INVEST IN FLEXIBILITY

FIVE KEY MASTERPLANNING CONSIDERATIONS

WHITE PAPER
February 2016

INVEST IN FLEXIBILITY FIVE KEY

MASTERPLANNING CONSIDERATIONS
Ariel Bru, Principal Consultant, Hydrocarbon Management, Shell Global Solutions
International BV
Few people predicted the rapid revival in refinery margins. Such predictions are notoriously difficult to
make. What is easier to say with confidence is that the favourable conditions will end. With that in
mind, now is the time to prepare for tomorrows challenges.
As prices are difficult to predict, you would be wise to be wary of recommendations based on assured
knowledge of future product prices. Instead, you need to prepare your business for the unexpected and
build flexibility for responding to different economic environments.
Most refiners have clear aspirations for where they want to go, but many are less clear about how to
get there. There are so many options to consider when evaluating what project to select, what
equipment to install and what configuration changes to make. The economics of each option may differ
enormously, depending on mid- to long-term market changes.
So what preparations should be made? Which project is right for you?

INTRODUCTION
Hydrocarbon masterplanning is a high-level techno-economic assessment of business opportunities. Its
principal purpose is to help you to select the right project. The quality of the masterplanning work is
vitally important, as good project definition during the early stages when costs are low has a massive
impact on overall value (Figure 1). Get it right and you can reap long-term rewards.
This white paper highlights five key areas for consideration when undertaking hydrocarbon
masterplanning that could help you to select your next projects.

FIGURE 1: GOOD PROJECT DEFINITION IN THE EARLY STAGES, WHEN COSTS ARE LOW, HAS A MASSIVE IMPACT ON
OVERALL VALUE.

MASTERPLANNING FUNDAMENTALS
Hydrocarbon masterplanning is the process of selecting the right projects for a refinery. It is a high-level
techno-economic assessment of business opportunities with the potential to prepare companies for the
challenges ahead. Masterplanning typically includes:
a reality assessment and gap analysis;
base case modelling;
idea generation, screening and selection;
development and modelling tactics;
a high-level feasibility check (looking for showstoppers);
an economic assessment based on gross margin and capital expenditure;
options for next phase and a recommendation on the way forward;
the identification of key investigations and risk assessments for the next project phases;
identification of flexibility opportunities (crudes, feedstocks, products, assets, units, logistics, etc.);
and
main threats and potential responses, road map for the future.
It does not include detailed technical design work, the development and implementation of
recommendations, key investigations or final investment decisions.

A masterplan proposes a way forward into the scouting and basis-of-design project phases, supports
your strategy for meeting future challenges and provides investment proposals for further development.

METHODOLOGY
By way of illustration, let us assume that you need to increase your middle distillates capacity in
response to market changes. You could do this in several ways:
build a new unit;
revamp an existing unit;
upgrade to a higher-activity desulphurisation catalyst; or
improve the refinerys hydrocarbon management another way.
But which option would be the best fit for your particular refinery?
Having established the economic premises and understood your companys strategy, the hydrocarbon
management and project team at Shell Global Solutions would screen the options and make detailed
technical and economic evaluations. The team would estimate the capital cost using our extensive
projects database and establish the operating costs using our operating experience and best-in-class
benchmarks. A scenario-based approach is applied so that the selected option is robust under a wide
range of economic and environmental circumstances.
This option is then developed into a firm investment proposal that aligns with your long-term vision and
overarching strategic objectives.
This may sound simple, but carrying out a good masterplanning study relies on deep insight and
experience. There are many technical and economic factors to consider, some obvious and others less
so. For example, a seemingly value-adding project could potentially turn into a poor investment decision
if integration opportunities are overlooked during the early phases. Can all the existing units cope with
the streams from a new unit? If additional hydrogen is likely to be required, how much will be needed
and from where will it come? Are the existing utilities sufficient? Are there new governmental and
environmental regulations to be applied? There have been cases where refiners have discovered at a
very late stage that the existing boilers could not cope with the extra demand, which has resulted in
operations being dialled down or an additional boiler at considerable expense.
A high degree of interaction is necessary with the technical people at the refinery, but also with other
stakeholders, including traders (more generally, the people buying feedstock and selling products) and
those working in the integrated supply chain. A simple evaluation of refinery economics often only
captures a small proportion of the assets overall value to the interfacing businesses, so the whole chain
must be considered.

