More on the economic features of mini refineries

Today’s column concludes the coverage on the economic characteristics of mini-oil refineries, started last week. Following that, I will address two considerations which have immense bearing on the viability of mini refineries. These are 1) the expected price of crude oil at about the time such a refinery is likely to come on-stream in Guyana; and 2) an evaluation of Guyana’s crude oil find. I had addressed these topics earlier, so this coverage offers an updated position. After completing this task, I will offer to readers my personal view as to whether, at this stage, an oil refinery option for Guyana makes sense.

For readers’ convenience, the two features addressed last week and the remaining ten covered in today’s column will be summarized in a schedule and presented next week.

Economic Feature 3

Expert assessments of mini oil refinery management assert a consensus judgment that, such refineries are manageable and appropriate for immature and undeveloped industrial environments. Management specialists (especially those from Nigeria) go as far to assert that undeveloped industrial environments do not possess either a “business culture” or “operating environment” capable of dealing with large refineries. The demanding rigours of maintenance, standards keeping, logistics, time management, worker and material control operations, make the management of large oil refineries exceptionally difficult. However, space in this column, does not allow me to pursue this assertion in any detail.

Economic Feature 4

In circumstances where oil refining capacity in a developing country is based on modular mini refineries, industry analysts further claim this gives the authorities greater macro control of energy supply. This occurs, because several units are unlikely to all fail at the same time, even in cases of natural or manmade emergencies. When single large refineries break down, it is often calamitous for the economy and society. Multiple mini refineries do offer insurance against calamitous disruptions.

I believe, this argument tries to make a virtue from necessity, since overall refund productivity markets like Guyana, limit the achievement of economies of scale.

Economic Feature 5

As previously noted, the 2010s has witnessed strong trends towards smaller oil refineries. This has occurred even in markets as large as the United States and China. The vigour of the latter’s ‘teapot’ oil refineries reveals this. The global trend has generated innovations in configuring, financing, and managing minioil refineries, thereby creating a learning curve, from which latecomers like Guyana, can benefit.

Economic Feature 6

Contrarily, some analysts argue that, intrinsically, mini refineries are not economically viable. Their small size, combined with this typically basic and simple configurations, prevent them from delivering higher-valued refined products at competitive prices. Given this, these analysts do not support small economies’ reliance on mini refineries, since these will end up costly, producing for government regulated captured domestic markets, where high costs are forced onto consumers.

As previously indicated, based on the Nelson Complexity Index, mini-oil refineries are rated as the most basic and simplest. They are frequently confined to Level 1, on the Nelson Complexity scale of 1 – 4.

Despite its limited configuration, several economists have advanced mini refineries as a stop gap or an interim arrangement towards dependence on large scale oil refineries, where economies of scale can be fully achieved. This argument acknowledges mini refineries cannot maximize economies of scale, and can only search for other economies, to part compensate for this deficiency.

Economic Feature 7

Some analysts claim, because of their limited size, the mini refineries option in small economies provides room for affordable government initiatives. Typically, government initiatives take the form of fiscal support, pricing and relaxed regulation. In regard to fiscal support, a mini refinery does not pose an insuperable fiscal burden. Similarly, support (subsidized) prices for refined products is usually limited to domestic sales, as such refineries are unlikely to export. And finally, regulatory impacts (for example, environmental) if softened as a local incentive, would have smaller effects than those for a large refinery.

Economic Feature 8

An attractive feature of skid mounted mini refineries is that they offer considerable versatility in their location. They are more flexible than large refineries and their location can therefore be adapted to either proximity to its markets, or to its crude oil feedstock. Large refineries compensate for this loss of versatility, through pipeline distribution and its economies of scale. As a result, the locational versatility of mini refineries should be evaluated as part compensation for the scale economies that large refineries can attain.

Economic Feature 9

Many analysts make much of the fact that the absolute investment cost of mini refineries is within the capability of local private investors and partners in places like Guyana. Indeed our local media have already reported on a number of mini-oil refinery proposals. Nevertheless, the loss of economies of scale would mean that the cost per barrel of refined product is higher.

Further, as noted when addressing the basic economic characteristics of any oil refinery, the relevant considerations in this regard relate to cost versus price, cost and productivity, and cost as it relates to the price of crude oil inputs.

Economic Feature 10

Again, because of their intrinsic smallness plus their pre-fabricated modular nature, mini refineries are blessed in that they are quicker to assemble than on-site constructed large refineries. Economists are quick to point out, however, that this advantage has upper limits as aggregation of mini refineries can yield diseconomies of aggregation.

Economic Feature 11

Economic Feature Two (2) (see last week’s column) identified the significant growth of specialist engineering firms as suppliers of mini refineries. This has generated considerable competition, to the point where analysts remark on 1) the overall improvement in modules; 2) cost-efficiency reductions posed by their low level of complexity; and 3) greater quality assurance for these products.

Economic Feature 12

Finally, from the large number of brochures I have seen from the firms mentioned at Items 2 and 11 and advertisements provided by credit institutions, mini refineries seem to be in vogue for project finance providers. This circumstance makes it easier for local businesses, in partnership with these agencies/ organisations, to find investment funds.

Conclusion

For readers’ convenience I shall provide at the start of next week’s column the schedule summarizing the 12 economic features.