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Use oil accounting to capture the benefits of stock loss reduction, production tracking and knowledge of inventory position.

INTRODUCTION Oil accounting is the business process of measuring, validating, reconciling and publishing all the flows and inventories into, within and out of a refinery, and its practi ce varies widely in the industry. Some refiners are content to use a spreadsheet to tabula te and compare shipments, receipts and inventory changes on a monthly basis. This simpl e business model is adopted by a few refiners who are only interested in matching physical quantities in and out of their plant to paper transactions. In effect, a monthly balance around the fence confirms that material invoiced corresponds to measured physica l quantities, and nothing more substantial is asked of the oil accounting process. Individual unit engineers record unit balances on basis of the historian (should one exist) and there is no effort to integrate these balances among themselves, let alone with the oil a ccounting spreadsheet. At the other end of the complexity spectrum, refiners carry out a comprehensive dailyanalysis that involves not only the afore-mentioned in-out quantities, but also all the flows and movements inside the refinery, including combustible utilities (fuel gas, fu el oil, FCC coke) and non-hydrocarbon materials, such as sulfur (Figure 1.) The goal of this analysis is to produce a unique and coherent set of material balances for the entire refi nery, its units and its tanks, at the close of each operating day and following industry-accepte d production accounting rules [1]. Such a detailed daily analysis requires a topol ogical model of the refinery, wherein units and tanks are represented as nodes connecte d by pipes, together with well-defined business processes for gathering, validating a nd publishing production data. Thus daily oil accounting comes at a cost, and its b enefit, at a strict minimum, is that it avoids the month-end chase for past errors that is th e persistent bane of monthly balances. Figure 1. Refinery material balance envelope Why do some refiners deploy sophisticated oil accounting systems while others ge t away with only the most elementary oil accounting procedures? What value do the first derive from their systems and, conversely, what are the latter missing out by simply ma tching invoices against inventory changes? The purpose of this paper is to explain the

technical arguments for deploying an oil accounting system and to develop quantitative est imates of the benefits they can deliver to their users. OIL ACCOUNTING BASICS While the details vary from site to site, the business process of oil accounting can be broken down into four basic and successive steps: ! Data gathering, validation and processing ! Gross error detection and correction ! Reconciliation ! Reporting Data gathering, validation and processing. A comprehensive oil accounting analysis requires flows, movements, inventories a nd laboratory data, all of which must be secured from disparate sources in the refinery and centralized in a single dedicated sys tem for the subsequent steps (Figure 2; see also [2].) Flows are normally import ed from the refinerys data historian and inventories from the tank gauging system. Movements in, out a nd within the refinery are typically imported from an eclectic set of spreadsheets wherein the movements were logged manually by off-sites operators (rarely are movements load ed automatically from an oil movement system.) Flow, inventory and movement measurements must be imported with matching temperatures and pressures for compensation to standard conditions. The laboratory information system (LIS) sup plies the densities for measurement compensation and volume-to-weight conversion, as w ell as the gas heating values for fuel oil equivalency calculations. For reasons of emp loyee productivity, it is essential that the data import process be as automated as po ssible and feature well-defined quality control steps to ensure that the right data is impo rted into the system, especially insofar as oil movements are concerned. Indeed, the lost-time cost of correcting data after import is high. Refiners are well advised not to underesti mate the importance of this first step, as the old adage garbage in garbage out applies distressingly well to oil accounting systems. Figure 2. Oil accounting data flow diagram Gross error detection and correction. Regardless of the care taken, oil accounting is always hampered by gross errors, a term that designates patently incorrect or incomplete data. Gross errors materialize as nodal imbalances, wherein the residual of the expression

Node flows in Node flows out Node inventory change (1) is substantially different from zero, even after proper scaling. Gross errors ar e typically caused by: ! Missing movements (e.g., missing receipts, shipments, tank movements) ! Incorrect line-ups (e.g., incorrect source or destination node associated with a discrete movement) ! Automated data entry errors (e.g., meter signal failures, stuck tank gauges) ! Manual data entry errors (e.g., meter readings, lab values, etc.) A calculated nodal imbalance in excess of a pre-defined tolerance, or an automat ed correction to a flow or movement that exceeds the meters accuracy (see Reconc iliation below) are the most typical mathematical criteria for detecting gross errors. Wh ile easy to detect with software, gross errors can take time to track down and resolve, and argue for the importance of designing and validating robust automated data entry procedure s. Note that expert systems have been used successfully to detect and correct gross erro rs in complicated networks by automatically creating a movement when two tanks show opposite and matching inventory changes. It is at this step that the issue of reconciling on the basis of weight versus v olume first surfaces. North-American refiners perform their accounting largely on the basis of volume and assume volume expansion factors for each node in order to achieve closure. A subsequent comparison of the balanced results in terms of a weight balance ident ifies discrepancies in densities. Other refiners reconcile on the basis of weight [1]. It is worth noting that the North-American petrochemical industry reconciles on the basis of weight, which presents a challenging, albeit resolvable, material accounting problem whe n a refinery and a petrochemical plant are integrated within the same complex and sh are a common oil accounting envelope. Reconciliation. Even after correction for gross errors, material balances never close exactly and there is always residual error around the nodes. In fact, given the uncertainties around metered values, volume expansion factors and densities, it is unreasonabl e to expect that the nodes should balance exactly, whether on the basis of weight or volume data. Residual error is typically removed with an error distribution algorithm t hat adjusts or reconciles all the measurements to minimize the sum of the residual errors arou nd all

