Oil Yield Accounting

Use oil accounting to capture the benefits of stock loss reduction, production tracking and knowledge of inventory position. INTRODUCTION Oil accounting is the business process of measuring, validating, reconc iling and publishing all the flows and inventories into, within and out of a refinery, and its practice varies widely in the industry. Some refiners are content to use a spreadsheet to tabulate and compare shipments, receipts and inventory changes on a monthly basis. This simple business model is adopted by a few refiners who are only interested in matching physical quantities in and out of their plant to paper transactions. In effect, a monthly balance around the fence confirms that material invoiced corresponds to measured physical quantities, and nothing more substantial is asked of the oil accounting process. Individual unit engineers record unit balances on basis of the historian (should one exist) and there is no effort to integrate these balances among themselves, let alone with the oil accounting spreadsheet. At the other end of the complexity spectrum, refiners carry out a comprehensive daily analysis that involves not only the afore-mentioned in-out quantities, but also all the flows and movements inside the refinery, including combustible utilities (fuel gas, fuel oil, FCC coke) and non-hydrocarbon materials, such as sulfur (Figure 1.) The goal of this analysis is to produce a unique and coherent set of material balances for the entire refinery, its units and its tanks, at the close of each operating day and following industry-accepted production accounting rules [1]. Such a detailed daily analysis requires a topological model of the refinery, wherein units and tanks are represented as nodes connected by pipes, together with well-defined business processes for gathering, validating and publishing production data. Thus daily oil accounting comes at a cost, and its benefit, at a strict minimum, is that it avoids the month-end chase for past errors that is the persistent bane of monthly balances. Oil Accounting: basis and benefits 3/ 19 ©2002 Aspen Technology, Inc. Figure 1. Refinery material balance envelope Why do some refiners deploy sophisticated oil accounting systems while others get away with only the most elementary oil accounting procedures? What value do the first derive from their systems and, conversely, what are the latter missing out by simply matching invoices against inventory changes? The purpose of this paper is to explain the technical arguments for deploying an oil accounting system and to develop quantitative estimates of the benefits they can deliver to their users. OIL ACCOUNTING BASICS While the details vary from site to site, the business process of oil accounting can be broken down into four basic and successive steps: ! Data gathering, validation and processing ! Gross error detection and correction ! Reconciliation ! Reporting Oil Accounting: basis and benefits 4/ 19 ©2002 Aspen Technology, Inc. Data gathering, validation and processing. A comprehensive oil accounting analysis requires flows, movements, inventories and laboratory data, all of which must be secured from disparate sources in the refinery and centralized in a single dedicated system for the subsequent steps (Figure 2; see also [2].) Flows are normally imported from the refineryís data historian and inventories from the tank gauging system. Movements in, out and within the refinery are typically imported from an eclectic set of spreadsheets wherein the movements were logged manually by off-sites operators (rarely are movements loaded automatically from an oil movement system.) Flow, inventory and movement measurements must be imported with matching temperatures and pressures for compensation to standard conditions. The laboratory information system (LIS) supplies the densities for measurement compensation and volume-to-weight conversion, as well as the gas heating values for fuel oil equivalency calculations. For reasons of employee productivity, it is essential that the data import process be as automated as possible and feature well-defined quality control steps to ensure that the right data is imported into the system, especially insofar as oil movements are concerned. Indeed, the lost-time cost of correcting data after import is high. Refiners are well advised not to underestimate the importance of this first step, as the old adage ìgarbage in ñ garbage outî applies distressingly well to oil accounting systems. Oil Accounting: basis and benefits 5/ 19 ©2002 Aspen Technology, Inc. Figure 2. Oil accounting data flow diagram Gross error detection and correction. Regardless of the care taken, oil accounting is always hampered by gross errors, a term that designates patently incorrect or incomplete data. Gross errors materialize as nodal imbalances, wherein the residual of the expression Σ Node flows in ñ Σ Node flows out ñ Node inventory change (1) is substantially different from zero, even after proper scaling. Gross errors are typically caused by: ! Missing movements (e.g., missing receipts, shipments, tank movements) ! Incorrect line-ups (e.g., incorrect source or destination node associated with a discrete movement) ! Automated data entry errors (e.g., meter signal failures, stuck tank gauges) ! Manual data entry errors (e.g., meter readings, lab values, etc.) A calculated nodal imbalance in excess of a pre-defined tolerance, or an automated correction to a flow or movement that exceeds the meterís accuracy (see Reconc iliation below) are the most typical mathematical criteria for detecting gross errors. While easy to detect with software, gross errors can take time to track down and resolve, and argue for the importance of designing and validating robust automated data entry procedures. Note that expert systems have been used successfully to detect and correct gross errors in Oil Accounting: basis and benefits 6/ 19 ©2002 Aspen Technology, Inc. complicated networks by automatically creating a movement when two tanks show opposite and matching inventory changes. It is at this step that the issue of reconciling on the basis of weight versus volume first surfaces. North-American refiners perform their accounting largely on the basis of volume and assume volume expansion factors for each node in order to achieve closure. A subsequent comparison of the balanced results in terms of a weight balance identifies discrepancies in densities. Other refiners reconcile on the basis of weight [1]. It is worth noting that the North-American petrochemical industry reconciles on the basis of weight, which presents a challenging, albeit resolvable, material accounting problem when a refinery and a petrochemical plant are integrated within the same complex and share a common oil accounting envelope. Reconciliation. Even after correction for gross errors, material balances never close exactly and there is always residual error around the nodes. In fact, given the uncertainties around metered values, volume expansion factors and densities, it is unreasonable to expect that the nodes should balance exactly, whether on the basis of weight or volume data. Residual error is typically removed with an error distribution algorithm that adjusts or ìreconcilesî all the measurements to minimize the sum of the residual errors around all the nodes. The reconciliation techniques vary: some use a linear least-squares algorithm while others use an expert system, and arguments can be made for each. In either case, weighting factors are set to make each correction proportional to the raw measurementís magnitude and its meter accuracy. (As noted previously, an automated correction greater than the corresponding meter accuracy can trigger a gross error.) Regardless of the technique used, it always makes more physical sense to adjust the movements and flows while keeping the shipments, receipts and inventories constant as the latter are known more accurately and, in the specific case of the inventories, cannot accumulate error over time (except in the event of a leak.) This technique is known as ìpushingî the corrections onto the unit. The result of the reconciliation exercise is a set of ìbalancedî production statistics that are reported side by side with the ìrawî values. Oil Accounting: basis and benefits 7/ 19 ©2002 Aspen Technology, Inc. Strictly speaking, reconciliation serves no oil accounting purpose, as its net effect is to hide measurement errors from view. It is better to record raw measurements knowing the percent imbalance of each node (or that of the entire refinery) than to record data that might have been ìshoe-hornedî to closure. Substantial practical obstacles also exist: small but real and non-negligible flows are easily zeroed-out by reconciliation; flared quantities leap because of low weighting factors, and the accountant, pressed to publish results by noon, often does not have time to validate the results of reconciliation. These difficulties notwithstanding, reconciliation is the primary means of detecting measurement discrepancies, which leads to corrections that ultimately improve the accuracy of the raw oil accounting results. This point w ill be demonstrated later in this article. Reporting. In this final step of the oil accounting business process, results are posted in an accessible location for employees (nowadays an Intranet site) and are uploaded to the refineryís ERP system for production tracking (Figure 2.) Refinery-wide access to a single set of production statistics eliminates conflicting operational results, s upports highlevel analysis and decision-making, and facilitates identification and mitigation of operational problems. Production and inventory reports from multiple facilities can also be consolidated into corporate reports