Octane Symphony

And you
could you perform
a nocturne on a drainpipe flute?

Vladimir Mayakovsky, great Russian poet of the 20th century

The formation of TNK-BP five years ago shortly preceded the onset of the so-called “golden age” of refining, which endures to this day. Just a year after TNK-BP commenced, margins jumped to historic highs as demand held steadily stronger than supply. The Russian government responded to this dynamic with attractive tax incentives to encourage the refining of more oil products and called for incremental production of higher-quality refined products as an economic priority.

TNK-BP downstream key facts

• 5 refineries in Russia and Ukraine
• 34.5 mln tons — throughput volume in 2008
• 49% — rise in throughput in 2003—2008
• 93% — refining availability in 2008E
• $1.15 bn — total investments in 2003—2008
• $2 bn — investments in the next five years

TNK-BP’s downstream business soon  made it a priority to seize  this opportunity: since 2003 its total earnings have increased almost fivefold to $4.4 billion in 2008  compared with $900 million five years ago. This outstanding result has been achieved primarily thanks to a successful blend of ambitious professionals with various Russian and international working experience. Those professionals, who quickly became one of  the best integrated teams in the company, have delivered the right choice of strategy plus efficient coordination between the Downstream business segments of refining, marketing, and sales, trading and logistics.

The fact that commercial sales of oil and oil products are ultimately responsible for realizing a company’s profits is common  knowledge. Refining may sound less glamorous than high-profile sales deals, but its role is vital – clean, cost-effective fuels produced in ample quantities without damage to environment are  essential criteria for  a modern and progressive  integrated oil company.

Working wonders

When TNK-BP commenced operations in 2003, the shareholders reportedly  valued the firm based upon its upstream assets only. For valuation purposes, downstream was viewed circumspectly by both sets of shareholders. It may seem like a discouraging start, but, in fact, this prejudice was tackled as a challenge by the downstream business from Day 1.

TNK-BP inherited a refining portfolio which, while not as large as some of its competitors’, had the inherent competitive advantage of good geographic location. In particular, the firm’s refineries at Ryazan, Yaroslavl (50%-owned via shareholding in Slavneft), Saratov and Lisichansk in Ukraine are located close to major domestic markets and have good access to export infrastructure.

Throughput (diesel, gasoline, fuel oil)

Nevertheless, in 2003 and early 2004, as TNK-BP was starting, it was clear that these four key refineries in the portfolio required technological upgrades, new systems and processes to meet the rising demand for cleaner fuels both at home and abroad. The company’s refineries in Nyagan and Nizhnevartovsk, which catered to  regional demand also needed safety, environmental and technical improvements.

The refining team in Downstream launched a comprehensive  asset overhaul with the help of some of the best international experts. The strategic task was to upgrade refineries to first or second quartile – of the four quartile refinery classification. For this purpose, TNK-BP joined Solomon’s Fuels Refinery Performance Analysis – an industry-wide study of comparative refinery performance in the key areas of profitability, operations, maintenance, manpower and safety. This study is conducted every two years by Solomon Associates, leading international  industry consultants.

Over the past five years, TNK-BP has spent $1.15 billion on modernizing and expanding its refining capacity. A major $650 million upgrade was completed at the Ryazan refinery. Important projects  were also undertaken  at Yaroslavl, Saratov and the Lisichansk refinery in Ukraine.  These enabled the company to produce high octane gasoline and diesel compliant with modern European standards, thereby also minimizing hazardous impact on the environment.

Now the refining team is building  capability to take the company’s refineries to the next technological and environmental levels.. Investments in the existing refining portfolio are planned to reach $2 billion in the next five years.

Investments in refining 2004—2008 ($ mln)

Looking back, Tony Considine, Executive Vice President, Downstream since Day 1, has no hesitation in naming accomplishments in refining which he is proud of.

Living safely

Firstly, he cites the improved attitude to personal and industrial safety driven by a much greater awareness of risks and risk mitigation.           

TNK-BP now requires health, safety and environmental compliance from contractors as well – an innovation for the Russian oil industry. The company believes this is a major reason why large, complex and difficult refinery upgrades and turnaround projects at Ryazan and Saratov were completed without a single accident or fatality.

