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Introduction to Project Management (INTRPM)
Economics of Oil, Gas and Energy
Week 3: Assignment
Hand-in Assignment
Open the Microsoft Excel workbook Interactive model, week 3.xls. (You may have to zoom in or out to see the full image clearly, depending on your screen resolution.)
On the first tab you will see a figure similar to Figure 3.2. As before, the white cells are cells you can change by entering different numbers. You can experiment with the crude price, the operating cost, the quantity of each product, and its selling price. The exception is the quantity of residual fuel oil, which is calculated to match the total quantity of crude input (we are ignoring “refinery gain”; see the footnote in the Weekly Notes). As you change the quantities of the other products the fuel oil quantity will automatically adjust.
Near the bottom you will see the outputs, in particular the “Margin,” which is calculated using the equation in the Weekly Notes. As with last week’s model, clicking on the “Reset to Base Values” button restores the inputs to their starting point.
We will treat this “Distillation Refinery” as if it were the marginal global refinery. Economic theory says the marginal producer in any market will be one that operates at zero profit (more correctly, zero cash flow); other lower-cost producers will operate with positive profit, but the highest cost “marginal” producer operates at zero profit. The marginal producer has the last unit of production needed to match supply with demand: if the marginal producer is operating at positive profit, an even higher cost producer will enter and provide additional supply. When supply matches demand, any producer with lower cost will be producing; any producer with higher cost will be shut down.
1. Reset to base values. What crude price will cause this refinery to have a zero margin?
Refinery Margin is difference between the input price i.e. cost of the crude to the value of total output produced. It is 73.5 as calculated from base rate and base percentage of various products.
2. Now suppose the refiner decides to consider running different, heavier crude. The distilled fractions from this crude (“yields”) are shown below. For this marginal refiner to decide to switch, what is the maximum price for the heavier crude that would cause the refiner to be indifferent between the two crudes?
The indifferent price is as shown below with the base price of the various product taken as shown in the table:-
     
    Base Price
    Base Crude
    Heavy Crude
    Light End
    70
    10
    9
    Gasoline
    105
    25
    23
    Jet Fuel & Kerosene
    100
    10
    9
    Diesel and Heating Oil
    80
    20
    18
    Residual Fuel Oil
    40
    35
    41
     
     
     
     
    Base crude price
    73.25
     
     
    Heavy Crude Price
    70.25
     
     
    Indifferent price will be
    0.047952218
     
     
3. Does the heavy crude have lower or higher value from the base crude? Why?
It has lower value due to presence of lower amount higher value products such as Gasoline, diesel etc. It is clearly shown in the calculation above.
4. If this is the global marginal refiner, what is the crude price differential between these two crudes?
The crude price difference is 73.25-70.25 = $3 per barrel.
Do the same analysis comparing the base crude to lighter crude, whose yields are shown below. What is the break-even price that will make the refiner indifferent between these two crudes?
The breakeven price will be 73.25/70.25 i.e. 1.04 times the price of the price of the base crude. In...