FIVE KEY MASTERPLANNING CONSIDERATIONS

1 SET YOUR PREMISES AND STRATEGY
The first step in preparing for the future is to establish a view on the threats and changes that are likely
to affect your business. This means constantly generating ideas and maintaining a project pipeline
rather than performing a masterplanning study periodically after a set number of years.
It is important to understand the market fundamentals: to have a view of the future markets. What crude
price should you use in your calculations? Which products will be in highest demand? Will the product
specifications in your markets and environmental legislation tighten further?
Most analysts agree that demand for hydrocarbon fuels is likely to plateau and fall in Europe and North
America. At the same time, there is more new and very efficient refining capacity in the Middle East
and Asia, and new upstream technologies have demonstrated the capability to turn the USA into a net
exporter of most products. Assets with good distillate selectivity or those able to produce specialities
and petrochemicals often make strong margins. Regulatory requirements and engineering costs are
increasing.
Understanding these dynamics and other market fundamentals will help you to form the economic
premises and set a strategy that gives you a context for the evaluation of different project options.
However, it is important not to be cornered by single-point projects or investment solutions. In other
words, the investments must be based on well-analysed risks, but if the premises prove incorrect,
projects need the flexibility to work in the new economic environment.
In recent years, people have become less inclined to make investment decisions based on one price set.
They realise they are making a bet, but do not want to take too much risk, so decisions are now usually
tested using different pricing scenarios and economic conditions. Given historical price volatilities,
robustness against different price sets is vital. Probabilistic analysis is being introduced more often in
order to understand the up- and the downsides.
Masterplanning evaluates options within the framework of your overarching strategic considerations
and objectives. Once there is an agreed set of premises and we have defined the sensitivities to be
tested and the desired flexibility, we work with you to develop a list of all the investment options that
could help you to achieve your objectives: a task that calls for considerable experience and industry
insight.
What are the threats and opportunities for refiners?
The refining landscape is constantly changing. Some common threats with the potential to be turned into
opportunities are briefly described.

Gasoline demand is declining in OECD countries.

The reduction demand for gasoline may require a larger than usual step change like moving molecules
to middle distillates, aromatics and naphtha. Integrating with chemicals plants (aromatics and/or steam
cracking) can meaningfully reduce exposure to declining gasoline demand.
Are you ready to make such a change?

The marine bunker fuel price may collapse.

Based on recent developments, it is anticipated that sulphur specifications for marine bunker fuels will
shift from 3.5 to 0.5%. This may happen in 2020 for Europe and in 2025 for the rest of the world,
pending a decision by the International Marine Organisation due in 2018. The potential consequence
could be an immediate collapse in demand and therefore price. The impact on your business will vary
according to, for example, your asset base and the markets you serve.
Lower sulphur emission levels could be achieved by retrofitting flue-gas scrubbers to vessels, but such
changes are complex and costly for the marine transport industry. Alternatively, it might fall to refiners
to provide a 0.5%-sulphur marine fuel, which should be an opportunity for some.
So far, few refiners have taken the decision to invest in structurally moving away from making highsulphur marine bunker fuel and it is too late to make investments that would meet the new specifications,
should they be implemented globally in 2020. A 2025 target could be met. Studies are currently
considering the risk of continuing to produce marine bunker fuel as 2025 approaches and how to
mitigate this risk.
This threat can also be viewed as an opportunity. If the large marine transport market switches to a new
product, demand for the new fuel will be high and the fuel will be valuable. Those refineries that have
invested in its production or that can make it without much investment and with no impact on margin
will have a competitive advantage.
Is your refinery robust in the event of a price collapse? What strategy are you
adopting? Could a new low-sulphur marine fuel represent a commercial
opportunity/advantage for your asset?

Economically attractive, difficult-to-process crudes are increasingly available.

More challenging crudes are being produced, including those with high nitrogen and metal contents,
impurities and acidity. Refineries designed to process more-traditional crudes may struggle to capture
the potential economic advantages offered by these feedstocks.
Have you considered low-capital-cost revamps that could increase your assets
feedstock flexibility, thereby enabling you to take advantage of opportunity crudes
or low-cost, unwanted intermediate feedstocks?

There are strong competitors.

Do you understand what differentiates your business from the competition? What can
you do to make your products more competitive, i.e., lower cost? Can you make a
product, process a feedstock or do something that your neighbours cannot?