Considine gives a special acknowledgement here to Ryazan’s general contractor, Promfinstroi, who successfully managed safe and efficient work by all contractors on site during the major turnaround in 2007 – up to 3,000 people on peak days, and more than  2 million man hours of work. During the turnaround in Saratov (also last year) over 680,000 man hours were completed without any lost time injuries. 

A major effort has been put into reducing emissions from refinery operations and reducing  other harmful impacts on environment. Better environmental performance is a result of technological upgrades to produce cleaner, low sulphur fuels and of new equipment installed during major turnarounds and modernization projects.

The company refinery at Ryazan presents a good example. It owns the water supply point for the whole city of Ryazan. Leonid Rozenberg, Vice President for Refining Operations, TNK-BP, and until recently general director of the Ryazan refinery, proudly cites the ultra-violet water decontamination project following which  water supplied by the refinery to city residents is “even cleaner than the water we take from the Oka river.”

Putting to good use 

A second proud achievement for the refining team is the much improved plant utilization. This includes the delivery of both a maximum efficient throughput for the plant and the modernization of existing units.

In 2008, TNK-BP will refine 29.5 million tons of crude at its refineries in Russia, and another 4.5 million tons will be processed at the Lisichansk refinery in Ukraine.

This is a 49% increase  in crude volume processed at the company’s refineries since  2003. To a significant  extent, Russian refiners have been incentivised to boost their throughputs due to a benevolent  external environment, characterized by a rising demand for cleaner fuels and an attractive  tax structure.

But an important internal prerequisite  has also been  the right strategy and ready availability of professional skills to efficiently “re-invest  in the old assets that were cash-starved to do the necessary maintenance and upkeep,” as Considine puts it. TNK-BP’s plant capacity utilization now hovers around 93%, compared with the Russian industry average of 86%. Downstream’s plan is to increase that number to 96% — meaning the refineries will be working at their maximum practical capacity.

It is also important that refining capacity is employed to produce cleaner fuels, primarily for the domestic consumer as the Russian car fleet modernizes and demand for high octane gasoline continues to grow.  The company is also gearing up to produce more sulphur-free diesel to satisfy rising consumption in Europe and its stringent fuel specifications.

By virtue of having a widely experienced and multicultural team, TNK-BP has proven capable of delivering and executing a large number of capital projects at key Russian refineries in Ryazan, Saratov and Yaroslavl.

Ryazan rhapsody  

Project management  is an area where a shortage of knowledge and professionals continues to be felt, and the input of international expertise is valuable. “Managing the pace of change here was most challenging,” Tony Considine recalls.

The first priority was to complete a major modernization and upgrade programe at the Ryazan refinery, originally conceived in 1997, but then stalled for a variety of external and internal reasons.

The Ryazan refinery is now the flagship of the company’s refining portfolio and one of the best refineries in Russia. This transformation culminated in the inauguration of the VGO hydrotreater unit in 2006.

The VGO hydrotreater brought the Fluid Catalytic Cracker to its maximum capacity  and made it the largest cat cracking unit in Russia. It was also the first upgrade of such scale in the Russian refining industry and it enabled Ryazan to produce gasoline products with a low sulphur content that meets the Euro-4 standard. The VGO unit ensures the necessary quality to manufacture the premier BP Ultimate A95 and A98 blends which also have engine-cleaning characteristics.

Leonid Rozenberg says: “The entry of BP allowed us to resume construction of the VGO complex, which we eventually launched. This is a complex for deep conversion of crude. It includes a hydrotreating unit, a hydrogen unit, two SO2 units, and alkylation unit with an isomerization block and water preparation block.”

Rozenberg has no doubts about the benefits of the project: “Today our advantage is that we produce alkylate, which is a high-quality and environment-friendly additive to increase the octane number. The hydrotreater also provides us with a high-quality, low-sulphur feedstock for cracking. This results in better yields, and, ultimately, much better economics.”

Starting with the fourth quarter this year, Ryazan will have the capacity to produce an annual 1.7 million tons of Euro-5, 10 ppm diesel. While the demand for this high-quality product is still developing inside Russia, the company will have an opportunity to be among the first shippers of light product via a dedicated “North” oil product pipeline launched by the oil product operator Transnefteproduct in May 2008. The “North” pipeline runs to the Baltic port of Primorsk, the most economically attractive export oil product outlet in Russia today.

