
your money will increase with time. This situation is analogous to deposit-
ing your money in the bank with the expectation that the bank will pay you
interest on your principal. The concept of compounding interest used in
bank transactions is utilized in economic evaluation, where your money is
compounding interest at the end of each compounding period. To develop
a general formula describing the time value of money, the following letter
symbols are used:
P: Present single sum of money at time zero or at any point in time
from which we choose to measure time
F: A future single sum of money at some future date
A: The amount of each payment in a uniform series of equal payments
at the end of each period
n: The number of interest compounding periods between the point
time of P and F
i: The period compound interest. This refers to the return on invested
capital, cost of borrowed money or the minimum rate of return.
The following basic formula describes the time value of money:
F ¼ Pð1 þ iÞ
n
ð16:7Þ
or
P ¼
F
ð1 þ iÞ
n
: ð16:8Þ
For the uniform equal payment series of n payments, the relation between
F, P and A are given by the following formulas:
P ¼ A
ð1 þ iÞ
n
1
ið1 þ iÞ
n
; ð16:9Þ
F ¼ A
i
ð1 þ iÞ
n
1
: ð16:10Þ
As mentioned above, the CFD represents a clear visualization of each and
every transaction which occurs along the timeline of the project. The
discrete payments, either cost or income, are represented by an arrow at
the end of the time period when the payment is made. Costs are
shown as downward arrows (considered negative) and income or reve-
nue as upward arrows (considered positive) as shown in Figure 16.2. For
Refinery Economics 411
the economic evaluation of the investment proposal represented by the
CFD, each payment must be brought backward or forward in time then
compared. When this is done, the payments are called discounted
payments.
Example E16.3
Calculate the value of all the payments in the CFD in Figure 16.2 at time zero
and at the end of year 4. The interest rate is 8% per year.
Solution:
P
0
¼
3000
ð1 þ 0:08Þ
0
¼3000;
P
1
¼
2000
ð1 þ 0:08Þ
1
¼ 1851:9;
P
2
¼
2500
ð1 þ 0:08Þ
2
¼ 2143:3;
P
4
¼
1500
ð1 þ 0:08Þ
4
¼1102:5;
P
6
¼
1000
ð1 þ 0:08Þ
6
¼630:2:
The net present worth of all payments is the sum of all the above present values:
P ¼3000 þ 1851:9 þ 2143:3 1102:5 630:3 ¼737:5:
This means that the present value of the cost payments is more than the present
value of the income payments.
0
213
456
years
3000
2000
2500
1500
1000
Figure 16.2 An example of a representative cash flow diagram
412 Chapter 16
The value of all the payments at the end of year 4 can be easily obtained by
applying equation (16.7).TheP is the value of all of the payments at time zero
and n is 4 years:
F ¼737:5ð 1 þ 0:08Þ
4
¼1003:4:
Example E16.4
An 8 million ton per year (160,000 barrels per day) refinery with classic
conversion processes has been built at a cost of $1.5 billion. The cost has been
entirely financed by a loan at 8% interest, repayable over 15 years. Calculate the
annual capital charge for the loan (i.e. the annual payment which has to be made
to repay the loan in 15 years).
Solution:
The annual payments represent a uniform series of equal payments A. The
amount of the loan occurs at time zero; therefore, it is considered as a single
present value payment. Rearranging equation (16.9), the annual payment
needed to repay the loan is calculated as follows:
A ¼ P
ið1 þ iÞ
n
ð1 þ iÞ
n
1
¼ 1:5
0:08ð1 þ 0:08Þ
15
ð1 þ 0:08Þ
15
1
¼ 1:8 0:11683
¼ 0:17524 billion or 175:24 million:
This is the annual cost of capital and the refinery would need to have an
operating margin of $175.24 million each year just to cover the financial
obligations. This comes to $21.9 per ton (or $0.44 per barrel) of crude refined
in addition to any other operating costs.
16.6.3. Inflation
The effect of inflation in the economy results in increases in the cost of
equipment, labour, fuel and other operating costs. The payments shown on
the CFD should reflect this inflationary effect. Due to inflation, a dollar
spent in the future will purchase fewer goods and services than the same
dollar would purchase today or at any arbitrary base year. Therefore, these
future payments should be expressed in terms of their purchasing power as
shown in the following formula:
F
0
¼
F
ð1 þ iÞ
n
; ð16:11Þ
Refinery Economics 413
where F
0
is the purchasing value of the future payment F and n is the
number of year from the base year to the time this payment occurs on the
CFD. When all future payments are expressed in terms of their purchasing
power, the CFD is now inflation free and the calculations performed on it
should be done using the inflation-free interest rate i
0
. The relation between
the interest rate i and i
0
is expressed by
i
0
¼
1 þ i
1 þ f
1; ð16:12Þ
where f is the annual inflation rate.
16.6.4. Taxation and After-tax Cash Flow
When estimat ing the a nnual cash flow, we m ust account for the effect of
taxes. Taxation rat es for compa nies depend on the country where
the r efinery is built. They can be in the range of 40–50%. Central to the
calculation of the amount of tax to be paid is the determination of the
depreciation of the equipment in the process plant. When a compa ny
builds and operates a process plant,theequipmentandbuildingshavea
finite life . The value of these assets decreases with time. The decrease in
the value of the plant per year is called depreciation. When the plant is
closed, t he equipment may still be opera tional and would have a sa lvage
value if it is sold. This salvage value wou ld be shown as income on the
CFD at the end of the project. The amount and rate at which equipment
may be depreciated is set by the tax authorities in the country where the
refinery is located. For tax purposes, governments allow compani es to
deduct the annual depreciation from the revenues for tax calculation s as
follows:
Expenses ¼ operating costs þ annual depreciation
Income tax ¼ðrevenue expensesÞð tax rateÞ
Net profit ¼ revenue expenses income tax
After-tax net profit ¼ net profit þ depreciation:
ð16:13Þ
16.6.5. Profitability and Project Evaluation
To access the economic feasibility of a refinery or any process units, the cash
flows involved in the project, such as revenue from selling the refined
products, the capital expenditures, cost of purchased crude and any other
operating costs, are compared.
A new refinery project starts with preliminary studies needed before a
decision can be made. This constitutes the feasibility study and involves the
414 Chapter 16