The refining and petrochemical industry has a significant incentive to improve capital performance. The products of this industry are commodities. By definition, commodities are products that are undifferentiated from a competitor, and, hence, are sold on the basis of price. The price competition keeps the margins on commodity products relatively low. Because commodity products are often manufactured on a large scale to lower the unit cost of production, significant capital investment is required to build the manufacturing facilities. With low-margin products, the amount of capital investment required to make the products has a significant role in the profitability of the asset. During economic downturns, such as what is occurring globally and is expected to continue at least until 2010, spending capital as effectively as possible is even more important to a company’s bottom line.
Many refiners have invested substantial amounts of capital in recent years in large expansion projects in order to increase capacity at their refineries. In addition, governments continue to impose environmental regulations for gasoline and diesel fuel, some of which require the removal of sulfur and benzene from their products. To meet these new regulations, significant refinery additions/modifications are often required, also resulting in significant capital investment.
The basis of our work is the Refining and Petrochemicals Database that includes more than 3,500 projects executed worldwide and represents more than $200 billion in capital investment. The database includes a large number of grassroots/colocated projects of standard refining units, from atmospheric and vacuum distillation to hydrogen compression and manufacturing. From these data, we have developed cost estimating relationships that serve as tools for benchmarking the cost and schedule of these projects.