the nodes. The reconciliation techniques vary: some use a linear least-squares a lgorithm while others use an expert system, and arguments can be made for each. In either case, weighting factors are set to make each correction proportional to the raw measur ements magnitude and its meter accuracy. (As noted previously, an automated correction greater than the corresponding meter accuracy can trigger a gross error.) Regardless of the technique used, it always makes more physical sense to adjust the movements and flows while keeping the shipments, receipts and inventories constant as the latter are known more accurately and, in the specific case of the inventories, cannot accumulate error over time (except in the event of a leak.) This technique is known as pushing the corre ctions onto the unit. The result of the reconciliation exercise is a set of balanced prod uction statistics that are reported side by side with the raw values. Strictly speaking, reconciliation serves no oil accounting purpose, as its net e ffect is to hide measurement errors from view. It is better to record raw measurements knowi ng the percent imbalance of each node (or that of the entire refinery) than to record d ata that might have been shoe-horned to closure. Substantial practical obstacles also exist : small but real and non-negligible flows are easily zeroed-out by reconciliation; flare d quantities leap because of low weighting factors, and the accountant, pressed to publish re sults by noon, often does not have time to validate the results of reconciliation. These difficulties notwithstanding, reconciliation is the primary means of detecting measurement discrepancies, which leads to corrections that ultimately improve the accuracy o f the raw oil accounting results. This point will be demonstrated later in this article. Reporting. In this final step of the oil accounting business process, results are posted in an accessible location for employees (nowadays an Intranet site) and are uploade d to the refinerys ERP system for production tracking (Figure 2.) Refinery-wide access to a single set of production statistics eliminates conflicting operational results, s upports high-level analysis and decision-making, and facilitates identification and mitigation of operational problems. Production and inventory reports from multiple facilities can also be consolidated into corporate reports for the benefit of senior management or f eedstock and product traders.While reporting can be site specific, with each facility par tial to one report format or another, many best practice standard reports exist (e.g., charge and yields, inven tory,

combustibles, etc.) The important aspect of reporting is that results be made av ailable to all users on a timely basis. For operations staff, first-pass oil accounting res ults from the previous day must be made available in time for the morning review meeting, whic h can be as early as 8 am. This is possible in a refinery that tracks production from mid night to midnight and has a well-automated and robust process for loading data into the o il accounting system. The deployment of an oil accounting system is a politically delicate process tha t requires buy-in from many quarters of the concerned facility, and its operation requires transparency for acceptance. The sensitivity stems from the fact that the oil ac counting system depends and reflects on many aspects of a refinerys operations. For such a system to be successful data entry must be efficient and effective, which requires reli able instrumentation, a robust network infrastructure, comprehensive movement log-in, regular dips in the absence of a tank gauging system, etc. Perhaps most of all, success depends on excellent communication channels between the accountant and all relevant quarter s of the refinery to ensure that issues are resolved quickly. Consistent low performance in anyone of the aforementioned areas will hinder the oil accounting process and, given th e resulting and immediate visibility, is certain to put pressure on the responsible service. At the conclusion of the accounting process, the published production figures wi ll be different from those that unit engineers expect on the basis of the historian an d the unitscale balances they will invariably produce on their desktop. Unless the oil acc ounting process is open, it is vulnerable to being challenged and, possibly, rejected by o perations who will instead rely on their spreadsheets. An open oil accounting process is o ne that is based on clear and well-defined procedures that are repeatable and can be audite d. Only under these conditions will the oil accounting system meet the success and recei ve the acceptance that it deserves. Beyond a refinerys fundamental need for production s tatistics, and the need to meet growing regulatory reporting requirements, oil accounting systems are deployed f or three key reasons: ! Stock loss reduction ! Plan versus actual performance monitoring ! Knowledge of feedstock and product inventory position STOCK LOSS REDUCTION

