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You are a Logistics manager for VKT Corp., and energy extraction and production company. An oil well in the company's portfolio is generating 10,000 barrels of crude oil per day in excess of present sale commitments. The crude oil can be sold as is on the commodities markets, or refined and converted into other products which may be sold for higher prices, and potentially be worth more. You have been assigned to determine the company's best course of action. >> Prepare a sell vs. process further incremental analysis for each possible production outcome in an Excel worksheet. Your grade will be based on the correctness of your answers, as well as the use of Excel. That is, where possible, you should use formulas and cell references to get your answers, rather than keyed-in values. See your instructor for help with Excel basics if you need it. To help get you started, one analysis has been provided in the 'Your solution' tab. In a Word document, prepare a memo stating which products the company should produce (or if it should produce none and just sell the crude oil as is). This document should make specific reference to your incremental analysis, which should be used as the basis for your conclusions. Attach both files to the Canvas assignment space by the 12:00 noon on March 17. See the details of VTK's refining process below. HINT 1: Work backward. That is, before deciding whether to sell crude as is or refine it into butane, naphthalene, and kerosene, do the analysis for processing butane into propane, naphthalene into gasoline, etc., to find out what each product is worth in its best use. 28 >> HINT 2: A complete analysis will make five comparisons. One for each fully processed output (propane, gasoline, diesel fuel, heating oil), and one to determine whether the best array of products are worth more than selling the crude oil as is. VTK's Refining Process and Market Summary Instructions Your solution VTK's Refining Process and Market Summary Crude Oil The company is producing 10,000 barrels of oil per week in excess of existing commitments. These barrels can be sold as is on the spot market for $61.09 per barrel. (1 barrel = 42 gallons) NON MOON Refining Refining the crude oil requires heating and distilling it at a cost of $6,100 per week for the entire excess production. After basic refining, the crude oil is gone, but there are 44,000 gallons of butane, which can be sold for $1.58 per gallon, 201,500 gallons of naphthalene, which can be sold for $1.44 per gallon, and 60,500 gallons of kerosene, which can be sold for $3.78 per gallon. A vacuum distiller can also be run (at an additional cost of $2,200 per week) that will yield 114,000 gallons of heavy gas oil, for which there is currently no market. This by-product is lost if the vacuum distiller is not run. Further processing All of the butane can be treated to convert it into 42,000 gallons of propane. Propane can be sold for $1.69 per gallon, and the conversion process costs $2,700 per week. All of the naphthalene can be isomerized and blended to convert it into 196,500 gallons of gasoline. Gasoline can be sold for $1.60 per gallon, and the conversion process costs $1,700 per week. Kerosene can be sold for $3.78 per gallon. Alternatively, all of the kerosene and all of the naphthalene can be run through a hydrotreater at a cost of $3,100 per week to produce 259,800 gallons of diesel fuel, which can be sold for $2.23 per gallon. In this case, since the naphthalene is used, no gasoline production is possible. 58 C D E F G which can be sold for $1.44 per gallon, and 60,500 gallons of kerosene, which can be sold for $3.78 per gallon. A vacuum distiller can also be run (at an additional cost of $2,200 per week) that will yield 114,000 gallons of heavy gas oil, for which there is currently no market. This by-product is lost if the vacuum distiller is not run. Further processing All of the butane can be treated to convert it into 42,000 gallons of propane. Propane can be sold for $1.69 per gallon, and the conversion process costs $2,700 per week. All of the naphthalene can be isomerized and blended to convert it into 196,500 gallons of gasoline. Gasoline can be sold for $1.60 per gallon, and the conversion process costs $1,700 per week. Kerosene can be sold for $3.78 per gallon. Alternatively, all of the kerosene and all of the naphthalene can be run through a hydrotreater at a cost of $3,100 per week to produce 259,800 gallons of diesel fuel, which can be sold for $2.23 per gallon. In this case, since the naphthalene is used, no gasoline production is possible. Another use for the kerosene is to run it and the heavy gas oil through a hydrocracker (at a cost of $1,200 per week) to produce 173,200 gallons of heating oil, which can be sold for $1.34 per gallon. uw- Sell vs. Process Further - Butane/Propane Sell Make butane propane 69,520 70,980 (2,700) 69,520 68,280 5 Revenues 6 Expenses 7 Net income change in NI 1,460 (2,700) (1,240)
