Crude Inventory Classifications

March 27, 2015

Capital can take many forms in a refinery.  One type of capital outlay sometimes overlooked in a casual consideration is the total stock of hydrocarbons stored in tanks, unit fills, line fills, rolling stock (rail storage), and so on.  Larger sized refineries can have anywhere from five to ten million or more barrels on hand at any time.  Larger complex facilities with larger tank farms can store upwards to $1 billion of hydrocarbon product.  This multi-part series explores the roles crude inventory plays operationally, financially, and strategically in the business of a refinery.

Given any tank that feeds a unit, there are certain characteristics.  Even though there is only one material in the tank, schedulers, traders, and operators will know that there are actually different categories of that material.  For instance, at the bottom, there is a “bare minimum” amount that cannot be drawn out of the tank for use.  This is usually due to the physical location of the suction pipe or trough.  That amount of material is called unusable.  Using a little imagination, consider this unusable layer at the bottom of the tank (it actually is down there).  Continuing with our imagination, consider a layer on top of that called “safety stock.”  This material must always be on hand as it is required to safely shut down a unit or put a unit in recycle mode.  This amount could vary, depending on the specific unit, and other dependent downstream units.  Imagine a third layer on top of the unusable and safety stock – called “working stock.”  This is the amount of crude that is available for feed to the crude unit.  Do not assume this third layer fills the rest of the tank.  After all, crude is not free, and given a lot of parameters, there is probably a correct level of working stock that meets all criteria, and limits the capital outlay to that point, and not beyond.   This is usually expressed in “days inventory on-hand.”  This is often a metric to quickly ascertain risk when considering the possibility of running out of crude.  So maybe we are spending too much to avoid something bad that might happen.  This will be discussed in a later part of this series.

Continuing, we have now identified three layers of inventory: unusable, safety stock, and working stock.  There is a fourth and final layer – called “economic stock.”  Economic stock is inventory in excess of the previous three mentioned which is purchased due to the suggested financial benefit of adding stock beyond what is needed. Some examples include distressed cargos or trades from neighboring facilities to adjust for upsets and unexpected inventory levels.  Also, sometimes market conditions (such as a contango market) warrant purchasing economic stock.

With this basic understanding of inventory classifications, we will continue in the next part of this series to consider scheduling and the impact of scheduling on crude inventories.

By: Gil Moore