An oil accounting system provides an integrated forum from which a central group can detect and analyze measurement discrepancies on a refinery-wide scale. Stock los s reduction is achieved when these discrepancies are systematically tracked down t o their sources, explained and resolved. The sources of such discrepancies are numerous and varied: seasoned yield accountants report finding errors in floating roof weight compensation, strapping table errors, orifice plates mounted backwards and even tank temperature indicators lying on the ground. In a typical case example, oil accou nting led to stock loss reduction in a US Gulf Coast refinery when a persistent imbalance between a crude unit and its straight run naphtha tank was tracked to a closed (but cracke d) valve that leaked to a slop tank. The leak was not previously recognized because the c rude units charge balanced with its products. It was not until an attempt was made to reconcile the crude unit with its downstream units and tanks that the imbalance became apparent to the oil accountant. Measurement inconsistencies can be identified by visual inspection (an unusual o r unexpected imbalance catches the attention of the oil accountant,) or by statist ical analysis (a correction shows a sustained bias). In the latter case, detection is a key be nefit of reconciliation. As noted, reconciliation makes corrections to measurements in or der to minimize the sum of the residuals around the nodes. If random measurement errors are truly the source of the imbalances, the daily corrections to each of the flows s hould, on the average, sum to zero [3]. Stated differently, the frequency-distribution diagram of the daily corrections for each flow should be centered on the zero axis (see the con tinuous line in Figure 3.) Conversely, a sustained bias in the correction indicates that a no n-random process is at hand, which might suggest a leak or a faulty measurement. The latt er is illustrated by the histogram in Figure 3, which shows that a total of 100 daily corrections to a particular flow measurement averaged around 200 bbl ( the histogram shows, for example, that 26 corrections measured between 100 and 300 bbl.) In this manner, a major domestic refiner identified a stock loss that, eventually, could only be attribu ted to a bias in the custody transfer meter of a stream leading to an adjacent second-party pl ant. The meter correction worked out in favor of the refiner (the true flow was greater t han the measurement indicated) and the increased revenue accrued by the refiner after co rrecting the meter paid off the oil accounting system in less than six months. The business process of reducing stock loss with an oil accounting system is bes t compared to that of tightening a flange. It is unreasonable to expect that one p

articular area of a plant can be made free of measurement errors, allowing the oil account ant to focus on the next. Instead, material balance closure progresses by making margin al improvements in one area, usually the one with the most significant imbalance, t hen moving on to the area with the next most significant imbalance. Eventually, the oil accountant can revisit an area of the plant for further error reduction. In this manner, all the plants imbalances are gradually tightened much like the bolts around a flange are tightened to specification.A refinery nodes imbalance for any given time period c an be measured through its unaccounted loss, which is expressed through the equation: UL = C P V EL (1) Oil Accounting: basis and benefits where: UL is the unaccounted loss, C is the sum of the nodes charges, P is the sum of the nodes products, V is the inventory change, and EL denotes the estimated known physical losses. The sum of squares of nodal unaccounted losses: [ [ UL i ] 2 ] / F (2) where F denotes the refinerys throughput, is a good metric of a refinerys closure that can be trended as a function of time following the deployment of an oil accounting s ystem. The tuning of an oil accounting system is the period during which the major source s of imbalance are resolved and the refinerys closure settles at an asymptotic value o f two to three percent of throughput for daily balances, and less that one half percent f or monthly balances. Any excursion above these base line values should trigger an inquiry f rom the oil accountant. It can be reasonably expected that the introduction of oil accounting in a refin ery w

ill result in sustained stock loss reduction of approximately 1% of throughput. This means that mis-accounted material worth 1% of the refinerys throughput will be correctl y accounted for after the deployment of the oil accounting system. As illustrated by the cited anecdotes, not all stock loss reductions translate directly into net mater ial gains for the refinery. In the example of the cracked valve, the stock loss represented a loss in capacity since the slops, for the most part, were recycled back to the crude uni t. The economic gain of detecting the cracked valve consisted of the (albeit small) inc rease in crude processing capacity and the savings incurred by not having to process the recycled naphtha twice. The stock loss would have been more tangible had the naphtha been leaking to a tank that fed a cracking unit where the naphtha would have been lar gely Oil Accounting: basis and benefits converted to lighter, less valuable streams. In contrast, the custody transfer meter correction did result in a net gain to the refinerys bottom line because more mat erial was measured leaving the refinery. In calculating oil accountings tangible benefits, experience indicates that it is reasonable to assume that one fourth of total stock loss reduction will result in net produ ct recovery for the refinery. Under this assumption, 0.25% of the refinerys throughput is rec overed at a value further assumed to be equal, on average, to that of the refinerys marg in. Thus, a 200,000 bbl per day (BPD) refinery operating 350 days per year at a $2/bbl mar gin can expect $350,000/year of benefits from stock loss reduction alone. PRODUCTION TRACKING AGAINST PLAN Most refineries operate on the basis of a production plan that is itself based o n the results of a linear program-based (LP) planning system. The production plan determines t he most profitable quantities of components and finished products that must be manufactu red over the course of the plan, usually a month. The onus falls on the plants operating department to deliver the planned product quantities, i.e., to match the plan, for two reasons: The first is to honor commitments that the refinerys traders have made t o clients that the specified product quantities would be available for delivery within the plans tim eframe. The traders will either disappoint their clients, pay penalties, or be forced to buy the products from third parties to supply the clients if the refinery fails to manuf acture the committed quantities. (Note that whether the refinery can deliver the products a t the right time is a scheduling issue.)

