Issue III - 2011

Portfolio Value Creation Strategies

Reducing Working Capital and other Benefits of Storage and Logistics Optimisation
In a globally competitive environment,
those with asset portfolios in the refining
and petrochemical sectors are evaluating
opportunities to achieve greater leverage from
existing assets with relatively low investment
or payback in periods as short as six months.
Supply chain optimisation is one area in which
substantial reductions in working capital can
be achieved, as well as improved operating
efficiency. Working together with several super
majors, KBC has specifically targeted storage
and logistics optimisation and inventory
reduction opportunities (two components as
part of its broader supply chain optimisation
offering). In certain cases, excess inventories
(crude and feedstocks, intermediates, blend
stocks, and end product) of up to 40-percent
have been identified, which at current prices
(US$80/bbl crude), and typical inventory
holdings, represents a potential working capital
reduction of approximately US$240 million. In
these scenarios, approximately 50-percent of
the reduction opportunities were agreed upon
with the client as being immediate and the
remainder required further study, such as linear
programme (LP) quantification of the impact on
the refinery. Thus, the opportunity to reduce
tied up cash can be substantial.
The key to optimising supply chain value is to
have comprehensive knowledge of the entire
technical and commercial processes of a
refinery, not just inbound logistics or inventory
management. In certain cases, instead of
reducing the number of tanks or inventory, a
facility may leverage additional capacity.
For example, certain opportunity crudes may
increase the yield of higher value products,
thus increasing refining margins. `Therefore
it is important to understand all the potential
trade-offs. If a given refinery typically runs

three to five crudes Representative Results

and a LP analysis
has validated that Up to 40-percent
inventory reduction
by running seven
to eight crudes Equivalent to US$240
greater value could
million (based on $80/
be achieved from
bbl crude price)
the existing process
With typically 50-percent
configuration, then
implementable
the study outcome
immediately
might be such
that with greater efficiency in tank utilisation, the
refinery could in fact bring in additional crudes
and the overall inventory level may not significantly
decline because of the additional crudes.
However, the refinerys margin may be significantly
enhanced because of the revised crude slate and
greater value of end products produced due to
the increased number of crudes. Accordingly, a
comprehensive analysis will allow for a variety of
possibilities for improved working capital efficiency
and margin improvement.

Basic Storage and Logistics Review:

A Three-Step Process
1. Benchmarking
The first step in the process is to develop a
benchmark for the facility in which improvement is
being considered. This involves collecting existing
tank utilisation and logistical management data for
comparison to global leading practices, which will
identify the potential gap. This gap represents the
potential opportunity for improvement.

Oil Refining: Asset sales

signal the start of a new era
for the Atlantic Basin
The landscape of the oil refining industry
is in transition, with familiar faces taking
a step back and a new, more globalised
cohort of refiners buying up unwanted
assets. Will these new owners find profits
where their predecessors saw only trouble
ahead? Will more refineries close? Will it be
business as usual for the refining sector or do
unprecedented transformations lie ahead?
The market realities include many of the
super-major international refiners divesting
assets on the order of 20- to 35-percent
of their existing refining capacity many
refocusing on upstream investments. Yet
other players seem primed for entry, including
national energy companies expanding into
new markets, sovereign wealth funds adding
to their portfolios, conventional and countercyclical private equity players and trading
and marketing companies.
This Perspective covers the rapidly changing
dynamics within the Atlantic Basin refining
sector, analysing recent trends and
implications. Coming on the heels of KBCs
2011 Outlook for the World Refining Industry,
the KBC team considers questions including:
Whats next for refining margins?
Who are the class of 2011 the new
refinery owners entering the sector?
Are more refineries facing closure?
This 8-page Perspectives also includes likely
attractive opportunities for future investment
and identification of some of the key
associated risks. To obtain a copy, visit our
website at www.kbcat.com/perspectives/

Continued on pg. 2

In the current marketplace, navigating the challenges facing businesses today can be difficult. We collaborate with
clients to create unique solutions to provide results now that will move them closer to NextGen Performance in the
future. We offer:
Strategic Solutions Capital Solutions Operating Solutions Organisational Solutions Environmental Solutions

