Procurement risk management in a petroleum refinery.

Oliveira, Fernando S.

Abstract

We analyze a petroleum refinery's procurement strategy, explaining how risk management affects optimal sourcing from long-term, spot, and swap contracts. We use time series analysis to model the interaction between petroleum prices, transportation costs, and gross product worth. These models are then used to generate the scenarios incorporated in the stochastic program applied to compute the conditional value-at-risk. We prove the necessary and sufficient conditions for the optimal procurement and risk management strategies, and show that risk aversion can be better represented by the weighted average between expected profit and conditional value-at-risk, deriving the respective ISO curves. We estimate that an increase in the degree of risk aversion decreases the use of swap contracts. Our model is applied to the analysis of a refinery based in Singapore. Using regression analysis, we show we cannot reject the hypothesis of a statistically significant relationship between the way Saudi Arabia prices the long-term contracts and the shape of the forward curve. We then study how risk aversion influences the procurement strategies, profitability, and risk exposure of the refinery. Finally, we analyze the pricing of long-term (forward) contracts by Saudi Arabia, and study how the country could benefit from a different pricing policy.

Citation

OLIVEIRA, F.S. 2023. Procurement risk management in a petroleum refinery. Decision sciences [online], 54(3), pages 277-296. Available from: https://doi.org/10.1111/deci.12536

• Journal Article Type: Article
• Acceptance Date: May 5, 2021
• Online Publication Date: Jun 16, 2021
• Publication Date: Jun 30, 2023
• Deposit Date: Oct 21, 2023
• Publicly Available Date: Nov 2, 2023
• Journal: Decision sciences
• Print ISSN: 0011-7315
• Electronic ISSN: 1540-5915
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 54
• Issue: 3
• Pages: 277-296
• DOI: https://doi.org/10.1111/deci.12536
• Keywords: Manufacturing; Stochastic processes; Supply chain contracts and incentives; Supply chain risk management; Time series methods
• Public URL: https://rgu-repository.worktribe.com/output/2078478