Rapid market swings create shifting economics for refinery-petrochemical integrationRefining, Petrochemicals and Rails

Andrew W. Sloley - Principal Consultant, AdvisianLarry A. Shugart - Railway Consultant, AdvisianPrepared for Presentation at the Petchem Tech ForumHouston, TX, July 2016

Copyright Advisian. A. W. Sloley, L. A. Shugart. All rights reserved.

Volatility of feedstock prices in the refining and petrochemical business

Volatility and profitsMarket volatility is increasing, and its impacting: • Feed and product values• Shifting asset owners• Regulatory action• Political uncertainty

The result - short-term profit opportunities

Market and asset risk

When industry invests in heavy oils… everything is good.

Then tight oils arrive.

© 2012-2014 WorleyParsons

When industry invests in LTO… everything is good.

Then crude oil prices collapse.

Market and asset risk… reprise

Volatility in the market – long-term

Volatility in market – last 10 years

Refinery-PetroChem IntegrationIntegrated facilities have more flexibility and as a result, majors are moving their investments more towards integrated units (e.g. ExxonMobil and Shell).

Refinery-petrochemical integration

Objectives1. Introduce refining and

petrochemicals to each other2. Identify opportunities3. Connect the refinery and

petrochemical plant through pipelines on rails

Refinery-Petrochemical linksConventional Liquids• Naphtha to reforming• Reformate to aromatics• Naphtha to steam cracking• Gasoil to steam cracking

LPGs• Propane-propylene• Propane to cracking

Conventional Liquids• Naphtha to reforming• Reformate to aromatics• Naphtha to steam cracking• Gasoil to steam cracking

LPGs• Propane-propylene• Propane to cracking

OpportunityCurrent pricing

Refinery-Petrochemical links

Example fuels refineryFe

eds

Example integrated complex

Link between configurations

light ends

naphtha

kerosene

Gas Plant

HTreat

Treat

Reforming Aromatics

TDP

Cryst - Abs

Anhydride

PTA - DMTpta

dmt

anhydrideso-xylene

xylenes

benz-tosolv

gasoline

kerosene

Logistics System• Shipper storage• Rail• Receiver storage

Pipeline on Rails• Rail concepts for refiners and

petrochemical operators

How to link the Refinery to the Petrochemical Plant:

Pipelines on Rails for integrating refineries and petrochemical plants

Why Pipelines on Rails?

Existing rail services are flexible and available, and require less permitting than pipelines.Operators can implement phased approaches starting with pipelines on rail, then move to pipelines.

What is the general approach to rail?… some anecdotes

Our corporate culture prides itself

on decentralized decision making.

Large Coal Company

International Agribusiness firm

“

”

We are a mining company, not

logistics specialists.

“”

A high-performance logistics system requires collaboration

Too often shippers and rail carriers are combative instead of collaborative.

There are many opportunities for them to work together for mutual benefit.

How to collaborate? … first, understand the benefits of rail

Analyze the logistics system - identify its components, highlights and economic background

Processes

In a high-performance logistics system, three elements must be aligned

Logistics System Framework

Structure

Organization

Alignment

FacilitiesCarriersCommodity Flows

PlanningOperations Control

Procurement

MetricsInformation Systems

Organization Structure

Usually reasonably understood

Often the biggest gap

Typically room for improvement

How do plants select the best logistics system?Optimization is required

The best option must be determined by:

• Price• Time• Reliability• Safety• Ease of doing business• Value added services

= 1,250 miles (rail)

= 1,450 miles (rail)

= 1,100 miles (truck)

Logistics system analysis

Dependence on one pipeline route, customer or receiving agent

Planning for disruption

Cost of ownership of tank cars

Regulatory constraintsSecuring construction resources

Planning a network and its associated resources

Operation and maintenance of fleet

Options analysis Logistics chain optimization modelingRoute selection

Challenges through-out project life-cycle

International procurement

Design and execution planningConstruction logistics

Supply chain development

Progressive risk mitigation

Trains only move when all resources are available:

Train Departs

Locomotives Crews Cars

EOT Paperwork Interchange

Track capacity Mainline slot

The rail service is set by the cost structure - thecost structure determines the rail tariffs…

Incremental costs – direct costs of adding a piece of trafficVariable costs – changes proportional to overall traffic volume (fuel, labor, maintenance)

Fixed costs – may be variable over the long-term (depreciation, management, and sales, general, administrative (SG&A))Average costs – assigns all costs to all traffic evenly (cost per carload, cost per net ton mile, cost per loaded car mile)Fully allocated costs – assigns all costs to all traffic using logical activities

Economic costing analysisUniform Rail Costing System (URCS)• Based on multivariate models from

the 1970s• Primarily used to support regulatory

proceedings – not used by railroad companies to set prices or for internal management

• Has been widely accepted due to familiarity and enormous case history

• Maintained by Surface Transportation Board (STB) – these are the boxing gloves

The economic models use production function to assign cost to using the following activities:• Fuel – Gross ton miles• Train crew – Train miles• Track costs – Gross ton miles• SG&A – Carloads• Car maintenance – Car miles• Car capital – Car hours• Locomotive costs – Horsepower hours• Terminal costs – Car handlings

Competitive price analysis

Regulatory LimitsEquivalent truck priceCompetitors:• Across-the-fence• Open gate versus closed gate• Arbitration modelsAlternate modes (e.g. pipelines)Sourcing competition (e.g. transload terminals, mixing centers

Pipelines on Rails Business Case

Arrangements must make sense for the:• Supplier (seller)• Shipper• Receiver (buyer)Obtain the capabilities to understand each stakeholder’s business and economics.

Successful companies profit from volatilityVolatility is increasing. Operators need to accept these current conditions and make the best use of existing assets to continue to profit.