Turbo Analysis of an Oil Refining Dilemma

Challenge:

A European oil company had struggled for two years with the decision whether (or not) to close down a refinery operation. Refinery margins had fallen to an historic (and loss-making) low and recovered, but remained volatile. The client team was paralysed by the complex and interwoven impact of the decision on the company’s Europe-wide network of operations.

Solution:

In just 28 days—a true turbo analysis—I developed a sophisticated economic model of the refinery that showed how value was impacted by uncertainties in the feedstock and output product prices, and by a number of secondary optimisation decisions that were the subject of other projects being undertaken by the client.

A key insight was that uncertainty in the inputs dwarfed any difference in value between the continue and closure options. For example, varying the forecast for Rotterdam Refinery Margin between its 10^th and 90^th percentile range caused the NPV to range from €0.9 to €2.2 billion, whilst the shutdown decision made just €16 million of difference.

Results:

Although finely balanced, the decision to continue operation of the refinery added value over the management’s default case (closure). Over a second month, additional analysis of the secondary optimisations widened the gap to €30 million. The decision could swing, though, if a number of forecasts, most notably of long-term Rotterdam Refinery Margin and the price of Brent Crude, were to change adversely. We developed an approach for monitoring these forecasts and set criteria for triggering a re-evaluation of the decision.