for the benefit of senior management or feedstock and product traders. While reporting can be site specific, with each fac ility partial to one report format or another, many ìbest practiceî standard reports exist (e.g., charge and yields, inventory, combustibles, etc.) The important aspect of reporting is that results be made available to all users on a timely basis. For operations staff, first-pass oil accounting results from the previous day must be made available in time for the morning review meeting, which can be as early as 8 am. This is possible in a refinery that tracks production from midnight to midnight and has a well-automated and robust process for loading data into the oil accounting system. Oil Accounting: basis and benefits 8/ 19 ©2002 Aspen Technology, Inc. The deployment of an oil accounting system is a politically delicate process that requires buy-in from many quarters of the concerned facility, and its operation requires transparency for acceptance. The sensitivity stems from the fact that the oil accounting system depends and reflects on many aspects of a refineryís operations. For such a system to be successful data entry must be efficient and effective, which requires reliable instrumentation, a robust network infrastructure, comprehensive movement log-in, regular dips in the absence of a tank gauging system, etc. Perhaps most of all, success depends on excellent communication channels between the accountant and all relevant quarters of the refinery to ensure that issues are resolved quickly. Consistent low performance in anyone of the aforementioned areas will hinder the oil accounting process and, given the resulting and immediate visibility, is certain to put pressure on the responsible service. At the conclusion of the accounting process, the published production figures w ill be different from those that unit engineers expect on the basis of the historian and the unitscale balances they will invariably produce on their desktop. Unless the oil accounting process is ìopen,î it is vulnerable to being challenged and, possibly, rejected by operations who will instead rely on their spreadsheets. An open oil accounting process is one that is based on clear and well-defined procedures that are repeatable and can be audited. Only under these conditions will the oil accounting system meet the success and receive the acceptance that it deserves. Beyond a refineryís fundamental need for production statistics, and the need to meet growing regulatory reporting requirements, oil accounting systems are deployed for three key reasons: ! Stock loss reduction ! Plan versus actual performance monitoring ! Knowledge of feedstock and product inventory position Oil Accounting: basis and benefits 9/ 19 ©2002 Aspen Technology, Inc. STOCK LOSS REDUCTION An oil accounting system provides an integrated forum from which a central group can detect and analyze measurement discrepancies on a refinery-wide scale. Stock loss reduction is achieved when these discrepancies are systematically tracked down to their sources, explained and resolved. The sources of such discrepancies are numerous and varied: seasoned yield accountants report finding errors in floating roof weight compensation, strapping table errors, orifice plates mounted backwards and even tank temperature indicators lying on the ground. In a typical case example, oil accounting led to stock loss reduction in a US Gulf Coast refinery when a persistent imbalance between a crude unit and its straight run naphtha tank was tracked to a closed (but cracked) valve that leaked to a slop tank. The leak was not previously recognized because the crude unitís charge balanced with its products. It was not until an attempt was made to reconcile the crude unit with its downstream units and tanks that the imbalance became apparent to the oil accountant. Measurement inconsistencies can be identified by visual inspection (an unusual or unexpected imbalance catches the attention of the oil accountant,) or by statistical analysis (a correction shows a sustained bias). In the latter case, detection is a key benefit of reconciliation. As noted, reconciliation makes corrections to measurements in order to minimize the sum of the residuals around the nodes. If random measurement errors are truly the source of the imbalances, the daily corrections to each of the flows should, on the average, sum to zero [3]. Stated differently, the frequency-distribution diagram of the daily corrections for each flow should be centered on the zero axis (see the continuous line in Figure 3.) Conversely, a sustained bias in the correction indicates that a non-random process is at hand, which might suggest a leak or a faulty measurement. The latter is illustrated by the histogram in Figure 3, which shows that a total of 100 daily corrections to a particular flow measurement averaged around 200 bbl (the histogram shows, for example, that 26 corrections measured between 100 and 300 bbl.) In this manner, a major domestic refiner identified a stock loss that, eventually, could only be attributed to a bias in the custody transfer meter of a stream leading to an adjacent second-party plant. The Oil Accounting: basis and benefits 10/ 19 ©2002 Aspen Technology, Inc. meter correction worked out in favor of the refiner (the true flow was greater than the measurement indicated) and the increased revenue accrued by the refiner after correcting the meter paid off the oil accounting system in less than six months. 