5

Roxxon affiliate in Iran was prepared to supply and amount of crude up to

100,000 B/D at the cost of 2.00$/B at Abadan, the crude terminal on the Persian
Gulf (See Figure 1 for a map of the area).

Late in July, Ray Jackson returned from his field assignment to Aussi Petroleums,
Ltd., (APL) in Australia, where he had been working with local operating people
in determining the various characteristics and constraint in their operations,
which except for crude oil production, are fully integrated. APL’s refinery, located
in Sydney, is designed for a 50,000 B/D throughput. Process equipment includes
a catalytic cracking unit and sufficient auxiliary equipment to produce a
specification quality product from the crude normally available for its use. A large
part of Jackson’s time had been spent on familiarizing himself with the linear
programming model that APL uses for solving day-to-day operating plans at the
refinery. This model totals 110 rows and 250 columns which define the operating
characteristics of all the refinery’s equipment using various modes of possible
operation and the different crudes normally available.

Although the model had been designed to provide APL with the ability to solve
operational problems, Jackson believed that he could use it to derive cost
parameters and refining coefficients for planning purpose. With this goal in mind
and working with the local stuff to assure himself that the results were realistic.
Jackson used the refinery model to establish the yields and costs for the crudes
available in 2005. To accomplish this, he assumed that the quality specifications
for the three principal and products would remain constant during the planning
period. In addition, although the refinery had processing flexibility that permitted
a wide range of yields, he decided for planning purposes that the use of the
values at the highest and lowest conversion (process intensity) for the crudes
available would suffice. The yields so derived are as follows:

APL Refinery Yields

Brunei crude Iranian crude
process intensity process
Product Low High Low High
Motor Gasoline (Mogas) .259 .365 .186 .312
Distillate (Dist.) .371 .379 .229 .230
Fuel Oil (Fuel) .317 .194 .503 .378
Total .947 .938 .918 .920
 6

In using this data he realized that a certain amount of nonlinearity existed in the
refining yields of products going from low process intensity to high process
intensity, however, he felt that the error introduced by assuming a linear
relationship would not be significant in the planning model he hoped to
construct, and the linearity assumption would certainly reduce the size of matrix.
Jackson planned to test the significance of nonlinearity in the refining coefficients
on the planning model’s results after it was formulated by the Head Office
planning staff.

Using the high and low conversion limits as the refinery’s operating modes,
Jackson was able to determine incremental costs for those manufacturing
activities vary as a function of the type of crude being processed and the level of
process intensity being employed. These costs include special chemicals and
catalysts used, utilities required, the tetraethyl lead (TEL) used to bring the
product up to octane specification, and so on. Fixed charges (those not varying
with changes in processing modes) are excluded. Deducted from the sum of the
variable, or incremental manufacturing costs is the value of the byproduct
produced by the particular process mode using the particular type crude. These
so called by products are defined as minor products as contrasted to the three
main products manufactured for Far Eastern Area consumption (namely, motor
gasoline, distillate, and fuel oil), and consist of small quantities of specialty
products and such things as coke, tar, and fuel gas. The net incremental costs
Jackson found appropriate were

Incremental Manufacturing Costs ($/B)

Brunei Iranian
Intensity Level
Crude Crude
Low .12 .15
High .28 .30

APL management forecasted that fixed operating expenses at the refinery would
total $10,038,000 during 2005.

Besides the refinery study, Jackson collected data on shipping costs to the
Australian refinery. Normally, in this area crude is transported in tankers owned
by a subsidiary of the Roxxon Company, however, in cases where refinery
shipping demands exceed the fleet capacity, spot charters of independent