Portfolio Value Creation Strategies: Reducing Working Capital and other Benefits of Storage
and Logistics Optimisation (continued from pg. 1)
2. Operational Review
Once a benchmark has been established and the opportunity gap
identified, an important element of a storage and logistics optimisation
exercise is the operations review, since a number of operating practices
have generally crept in over time. Accordingly, a site-by-site, unit-by-unit
analysis is performed to address current working practices
3. Modelling
To truly optimise the entire supply chain, statistical analysis and modelling
are required to effectively assess the optimal levels of inventory as well as
offloading of crude to avoid a potential interruption to operations. The
push/pull of supply and demand around a facility, in addition to the
facilities throughout, will determine the realistic inventory that is required.
Poor supply chain management will lead to increased inventories being
held at the facility. With an effective model and once optimal levels are
computed, it is easier to justify removing tanks, or changing their service
e.g., to leverage previously utilised tanks for alternative crudes, increasing
the flexibility of the particular facility. Similar analysis is performed on a
unit-by-unit basis for the storage of intermediates, required blending
stocks, and end product storage.
To evaluate supply chain opportunities, certain major oil companies prefer
to use discrete event simulation (a/k/a stochastic) modelling which has
been traditionally applied to production and operating systems in order
to identify debottlenecking and management opportunities, and to allow
the analysis of a variety of what-if scenarios. Such simulation typically
involves Monte Carlo simulation programmes, utilising statistical sampling
techniques, in order to predict future performance of the system. The
advantage of such simulation is the ability to develop models of complex,
integrated systems including product flows, pipelines, tankage, supply,
and production schedules. Current experimentation is to link these
types of models into scheduling systems, linking production parameters
with tankage utilisation and logistics management, in order to generate
scenarios which more fully optimise the overall supply chain. Through
this combination, the desired production and oil movement rates can be
forecast.
Coupling KBCs TankStatTM data with different stochastic modelling
solutions, a variety of analysis can be completed, from the facility on a
stand-alone basis to an extended model including the facility, terminals,
and distribution points. Using Monte Carlo simulation, KBC has
developed a process unit-by-unit database which includes possible unit
upset occurrences that can be readily tailored for a specific site to test

the impact of various tankage scenarios on the refinerys service factor.

Further, the LP analysis can determine the value of crude flexibility in
terms of the plants operations.
This same analysis can be used for greenfield investments to determine
the tankage capacity required for each unit to meet a specified production
objective, taking into account the critical logistic and scheduling
constraints of a location. For example, a European client invested in a
hydrocracker expansion for which the EPC contractor had included a
certain number of tanks at certain volumes as part of the project. Generally,
the EPC contractor will use broad estimates which tend to be extremely
conservative. However, by being able to develop a statistical model and
integrate it with the refinerys LP, a more accurate estimate could be made
in terms of the right number of tanks and the right volumes of these tanks,
significantly less than proposed by the EPC contractor and significantly
reducing the required capital expenditures. The advantage of statistical
modelling both an existing facility and a greenfield project are that they
refine broad range estimates and increase overall efficiency.

Storage and Logistics Optimisation Results

By using the three-step process of benchmarking, operational review,
and modelling, storage and logistics functions and inventory held can be
most effectively optimised. In certain cases, this maybe a reduction in
inventory and associated working capital. In other cases, it can increase
the flexibility of a facility to accept additional feedstocks which may not
reduce the number of tanks utilised or the overall level of inventory, but can
significantly increase production efficiency or the ability to create higher
end products, which can also increase refinery margins. Accordingly, the
analysis must consider all aspects of the operation, from work practices,
to available feedstocks, to front-end trading practices, to the ability to
produce higher end products with increased flexibility. Regardless of
which scenario is ideal for a given client, the ability to optimise the storage
and logistics across the facility creates significant opportunities for margin
improvement and likely the opportunity to reduce working capital
required in the business. Further, the return on investment for a storage
and logistics optimisation study is often very significant because most
opportunities for improvement do not require substantial investments. A
solution might include revised work practices, revised job performance
profiles (JPPs), and revised operator training for those involved along
the supply chain. In fact, changes in work practices alone can produce
significant improvements, and when coupled with modelling, produce
optimal results.