0 5 10 15 20 25 30 -700 -500 -300 -100 100 300 500 700 900 Correction magnitude (bbl) Number of corrections Figure 3. Correction histogram for 100 flow measurements The business process of reducing stock loss with an oil accounting system is best compared to that of tightening a flange. It is unreasonable to expect that one particular area of a plant can be made free of measurement errors, allowing the oil accountant to focus on the next. Instead, material balance closure progresses by making marginal improvements in one area, usually the one with the most significant imbalance, then moving on to the area with the next most significant imbalance. Eventually, the oil accountant can revisit an area of the plant for further error reduction. In this manner, all the plantís imbalances are gradually tightened much like the bolts around a flange are tightened to specification. A refinery nodeís imbalance for any given time period can be measured through its unaccounted loss, which is expressed through the equation: UL = Σ Cñ Σ Pñ ∆ V ñ EL (1) Oil Accounting: basis and benefits 11/ 19 ©2002 Aspen Technology, Inc. where: UL is the unaccounted loss, Σ C is the sum of the nodeís charges, Σ P is the sum of the nodeís products, ∆ V is the inventory change, and EL denotes the estimated known physical losses. The sum of squares of nodal unaccounted losses: [ Σ [ UL i ] 2 ] Ω / F (2) where F denotes the refineryís throughput, is a good metric of a refineryís closure that can be trended as a function of time following the deployment of an oil accounting system. The ìtuningî of an oil accounting system is the period during which the major sources of imbalance are resolved and the refineryís closure settles at an asymptotic value of two to three percent of throughput for daily balances, and less that one half percent for monthly balances. Any excursion above these base line values should trigger an inquiry from the oil accountant. It can be reasonably expected that the introduction of oil accounting in a refinery w ill result in sustained stock loss reduction of approximately 1% of throughput. This means that mis-accounted material worth 1% of the refineryís throughput w ill be correctly accounted for after the deployment of the oil accounting system. As illustrated by the cited anecdotes, not all stock loss reductions translate directly into net material gains for the refinery. In the example of the cracked valve, the stock loss represented a loss in capacity since the slops, for the most part, were recycled back to the crude unit. The economic gain of detecting the cracked valve consisted of the (albeit small) increase in crude processing capacity and the savings incurred by not having to process the recycled naphtha twice. The stock loss would have been more tangible had the naphtha been leaking to a tank that fed a cracking unit where the naphtha would have been largely Oil Accounting: basis and benefits 12/ 19 ©2002 Aspen Technology, Inc. converted to lighter, less valuable streams. In contrast, the custody transfer meter correction did result in a net gain to the refineryís bottom line because more material was measured leaving the refinery. In calculating oil accountingís tangible benefits, experience indicates that it is reasonable to assume that one fourth of total stock loss reduction will result in net product recovery for the refinery. Under this assumption, 0.25% of the refineryís throughput is recovered at a value further assumed to be equal, on average, to that of the refineryís margin. Thus, a 200,000 bbl per day (BPD) refinery operating 350 days per year at a $2/bbl margin can expect $350,000/year of benefits from stock loss reduction alone. PRODUCTION TRACKING AGAINST PLAN Most refineries operate on the basis of a production plan that is itself based on the results of a linear program-based (LP) planning system. The production plan determines the most profitable quantities of components and finished products that must be manufactured over the course of the plan, usually a month. The onus falls on the plantís operating department to deliver the planned product quantities, i.e., to ìmatch the plan,î for two reasons: The first is to honor commitments that the refineryís traders have made to clients that the specified product quantities would be available