The second reason actual production must match the plan is to ensure the month-e nd closure of the refinery. The LP-based plan not only predicts an economically opt imal finished product slate, it also ensures that all the components are manufactured in the right proportions to be all blended into sellable finished products. Deviation from th e plan implies that the refinery could find itself short on some components and long on others as it nears the end of its planning period. The tangible consequence of this imbala nce is that the refinery will be forced to buy components or downgrade others in order to cl ose its material balance and meet its product shipment schedule. The oil accounting system offers the only reliable means to accurately track act ual production against plan. A number of best practices exist to do so and the simpl est consists of the month-to-date production charts shown in Figure 4. Each chart sh ows a products planned production as a straight line interpolated across the planning p eriod, in this instance 30 days. The accrued actual productions are shown as the dotted li nes that are expected to track the straight lines. Components or finished products can be grouped by family, as is done in Figure 4 for five types of gas oils as well as their total. Figure 4. Production tracking versus plan (Kbbl per Month) The refinerys production department can use charts such as those shown in Figure 4 to monitor whether actual production matches the plan, and use them as basis for co rrective action, if necessary, to return to the plan. In practice, it is only necessary to track key components and finished products, as the others necessarily follow by material b alance. The inability to close its material balance can easily force a refinery to downg rade a shipment of finished product per month. A 200,000 BPD refinery forced to downgra de a 75,000 bbl shipment (a typical size shipment for such a fac ility) per month at a differential price (assumed equal, on average, to the refinerys margin) of $2/bbl loses $150,0 00 in monthly revenue. The benefits of oil accounting in reducing these losses can be estimated if it is assumed that close production tracking with the oil accounting system l eads to early detection and timely (and effective) corrective action in the event of deviation from plan. Assuming that such a process avoids half the downgrades, the oil accounting syst em can claim to save the refinery $900,000/year of renewable benefits. KNOWLEDGE OF INVENTORY POSITION The value of knowing inventory position lies in the trading and hedging activiti

es that crude and product traders play to minimize their financial exposure to the vagar ities of the petroleum markets. In order to hedge effectively, traders must know their positi ons accurately, not just by volume, but also by material type (e.g., for crudes, hig h-sulfur, lowsulfur, etc.) A large oil company processing one million BPD of crude in multipl e facilities can hold as much as $100 to $200 million in crude inventory alone. Integrated oi l accounting systems alone can provide traders with a morning report that summariz es crude inventories by quantity and by type, from which the days opening position c an be accurately calculated for the all facilities, both individually and combined. In this manner, an independent US refiner in the million BPD category improved the accuracy of i ts daily crude opening inventory position from $20 million to $0.5 million after deploying integrated oil accounting systems at all its facilities. Inventory position is not so easily known on the product side since the bulk of a refinerys downstream inventory is held in intermediate or unfinished components. However, a new breed of on-line trading tools overcomes this limitation [4]. These trading tool s leverage known component inventories with sophisticated shrink-wrapped planning and blend ing tools to calculate virtual finished product pools from which position can be calcu lated. Case study management utilities allow traders to evaluate how their positions va ry depending on the selected virtual product slate. Because of the speculative natu re of crude purchasing and the volat ility of the oil markets,tangible benefits assignable to oil accounting in this domain are the hardest to quantify. These benefits, however, are potentially the greatest and a quantitative estimat e can be made based on considerations of the sums involved. A 200,000 BPD refinery presen tly spends in the order of $1.4 billion/year on crude purchasing. From more accurate knowledge of their position, crude traders can more precisely predict what crude s their refinery needs and when it needs them. This improved prediction of demand can tr anslate into better crude purchase timing, which will be reflected in the price paid for the crude. Assuming that this process shaves 0.1% off the cost of crude purchases, the bene fits attributable to oil accounting from knowing inventory position are $1,400,000/ye ar. VALUE PROPOSITION The deployment cost for a state-of-the-art oil accounting system in a world-clas s refinery is in the order of $700,000 (Table 1.) To that one-time cost must be added the a nnual

operating cost for the 1.5 full time technical staff required to run the system on a daily basis, and the yearly software support and maintenance fees, which add up to $150,000/year. Assuming that the oil accounting system is purchased and deployed in nine months and that the benefits ramp up from zero to 100% of full potential in the year following deployment, the payback period of the system is slightly less than 18 months (Figure 5) from the start of the project.