Even as  modernization at the refinery continues, it still  works at maximum capacity, with an average processing volume of about 1.3 million tons per month, or 15 million tons per year. Rozenberg says Ryazan’s 5 and 10 year plans provide for increasing throughput to 17 million tons – which is the nameplate capacity.

Saratov, the company’s smaller refinery in the Volga-Urals region, has been implementing similar improvements. The refinery has been expanded to its maximum capacity of 6.5 million tons per year. Like other refineries of TNK-BP in Russia, Saratov is equipped with a visbreaking unit, processing fuel oil into heating oil and making good use of another component of crude refining.

Saratov is currently constructing an isomerization unit at a cost of $140 million – needed to improve the quality of gasoline by increasing its octane rating. If the Russian government proceeds with its plan to build a dedicated pipeline for clean oil products in the south of the country, Saratov will have the option to build capacity for production of European-quality diesel. 

YANOS TNK-BP owns the YANOS refinery in Yaroslavl equally with Gazpromneft (as part of joint ownership of Slavneft). Improvements at YANOS have been focused on creation of the complex for deeper conversion of crude enabling the refinery to produce diesel fuel 50 ppm compliant with Euro-4 standards. Since January 2007, YANOS has further reduced hazardous sulphur content in its fuels and has started production of 10 ppm diesel – in line with the most stringent Euro-5 requirements.

What may sound like a technical description of engineering activities has an important  impact for ordinary people.  Refinery upgrades lead to bigger production of fuels with improved specifications, resulting in cleaner air, water and soil for all of us.

Another priority for TNK-BP’s refining team is to make refinery operations run as efficiently as possible despite the new equipment and higher technical standards which have now been introduced.

Focus on efficiency  The notion of an efficient operation has many facets to it.  For TNK-BP’s refineries, there have been three priorities to focus on: introducing effective planning and management systems and processes; extending the availability of the plant, i.e. the time between turnarounds; and raising power efficiency.

Ryazan Chief Mechanic Vladimir Abramov says: “With the arrival of TNK-BP, the refinery switched from a “patching up” policy to planning our future. A large amount of work has been done towards implementing different projects at the refinery. Another good thing about this planning is that lots of different specialists were involved; this  gave an opportunity to heads of divisions and refinery shops to submit well-grounded and responsible initiatives.”

Company experts were successful in the careful planning and management of the difficult turnarounds in Ryazan, Saratov and Lisichansk. The long term objective is to raise the plant availability to European levels, from the currently achieved two years between maintenance periods up to three or more years, avoiding idle time and possible market shortages caused by lower product volumes.

Throughput (diesel, gasoline, fuel oil)

^*

Divested at the end of 2005

^**

Starting from 2Q  2006 as regulated by the agreement with YANOS on crude refining

Serious attention still needs to be paid to increasing the reliability of the power supply. The Ryazan refinery, for example, is dependant on power supply from the city facilities belonging to the national energy utility operator. More than one dramatic sudden fluctuation in power supply has led to disruptions of the working process and unwelcome extra costs. The plan for the near future is to have the refinery’s electric power substations automatically switch to alternative supply facilities to avoid major disruptions. Production of higher quality Euro-4 and especially Euro-5 fuels consumes more energy, which again makes energy efficiency a centrepiece of cost management.

Roadmap for the future

When talking to members of TNK-BP’s refining team, you are pleasantly struck by the fact that they all have a clear idea of what is lying ahead.

“There is a clear master plan for each refinery, and now we are putting in place the capability to manage the next phase of our investment program over the coming years,” Tony Considine says. The ultimate objective is to achieve drastic reduction in production of low-value, semi-finished products and fuel oil, and offer consumers only contemporary fuels.

“Refining is seen as a very good candidate for growing our business, for investment, and this is a joint view held by the management and shareholders,” says Volker Woyke, Vice President for Refining, TNK-BP. “In Russia we see fundamental support for the refining business, and it looks like this will be maintained in the long term.”

Vladimir Kapustin, General director of VNIPIneft scientific research institute, says that the level of refining and petrochemicals speak more about a country’s progress than the availability of modern computers – as today advanced refining is a combination of many technological, economic, administrative and even social factors.

In refining, like with its mature oil fields, TNK-BP has proved that professional brains, dedication and the right choice of technology may re-invent old assets into industry leaders.

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  Octane symphony (PDF, 1.1 MB)