for delivery within the planís timeframe. The traders will either disappoint their clients, pay penalties, or be forced to buy the products from third parties to supply the clients if the refinery fails to manufacture the committed quantities. (Note that whether the refinery can deliver the products at the right time is a scheduling issue.) The second reason actual production must match the plan is to ensure the month-end closure of the refinery. The LP-based plan not only predicts an economically optimal finished product slate, it also ensures that all the components are manufactured in the right proportions to be all blended into sellable finished products. Deviation from the plan Oil Accounting: basis and benefits 13/ 19 ©2002 Aspen Technology, Inc. implies that the refinery could find itself short on some components and long on others as it nears the end of its planning period. The tangible consequence of this imbalance is that the refinery will be forced to buy components or downgrade others in order to close its material balance and meet its product shipment schedule. The oil accounting system offers the only reliable means to accurately track actual production against plan. A number of best practices exist to do so and the simplest consists of the month-to-date production charts shown in Figure 4. Each chart shows a productís planned production as a straight line interpolated across the planning period, in this instance 30 days. The accrued actual productions are shown as the dotted lines that are expected to ìtrackî the straight lines. Components or finished products can be grouped by family, as is done in Figure 4 for five types of gas oils as well as their total. LGO 0 250 500 750 1000 0 5 10 15 20 25 30 HGO 0 250 500 750 1000 1250 0 5 10 15 20 25 30 LVO 0 250 500 750 0 5 10 15 20 25 30 HVO 0 250 500 750 0 5 10 15 20 25 30 Oil Accounting: basis and benefits 14/ 19 ©2002 Aspen Technology, Inc. LCO 0 250 500 750 0 5 10 15 20 25 30 Total GO 0 1000 2000 3000 4000 5000 0 5 10 15 20 25 30 Figure 4. Production tracking versus plan (Kbbl per Month) The refineryís production department can use charts such as those shown in Figure 4 to monitor whether actual production matches the plan, and use them as basis for corrective action, if necessary, to ìreturnî to the plan. In practice, it is only necessary to track key components and finished products, as the others necessarily follow by material balance. The inability to close its material balance can easily force a refinery to downgrade a shipment of finished product per month. A 200,000 BPD refinery forced to downgrade a 75,000 bbl shipment (a typical size shipment for such a fac ility) per month at a differential price (assumed equal, on average, to the refineryís margin) of $2/bbl loses $150,000 in monthly revenue. The benefits of oil accounting in reducing these losses can be estimated if it is assumed that close production tracking with the oil accounting system leads to early detection and timely (and effective) corrective action in the event of deviation from plan. Assuming that such a process avoids half the downgrades, the oil accounting system can claim to save the refinery $900,000/year of renewable benefits. KNOWLEDGE OF INVENTORY POSITION The value of knowing inventory position lies in the trading and hedging activities that crude and product traders play to minimize their financial exposure to the vagarities of the petroleum markets. In order to hedge effectively, traders must know their positions accurately, not just by volume, but also by material type (e.g., for crudes, high-sulfur, lowsulfur, etc.) A large oil company processing one million BPD of crude in multiple facilities can hold as much as $100 to $200 million in crude inventory alone. Integrated oil Oil Accounting: basis and benefits 15/ 19 ©2002 Aspen Technology, Inc. accounting systems alone can provide traders with a morning report that summarizes crude inventories by quantity and by type, from which the dayís opening position can be accurately calculated for the all fac ilities, both individually and combined. In this manner, an independent US refiner in the million BPD category improved the accuracy of its daily crude opening inventory position from ±$20 million to ±$0.5 million after deploying integrated oil accounting systems at all its fac ilities. Inventory position is not so easily known on the product side since the bulk of a refineryís downstream inventory is held in intermediate or unfinished components. However, a new breed of on-line trading tools overcomes this limitation [4]. These trading tools leverage known component inventories with sophisticated shrink-wrapped planning and blending tools to calculate ìvirtualî finished product pools from which position can be calculated. Case study management utilities allow traders to evaluate how their positions vary depending on the selected virtual