Shale Gas: How to Hedge the Value

Proposition
Shale gas is one of the hottest topics in international energy markets and
has the potential to be a true game changer. Large quantities of shale gas
have been introduced to the markets and in the US have adversely affected
domestic prices. As the shale gas phenomenon spreads globally, its
impact will be uneven but significant. KBC believes one near-term hedge
against price risk is exploitation of the associated liquids production.
There are significant reasons to exploit shale gas reserves, particularly
in countries which are currently net gas importers, or require gas to fuel
industrial expansion. As an example, Poland an importer of Russian gas
now regards development of domestic shale gas reserves as an option
to both replace coal-fired power generation to meet European Union
emission restrictions and as a path forward to energy independence.
While shale gas has already revitalised the US petrochemicals sector, there
is a real risk of overcapacity as other countries such as China develop their
shale gas reserves. Thus, while euphoria over shale gas seems to have
captured the attention of the global energy market, there are underlying
risks and challenges still to be considered.
2 | Issue III - 2011 | NextGen Performancen Realised

This Perspective covers the changing dynamics and challenges introduced

by shale gas into global gas markets, addressing topics such as:
An unfolding global phenomenon
Impact on clean fuels
Potential to alter global gas trade flows
Revitalisation of US petrochemicals, once again creating a low-cost
advantage
Environmental concerns that could hinder short-term production
This 8-page Perspectives also includes likely attractive opportunities for
future investment and identification of some of the key associated risks.
To obtain a copy, visit our website at www.kbcat.com/perspectives/

Phase 1 Due Diligence: Identifying Sources of Value; Mitigating Risk (part 2)

(This article continues from the last issue that discussed
the significant number of transactions occurring within the
refining and petrochemical sectors, and the importance of due
diligence.)
Phase 1 Due Diligence is Only a First Step
Phase 1 Due Diligence is not meant to be the only due diligence
performed on a potential transaction. Rather, it is intended to provide
the potential acquirer with an initial go-no go decision with regard to
the assets of interest. Should the acquirer, after an initial round of due
diligence activities, decide to advance in terms of the transaction, typically
further investment in due diligence is required in order to determine how
best to unlock the sources of value embedded within the transaction as
well as to develop a plan to mitigate potential risks. If done effectively, this
can also be the precursor to integration planning. Typically, Phase 2 Due
Diligence might include:

Detailed asset assessments including physical, mechanical, and

operational assessments.

Refined validation of synergy assumptions developed during Phase

1, including the cost and effort to capture these synergies (including
whether some of the investments required to capture the synergies
will need to be made during a turnaround or require a unit shutdown).

Assessment of personnel and operating practices.

Review of capital expenditure plans.

Because the buyer and seller are potential competitors, advanced due
diligence and initial integration planning may often progress in a cleanroom environment whereby an independent third-party is provided

REFINING MARKET UPDATE

confidential information from the both the seller and buyer, in order
to develop analysis on an as combined basis. This can significantly
accelerate synergy capture planning, leveraging the time before a
potential buyer and seller can formally exchange information (e.g. prior
to regulatory or shareholder approvals). Such clean-room analysis can
be everything from synergy calculations such as obtaining the lowest
prices for feedstock and its implications on a combined basis to the
development of a linear programme for the combined entity, preparing
scenarios for post-closing operations. Even in an environment where not
all information can be initially shared between a buyer and seller, ongoing
analysis can be performed in preparation for a contemplated merger via
a third-party, independent intermediary who can perform the necessary
analysis behind the scenes without revealing the specific data from either
company. Generally, such analysis is generally extremely valuable to a
potential buyer who must hit the ground running in terms of achieving
the promised transaction value. This is particularly true of financial
investors who generally have shorter term investment horizons.
Anyone contemplating the purchase of assets in either the refining or
petrochemical sector should carefully consider the merits of having an
independent party performing at least Phase 1 Due Diligence in order
to identify potential sources of value as well as potential risks. Similarly,
those interested in investing in new capital projects or facilities should also
consider various levels of due diligence to adequately assess potential
returns on investment and avoid potentially costly mistakes.
KBC has significant experience in performing technical, commercial, and
environmental services in a variety of investment scenarios, being very
experienced in synergy and risk identification as well as synergy capture
planning and implementation and risk mitigation. Clients have included
a variety of national energy companies, independent companies, and
market for lower sulphur fuel oils in the region, although higher
sulphur residues came under pressure.

