With declining crude prices putting pressure on refineries, we are seeing a larger-than-average number of refineries choosing to shut down operations, especially those with slimmer margins.  What is interesting; however, is that crude demand is remaining relatively constant, and the remaining refineries are showing a consistent volume of crude throughput.

These refineries are not; however, exempt from the pressure of the lower crude prices, and are seeing a decline in their margins as a result.  While both their revenues and variable costs are declining together, a stable fixed cost is causing many refineries to look at areas for improvement that had been previously ignored.

When determining areas to help their overall profitability, refineries can look to either their revenues or costs.  With revenues heavily influenced by market conditions, costs are now the focus of potential margin improvements, specifically the per barrel variable costs.

In the past, the opportunity to reduce variable costs on a per-barrel scale was relatively small.  However, as the price of raw inputs and finished products declines, that percentage of recoverable variable cost becomes larger in relation to the costs of a refinery as a whole.  While the overall dollar amount might remain lower than previously available, hydrocarbon loss recovery, on a percentage basis, is becoming more and more appealing the further crude prices drop.

Refineries who are worried about their margins being pressured by declining crude prices should now, more than ever, be considering improvements to their hydrocarbon loss recovery initiatives.

By: Karl Van Dam