product slate. Because of the speculative nature of crude purchasing and the volat ility of the oil markets, tangible benefits assignable to oil accounting in this domain are the hardest to quantify. These benefits, however, are potentially the greatest and a quantitative estimate can be made based on considerations of the sums involved. A 200,000 BPD refinery presently spends in the order of $1.4 billion/year on crude purchasing. From more accurate knowledge of their position, crude traders can more precisely predict what crudes their refinery needs and when it needs them. This improved prediction of demand can translate into better crude purchase timing, which will be reflected in the price paid for the crude. Assuming that this process shaves 0.1% off the cost of crude purchases, the benefits attributable to oil accounting from knowing inventory position are $1,400,000/year. VALUE PROPOSITION The deployment cost for a state-of-the-art oil accounting system in a world-class refinery is in the order of $700,000 (Table 1.) To that one-time cost must be added the annual operating cost for the 1.5 full time technical staff required to run the system on a daily Oil Accounting: basis and benefits 16/ 19 ©2002 Aspen Technology, Inc. basis, and the yearly software support and maintenance fees, which add up to $150,000/year. Assuming that the oil accounting system is purchased and deployed in nine months and that the benefits ramp up from zero to 100% of full potential in the year following deployment, the payback period of the system is slightly less than 18 months (Figure 5) from the start of the project. Oil Accounting: basis and benefits 17/ 19 ©2002 Aspen Technology, Inc. Table 1. Oil accounting system costs and benefits Description US$ One-time costs Third party installation costs (includes software license fee and consulting services) $500,000 Internal cost (includes work on system and internal business process changes) $150,000 Hardware and network $25,000 Total one-time costs $675,000 Operating costs 1.5 full-time staff $125,000/y Software maintenance and support $25,000/y Total operating costs $150,000/y Benefits Stock loss reduction $350,000/y Production tracking $900,000/y Inventory position $1,400,000/y Total benefits $2,650,000/y -1,000 -500 0 500 1,000 1,500 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Months from project kick-off Net cash position ($000) 0 50 100 150 200 250 Monthly cost and benefit ($000) Monthly system cost Monthly system benefit Net cash position Figure 5. Oil accounting system ROI analysis Oil Accounting: basis and benefits 18/ 19 ©2002 Aspen Technology, Inc. References [1] ìGuide to Hydrocarbon Loss Accounting and Control in Petroleum Refinery Operations,î in Petroleum Measurement Manual ñ Part XVII IP (The Institute of Petroleum), London, 1995. [2] ìUnderstand Operation Information Systems,î Pierre Grosdidier, Hydrocarbon Processing , Vol. 77, No. 9, 1998. [3] ìOvercome DataGlut,î P. Grosdidier, Hydrocarbon Processing , Vol. 78, No. 5, 1999 [4] ìA new breed of e-commerce engine drives profits,î L. Hakimattar, Hydrocarbon Processing , Vol. 80, No. 12, 2001. Acknowledgments The authors are indebted to their AspenTech colleagues Fred Salmen and David McDowell for their contributions to this paper. The anecdotes discussed in this article are all based on specific situations encountered by AspenTechís oil accounting consultants. Figures 3 and 4 are based on constructed data to illustrate the arguments. The authors Pierre Grosdidier works at AspenTech Canada, where he is Petroleum Practice Director in Toronto. After a start in multivariable predictive control, he has specialized in understanding, promoting and managing the deployment of production management systems in the refining and petrochemical industries. Pierre has been with Setpoint and, subsequently, AspenTech since 1986. IISYS, Inc., the company that developed Aspen Advisor, todayís market-leading software for production accounting, was successfully incorporated into AspenTech under his leadership following its acquisition in 1998. Pierre earned B.Eng. and M.Eng. degrees from McGill University and the Ph.D. from Caltech, all in chemical engineering, and is a registered professional engineer in the State of Texas. Michael (Mike) J. McLaughlin is a Principal Advisor and Director of Production Accounting for AspenTech since 1998. Before joining AspenTech, Mike spent 17 years working in this area for Bonner and Moore and, subsequently, Simulation Sciences. He has consulted for most major refining companies all over the world, and has led or been a major contributor in nearly 100 implementations of production accounting systems in refineries and chemical plants. He previously worked over 12 years for a major oil company in their technical computing department. He is an honors graduate from the University of Houston with a B. S. in Computer Science.