Environmentally driven emission and product quality standards, and product demands are changing.
Legislation that controls refinery emissions, for example, sulphur dioxide, nitrogen oxides and
particulates, and product quality is constantly tightening. Europe, the USA and some other countries
have moved by steps to a 10-ppm transport fuel sulphur limit, with Asia and other regions following
closely. Reducing emissions and making cleaner products can put strain on margins.
In some countries, the amount of energy a business uses is being controlled and demand for certain
products may fall as people act to mitigate global warming.

Do you understand how best to meet new specifications to remain compliant while
protecting margins? Do you have the flexibility to burn gas in your asset rather than
liquid fuels to meet emissions limits?

2 ESTABLISH WHERE YOU STAND

Knowing where your company stands in terms of technical and business performance in relation to your
peers helps you to see where to put your efforts.
Benchmarking performance against peer groups can show you where there is a process-level utilisation
gap or a difference in energy use. It can also demonstrate where your existing assets have the potential
to capture additional margin and how your reliability and costs rank against your competitors.
Understanding your performance means clearly seeing what brings value and how money is generated.
Such understanding will show you which products to maximise. It is also vital in evaluating feedstock
flexibility at the refinery and unit levels, the resilience to low-margin environments and where to make
capital investments.
The position of the refinery in the wider picture also needs considering. What is its trading value and
does it integrate well in the overall supply chain? In an extreme case, the refinery may lose money, but
be profitable as part of the wider supply chain. Is there a good fit with upstream or petrochemicals?
What exposure to risk is the company willing to take in different areas? Are the competencies of the
people who run the asset being maintained so that the facilities are technically and economically
optimised?
In some regions, asset age is becoming an issue, particularly in the light of strong competition from the
new government-supported investments and protected markets that have helped to create strong assets
in Asia and the Middle East. Investing in ageing assets has been difficult, especially when margins are
low. Many refineries built in the 1960s and 1970s have units operating beyond their design lives. At
the same time, these units are often hard pressed to meet current operational and environmental
standards.
Whatever your assets age and condition, and especially if it is old and in need of investment, you
need to understand its potential: how far can it be pushed and how does it compare to your
competitors assets?

3 UNDERSTAND WHAT SETS YOU APART

What differentiates your business from the competition? Do you produce specialities or petrochemicals
that command high margins? Can your asset process feedstocks that other facilities would not touch?
If everyone applied the same off-the-shelf solution to meet a common market trend, no one would derive
much benefit. Going for solutions that are right for your particular asset and business, and that give you
an advantage over your neighbouring refineries, might be the better option. If your asset can do
something your competitors cannot do, you may be creating an advantage.
For example, if demand is moving strongly from gasoline to gas oil, an obvious answer is for every
refinery to shut down a fluidised catalytic cracking unit (FCCU) and replace it with a hydrocracking unit
(HCU). But the time and economic context which would trigger this solution will be different from one

business to another, and some intermediate solutions or different FCC operations may also be a realistic
path forwards.
You need to understand why a particular investment would fit well with your asset and business, and the
feedstocks you would like to be able to process and the products you aim to make.
Consequently, the solution right for your asset and your business is likely to be unique. In that respect, it
is particularly important to establish the margin drivers of a site: to understand why you are doing
business and which products, units, and supply and trading options generate the most value.

4 BE FLEXIBLE
Being flexible applies to projects, feedstocks, asset configurations, products and logistics, and to an
organisation as a whole.
As mentioned, your economic premises may prove incorrect. The economic landscape can change and
there are major uncertainties in the industry, not least the marine bunker fuel situation. For that reason,
building flexibility into projects so that they can be successful in a range of economic environments can
be a major advantage.
Decision makers are increasingly thinking about how to capture the value in optionality and flexibility.
For example, for an average price set, a particular option may not provide much value, but that same
option might generate substantial income for a few weeks or months a year, so it may be worth
considering. Similarly, investing in a particular logistics flexibility may give you an advantage or
product premium for a short period, and you may get a full return on your investment over just a few
weeks. In addition, trading and marketing value derive from building refinery capabilities and they
should be properly reflected when allocating capital expenditure.
Ultimately, the solution needs to be one that is believable: a flexible solution where the risk can be
mitigated and that will succeed in different economic environments.
Increasing feedstock flexibility can be beneficial. Many refineries with good margins can process a
wider range of crudes and intermediate feedstocks (leftover feedstock by other refiners). It is important
to understand crude constraints, such as nitrogen content and acidity, and decide whether you could
profitably process technically challenging opportunity crudes with the right improvement projects.
Logistics are important too. For example, do you have enough tankage to handle the desired products
flexibly?
Organisational flexibility means having the ability to take decisions and respond quickly. In a large
organisation, you have a good chance of being right, but often decisions are taken too late to take full
advantage of the opportunity. For example, traders in your organisation may have the opportunity to
buy cheap crude with an unusual or challenging composition, and need to know quickly whether it can
be processed at your asset. Within a few hours, the opportunity may have gone, so good asset
knowledge and a quick response are vital.
This is not easy, especially as more data are now available. There are numerous technology providers,
consultants and analysts keen to offer data and information, and managers are asking for more
information and analyses before making decisions. However, there is a risk of overanalysing