Refining margins widened in July thanks to the seasonal surge of Strong gasoline cracks also boosted US margins in July. Continued
gasoline cracks as well as ongoing support from middle distillates.
strong exports to South America lend support to gasoline
The coordinated release of emergency stocks by the International
and distillate margins. It should be noted that WTI weakness
Energy Agency, part of which was delivered to the market as products,
has led to a sharp gain in cracks and margins across the board
particularly in Europe and Asia, dented crack spreads in all regions
when measured against the traditional US benchmark. Midwest
when it was first announced.
refineries that have access to WTI or WTI pricing related crude
are increasing operating rates close to 95% to take advantage of
In Europe, high conversion refining margins increased by around a dollar
favourable margins.
per barrel compared to the previous month, reaching $3.55/bbl in July.
This was largely the result of strength in gasoline cracks partly reflecting
good demand from Muslim countries in
International High Conversion Refining Margins
the Middle East and North Africa. Middle $/bbl
distillate margins also remained healthy.
25
Heating oil cracks were buoyed by around
a dollar per barrel by early buying for the
20
winter season in Germany, where residential
stocks remain unusually low. Fuel oil cracks
15
were $0.25-50/bbl stronger in July than the
previous month.
10

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In Asia, KBC Energy Economics HS&C

margin assessment improved to $6.95/
bbl in July, having dropped in June
to $6.30/bbl. Improvement resulted
from a $3/bbl gain in gasoline cracks.
As in Europe, naphtha cracks also
became less negative, contributing to
a better margin but scarcely a sign of
an overall change in the fortunes of
the petrochemical feedstock. Seasonal
demand for electricity remains strong
in northern Asia, and this tightened the

2007

3 2 1 LLS Crack spread

2008

2009

Europe High Conversion Margin

2010

2011

Singapore Basis Dubai

NextGen Performancen Realised | Issue III - 2011 | 3

KBC Advanced Technologies, Inc.

15021 Katy Freeway
Suite 600
Houston, Texas 77094, USA
T +1 281 293 8200
+1 800 726 5914
F +1 281 616 0900
KBC Process Technology Ltd
KBC House
42-50 Hersham Road
Walton on Thames
Surrey KT12 1RZ, UK
T +44 (0) 1932 242424
F +44 (0) 1932 224214
KBC Advanced Technology Pte Ltd
435 Orchard Road #16-02/03
Wisma Atria
Singapore 238877
T +65 6735 5488
F +65 6736 4759

LEAD STORY: Portfolio Value Creation Strategies:

Reducing Working Capital and other Benefits of

Storage and Logistics Optimisation

Where do You Want to be

on the Performance Curve?

Your Company + KBC Produces

NextGen Performancen
We collaborate with our clients to create unique
solutions to their specific challenges. Some of these
challenges may include:
Strategic Challenges

P = People
M = Methodologies
T = Technologies

Creating effective business strategy/decisions

Increasing return on investments
Enhancing returns on acquisitions/divestitures
Reducing strategic/capital/market/investment risk
Enhancing yields
Creating effective response to crude/feedstock/product markets
Improving financial performance

Capital Challenges

Increasing return on capital investment

Rationalising/optimising environmental
compliance capital expenditures
Reducing capital risk

Operating Challenges

Improving yield
Increasing availability
Reducing maintenance costs Improving safety performance
Implementing/improving
Managing operational risk
behaviour-based reliability
Improving supply chain performance

Organisational Challenges

Increasing organisational effectiveness

Improving employee competency/capability
Enhancing employee support systems
Improving shift team function

Environmental Challenges

Reducing emissions
Ensuring compliance
Reducing/managing
Improving energy efficiency
environmental liabilities
Rationalising compliance expenditures

NextGen Performancen Realised | Issue III - 2011 | 4