Corporate Risk Management, 2nd Edition

15

CASE STUDY 2

Risk Modelling of Supply and Off-take Contracts in a Petroleum Refinery Procured through Project Finance

15.1 INTRODUCTION

For the last three decades, the oil industry has been burdened with surplus refining capacity, often resulting in low margins. Projects procured using project finance were developed primarily for cogeneration projects, typically undertaken by independent power producers. Compared to refining projects, the technology used in cogeneration projects is known and well proven, and project profitability is reasonably predictable (Jenkins 2005). By comparison, the hydrocarbon industry is far more uncertain. Apart from typical risks in a refinery, the different types of crude oil characteristics can significantly influence refinery cash flow.

The procurement of refinery projects is a high risk venture. Determining how to finance a refinery and manage typical risks in order to get sound economic returns is a major challenge. There are significant risks exposed in refinery business environment, for instance construction risk, demand risk, operation risk and especially price risk on both demand and supply sides. Availability and characteristics of types of crude oil supply and product derivatives can determine the choice of refinery types. Apart from buying crude oil in the spot market and selling its products on a similar basis it is necessary to create significant price certainty to ensure a robust cash flow is achieved. The supply contract and off-take ...