information, such that decisions are deferred and opportunities are missed. Ultimately, you must make a
decision and that involves risk.

5 EMPLOY GOOD PEOPLE

It is vital to maintain a workforce with a strong technical base and a good understanding of the margin
drivers and economics of your site. With the right competencies and understanding, these people will
always be able to make good decisions. Your business needs to recognise and reward good people to
keep them in the organisation, as they are the driving force in optimising your asset.

PROTECTING MARGINS IDENTIFIED DURING PROJECT DEVELOPMENT

Masterplanning is about doing the right project: establishing a set of premises, analysing the refinery
and deciding which options fit best and discarding the others. Project development is about doing the
project right.
However, the final margin generated by a project can fall short of its full potential. Potential margins
can be protected during the project development phases by:
giving the project development team ownership over the premises and collaborating across the
organisation, which helps to avoid alignment and communication issues;
embedding change in mind-sets after concept selection;
maximising the value of flexibility rather than meeting the minimum technical scope;
considering the value and margin impact during design;
fixing the scope once the design concept is selected;
understanding outside-battery-limits (non-process infrastructure) and interface impacts;
avoiding excessively optimistic scope definition and/or cost estimate during the early phases,
including overly optimistic contractor and vendor estimates and client misunderstanding of
exclusions;
planning properly and completing deliverables to promote good decision making;
ensuring high-quality resources and execution standards; and
independently checking what contractors, licensors and consultants are saying.
A smooth transition between the masterplanning and the execution phases is key to delivering a
projects full potential. Ideally, some of the people involved in selecting the project will work with the
development team. This continuity can help the development team to understand the margin drivers and
why the option was preferred over others.
Substantial value can be won or lost during front-end development. No matter what your business
objectives are, there is likely to be a wide range of potential responses and it is important to consider
them through a range of operational and strategic lenses.

CASE STUDIES
Masterplanning aims to find the most cost-effective solution; one that aligns with your long-term vision
and overarching strategic objectives, is informed by your economic premises, is tested against pricing
scenarios and has the flexibility to work in different economic conditions. To choose a selection of
options, you need to understand your asset and its technical capabilities. Then it is a case of getting
people with good experience of refinery technologies and economics to consider the best options for
the strategy and premises, and to deliver the full potential margin during project development. Although
there is no standard solution that is transferable between refineries, there are trends and projects
implemented in one refinery that could be adapted as options for another, so it pays to use consultants
with wide experience from different assets.
The following case studies give a small taste of the range of projects defined in partnership with Shell
Global Solutions hydrocarbon management and project team.

CHASING EXISTING UNUSED CAPACITY RATHER THAN A MAJOR UPGRADE

A common refinery improvement trend is to increase vacuum gas oil recovery. In one example, the
customer wanted to increase vacuum gas oil recovery to maximise feedstock for the HCU and the
FCCU. However, before investing in a major upgrade, the customer and Shell Global Solutions went
after existing spare capacity through several small, low-capital-cost projects.
Key to the solution was understanding the vacuum gas oil balance, in particular, whether molecules in
the 530580C boiling range were being recovered as conversion feedstocks.
The small projects included:
additional draw-off or increased overflash for extra heavy gasoil recovery at the crude distillation
unit (CDU);
a deeper cut at the high vacuum unit (HVU) and the vacuum distillation unit (VDU) through
column modifications (new packings, trays and a wash oil section); and
routing extra heavy gas oil from the CDU draw-off to the HVU and VDU column top to use spare
capacity in these units and recutting the extra heavy gas oil into gas oil and vacuum gas oil. This
offloaded the HVU furnace and allowed a deeper cut at the HVU column bottom.
The result was a gross margin improvement of several tens of millions US dollars a year with moderate
capital costs, which built on the existing refinery capabilities to provide greater resilience, robustness
and competitiveness.

