11

Some ten days later the report from Davies operations group arrived. The report
stated that because of the resurgent European economy, demand in that area is
exceeding present refining capacity. Although additional units are in
construction, a surplus of product could not be depended upon during 2005. On
the other hand, United States operations on the West Coast expected a surplus
of 10,000 B/D of distillate and 7,000 B/D of fuel oil during 2005. The price for
distillate and fuel oil, at the loading port of Los Angeles, was quoted by the
American affiliate at $2.10 and $1.25 per barrel, respectively. The burgeoning
population growth in the western states and the high per capita auto ownership
precluded any excess of motor gasoline for export. A politically sensitive
situation in Malaysia had caused the U.S. State Department to request that
petroleum products not be exported from the United States to Malaysia in the
near future. The costs for transportation of the products to the Far Eastern
markets as estimated by Davies are listed below and include all variable costs,
such as duties, port costs, and tanker expenses:

Product Costs ($/B)

Countries Dist. Fuel
Philippines .75 .80
New Zealand .60 .65

Following the receipt of this information, White asked Jackson and Cramer to
develop a comprehensive plan for satisfying the Far Eastern market during 2005.
He indicated that the plan should include the requirements for each type of crude
available, the amount and proportion of crude to be processed by the Australian
and Japanese refineries during 2005, and the distribution pattern for supplying
the various markets including import requirements, if necessary, as well as the
local affiliate’s share. Table 1 is an outline of the type of information that White
believed would be necessary to establish the planning documents he had in mind
for Roxxon’s Far Eastern operations for 2005. He also requested that he be
supplied with information regarding the marginal value of crude and product so
that if further capital became available for investment in the area the relative
economics of the various facets of the operations would be known and could be
further evaluated. In their regard White was particularly interested in knowing
what the value of additional capacity is at the two refineries. In determining these
marginal values, he told Jackson and Cramer that he was interested only in the
variable costs and thus fixed charges were not to be included in their
calculations.
 12

While discussing the approach to take for accomplishing their assignment,

Jackson and Cramer decided that, in addition to obtaining the base solution, it
would be worthwhile to determine the sensitivity of the model to the various costs
and restrictions used in its construction. This would involve programming the
computer to test how much each cost or restriction could be increased and/or
decreased without charging the base solution, while holding the other costs or
restrictions constant. These operations, called cost ranging and RHS (right hand
side) ranging, respectively, were believed by both men to justify the extra time
and expense in terms of the value of learning where the model was most sensitive
to change.

Notes:

1. The total for product output does not equal 1.000 because of the use of a
portion of the throughput as fuel to operate the processing equipment as well
as the production of minor byproducts such as coke, tar, and fuel gas. The
latter are accounted for as credits against the manufacturing costs.

2. The standard-sized tanker operating in this area is 47,000 DWT (dead weight
tons) and the fleet capacity is described by the company in terms of 47,000
DWT tanker equivalents

3. For example, if the APL refinery requires 10,000 B/D of Brunei crude this
means that 0.5 47,000 DWT tanker equivalents of fleet capacity will be
needed. If a 47,000 DWT tanker is used, whose capacity is 270,000 barrels of
crude and whose round-trip time from Borneo to Sydney (including loading
and unloading) is approximately, 13 ½ days, then it can be seen that 135,000
barrels or roughly 50 percent of its time supplying APL with Brunei crude,
leaving 270,000 barrels each trip it makes to Australia once every 27 days.
Actually, the refinery is supplied by Roxxon’s tanker fleet operating in the
area. This fleet is comprised of tankers of different capacities and serves the
various area affiliates so that economical dispatching normally precludes the
permanent assignment of a specific tanker to an affiliate.