Considering Refinery Giveaways

May 19, 2015

Refineries focus on maximizing per-barrel profit margins by changing crude slates and unit operations to maximize the market value of finished products. However, emphasizing these major strategic priorities understates the impact of unit operations and margin incentives as well as potential areas of quality giveaway.

Quality giveaway can be defined as any time a refinery produces a product of higher value than what is specified (i.e. what the market is willing to pay). The variance between actual product results and specified product results represents giveaway. This giveaway causes margin erosion on gasoline, distillate, and heavy oil sales. These giveaways are translated onto the refinery’s income statement through various forms of opportunity costs.

For gasoline blending, typical considerations for operational metrics are octane giveaway and volatility giveaway (which includes T50, Reid Vapour Pressure, and Vapour/Liquid ratio considerations). It’s important to note that an octane giveaway reduction doesn’t necessarily translate into a direct profit/loss impact. Rather, it is expressed through a higher octane pool that allows a refinery to blend more premium gasoline or sell more high-octane component inventory. Additionally, volatility giveaway reflects a consideration for the opportunity cost of not using butane as a blending component. Since butane is a low cost gasoline blending component, it is typically advantageous to use as much of it as possible to decrease a refinery’s cost per blend.

Distillate blending focuses on specifications such as sulfur, flash, pour, or cloud point giveaways, all of which impact the actual severity of diesel-producing units (the main one being a refinery’s diesel hydrotreaters). Reducing the giveaways allows refineries to either increase the severity, which increases capability of processing lower quality feedstock (such as light cycle oil), or increasing the unit runlength to pair with upstream units. Overall, there are several benefits associated with focusing specifically on sulfur giveaway:

  • Runlength or severity increase
  • Reduced catalyst deactivation
  • Reduction in hydrogen and hydraulic pressure
  • Lower fuel gas consumption, which lowers energy expenses

Heavy oils are the bottom-of-the-barrel products and are typically traded based off of a sulfur marker or viscosity (keep in mind that viscosity is a logarithmic formula and experiences diminishing returns with blending). Refineries can evaluate themselves via API gravity, viscosity, or sulfur giveaways as these are typically their key specifications. However, if your refinery is not held to a specification, there is an opportunity to evaluate yourself on a per-barrel margin. Although LCO, ICO, and diesel have gasoline and diesel opportunity costs associated with them and may not be the typical refinery cutterstock, they may increase a refinery’s per-barrel margin based on gasoline, diesel, and heavy oil market values. Additionally, it is also important to consider that each cutterstock has different compression benefits on viscosity, which is the key specification in some markets.

Based on my humble experience, refineries typically focus on octane giveaway and ignore the other dimensions of giveaway. Although octane giveaway is an important metric, quality giveaway may occur across all products and have a considerable impact on refinery margins. Based on our previous experience, a typical 150,000 bpd refinery may experience +$30 million in giveaway for gasoline, distillate, and heavy oils.

By: Peter Hryniak