GETTING THE RIGHT MOLECULES IN THE RIGHT PLACE

Some refineries may be running low-margin units at less than full capacity. If this is the case, these units
may be better off being retasked or processing different feedstocks.
A refinery with an HCU recently built a new ultra-low-sulphur-diesel (ULSD) unit on top of its existing gas
oil hydrodesulphurisation unit. The HCU was at maximum throughput and hydrogen availability was
limited.

10

The solution was to revisit the routing of gas oil molecules and to fill the hydroprocessing units from low
pressure to high pressure to enable more tonnes of product to be treated per tonne of hydrogen. The
idea was to put the easier molecules in the lower-pressure units and leave the more difficult molecules
for the higher-pressure units with higher conversion potential. This meant going to the kerosene
hydrotreater, the gas oil HDS unit, the ULSD unit and then the HCU. The hydrogen saved by rerouting
the molecules is being used to upgrade more and heavier vacuum gas oil in the HCU and to
desulphurise fuel oil cutter stock to middle distillates.
The result is a US$55 million/year margin improvement. This was achieved quickly and at virtually no
cost by increasing the heavy gas oilextra heavy gas oil and extra heavy gas oilatmospheric residue
cut points, which saved about 30 t/d in hydrogen. The change in cut points unlocked spare capacity in
the HVU and the HCU, and avoided cracking some gas oil into naphtha. More atmospheric residue
and/or vacuum gas oil import can now be routed to the HVU and the HCU, and a deeper cut is made
at the HVU.
Building on this first quick success, moderate capital expenditure solutions are now being implemented,
including deeper flash at the HVU and recovery of thermally cracked vacuum gas oil to the HCU;
desulphurised fuel oil cutter stocks becoming available for finished middle distillates; and conversion at
the visbreaker unit can be increased.

INCREASING FEEDSTOCK FLEXIBILITY FOR LOWER COSTS

In the volatile oil markets, crude economics can swing, so, if you have the capability for processing a
broad range of crude types, you can take advantage of cheap feedstocks when they become available.
Key to increasing feedstock flexibility is a good analysis of your asset capabilities.
With minimum capital expenditure, one refinery has reduced its feedstock costs by US$1/bbl by
increasing feedstock flexibility. This has helped the refinery to lessen its dependency on conventional
crude diets, to take advantage of opportunity crudes and to process condensates, components and
residual feedstocks (Figure 2).

11

FIGURE 2: THE FEEDSTOCK DIET HAS BECOME INCREASINGLY FLEXIBLE ALLOWING THE REFINER TO FOLLOW THE OPTIMUM
CRUDE ECONOMICS.

SUMMARY
With high margins that are unlikely to last, now is the time to prepare for the future. Engaging
experienced people in masterplanning can help you to select and define the right project. Key to the
masterplanning process is to set economic premises, to form a strategy, to establish where you stand
and what makes you different, to be flexible in terms of capabilities and configuration, feeds, products
and organisation, and to attract and retain good people.
So what steps should you take to make a robust investment?
In Shell Global Solutions view, it pays to get the early phases right when costs are low but the
implications for overall value are substantial. There is no hard and fast route to selecting the right
project and that project will be unique to your circumstances. However, multi-asset experience is vital
for success.
The hydrocarbon management and project team at Shell Global Solutions typically deliver more than
10 investment planning studies a year for refineries and petrochemical plants around the world. As an
owneroperator with a global portfolio of assets, Shell has broad operational experience, including
first-hand understanding of capital constraints, project development issues, asset start-up and operation,
and optimising integrated margin in volatile environments.
Ask us how we can help you to select the right project.

12

ABOUT US
Shell Global Solutions provides technical consultancy and licensed technologies for both the Shell
Group and third party customers within the energy industry. Shell Global Solutions strives to deliver
innovative technical solutions and effective technology to support its customers in their day-to-day
operations and delivery of strategic plans to improve the capacity and performance of existing units;
integrate new process units into existing refineries and petrochemical complexes; incorporate advanced
proprietary catalyst systems (CRI/Criterion) and reactor internals; through to the design of grassroots
refineries.
Shell Global Solutions is affiliated with Shells catalyst companies which innovate and sell catalysts
through a network that includes Criterion Catalysts & Technologies, Zeolyst International, CRI Catalyst
Company and CRI Leuna (formerly known as Kataleuna).
www.shell.com/globalsolutions

13