The Global Oil Company The Global Oil Company is an internationalproducer, refiner, transporter and distributorof oil, gasoline and petrochemicals. Global Oil is a holding company with subsidiary operatingcompanies that are wholly or partially owned. A major problem for Global Oil is to coordinatethe actions of these various subsidiaries into an overall corporate plan, while at the same timemaintaining a reasonable amount of operating autonomy for the subsidiary companies.To deal with this dilemma, Global Oil Headquarters develops an annual corporate-wideplan that provides the pattern of shipments among the various subsidiaries. The plan sets annualtargets for each of the subsidiaries. It does not detail their day-to-day operations. Within theframework of this annual plan, the operating companies can make their own decisions and plans.This corporate-wide plan is presently done on a trial and error basis and, unfortunately, this hasseveral drawbacks. First, the management of the subsidiaries often complains that the plan doesnot reflect properly the operating conditions under which the subsidiary operates. The plansometimes calls for operations or distribution plans that are impossible to accomplish. Second,Global Oil’s CEO Pedro Kemikol is concerned that the plan does not optimize for the totalcompany.In fact, Pedro Kemikol has made it his top priority to optimize the entire supply chain,from the procurement of crude oil to the distribution of gasoline at the pump. Global Oil hashired recently some young graduates from the Northwestern. They have hinted to Pedro thatlinear programming can be used to optimize the flow of raw materials and finished products byaveraging over a year. This way, they argued, a corporate-wide annual plan would be generatedbased on a sound quantitative approach. Although Pedro is somewhat skeptical, he is openminded and willing to give it a try. Before embarking on the development of a world-widemodel, Pedro Kemikol asks you to build a model of the Far Eastern Operations. The details ofthe Year 2006 planning model for the Far Eastern Operations are now described.
2
Far Eastern Operations
There are two sources of crude oil, Saudi Arabia and Borneo. The Saudi crude isrelatively heavier (24 API), and the Far Eastern sector could obtain as much as 80,000 barrels perday (b/d) at a cost of $62 per barrel during Year 2006. A second source of crude is from theBrunei fields in Borneo. This is a light crude oil (36 API). Under the terms of an agreement withthe Netherlands Petroleum Company in Borneo, a fixed quantity of 30,000 b/d of Brunei crude,at a cost of $67 per barrel is to be supplied during Year 2006.
There are two subsidiaries that have refining operations. The first is in Australia,operating a refinery in Sydney with the capacity of processing 30,000 b/d of crude. TheAustralian subsidiary markets its refined products throughout Australia, as well as having asurplus available for shipment to other subsidiaries. The Australian subsidiary does not importrefined products.
The second subsidiary is in Japan, which operates a 50,000 b/d capacity refinery. Refinedproducts are marketed in Japan, and excess production is available for shipment to other FarEastern subsidiaries. The Japanese subsidiary does not import refined products.In addition, there are two marketing subsidiaries without refining capacity of their own.
One of these is in New Zealand and the other is in the Philippines. Their needs can be suppliedby shipments from Australia, Japan, or the Global Oil subsidiary in the United States. The latteris not a regular part of the Far Eastern Operations, but may be used as a source of refinedproducts.
Finally, the company has a fleet of tankers that move the crude oil and refined productsamong the subsidiaries.
Refinery Operations
The operation of a refinery is a complex process. The characteristics of the crudesavailable, the desired output, the specific technology of the refinery, etc., make it difficult to usea simple model to describe the process. In fact, management at both Australia and Japan havecomplex linear programming models involving approximately 300 variables and 100 constraintsfor making detailed decisions on a daily or weekly basis.
3
For annual planning purposes the refinery model is greatly simplified. The two crudes(Saudi and Brunei) are input. Two general products are output – (a) gasoline products and (b)other products such as distillate, fuel oil, etc. In addition, although the refinery has processingflexibility that permits a wide range of yields, for planning purposes it was decided to includeonly the values at highest and lowest conversion rates (process intensity). Each refinery coulduse any combination of the two extreme intensities. These yields are shown in Table 1.The costs of operating the refinery depend somewhat upon the type of crude and processintensity. These costs are shown in Table 1. Also shown are the transportation costs from eitherBorneo or Saudi Arabia.
Table 1: Refinery Operations
Australia Japan
Capacity (b/d of input) 30000 50000
Saudi Crude
Transportation Cost ($/b) 0.75 0.8
High Process Intensity ($/b) 1.19 1.26
Yield of Gasoline 0.31 0.3
Yield of Distillate 0.61 0.62
Low Process Intensity ($/b) 0.89 0.88
Yield of Gasoline 0.19 0.18
Yield of Distillate 0.76 0.77
Brunei Crude
Transportation Cost ($/b) 0.35 0.35
High Process Intensity ($/b) 0.93 0.91
Yield of Gasoline 0.36 0.35
Yield of Distillate 0.58 0.59
Low Process Intensity ($/b) 0.61 0.55
Yield of Gasoline 0.26 0.25
Yield of Distillate 0.72 0.73
Marketing Operations
Marketing is conducted in two home areas (Australia and Japan) as well as in NewZealand and the Philippines. Demand for gasoline and distillate in all areas has been estimatedfor Year 2006.
4
Year 2006 Demand
Area (thous. of b/d)
Gasoline Distillate
Australia 6 15
Japan 8 21
New Zealand 5.4 14
Philippines 3 8
TOTAL 22.4 58
The variable costs of supplying refined products to New Zealand and the Philippines areas follows:
Variable costs of shipment of gasoline/distillate in
$/b
To: New Zealand Philippines
From:
Australia 0.2 0.2
Japan 0.45 0.25
Tanker Operations
Tankers are used to bring crude from Saudi Arabia and Borneo to Australia and Japanand to transport refined products from Australia and Japan to New Zealand and the Philippines.The variable costs of these operations are included above.
However, there is a limited capacity of tankers available. The fleet has a capacity of 6.5equivalent (standard sized) tankers.
The amount of capacity needed to deliver one barrel from one destination to anotherdepends upon the distance traveled, port time, and other factors. The table below lists the fractionof one standard sized tanker needed to deliver 1,000 b/d over the indicated routes.
Tanker Usage Factors
(Fraction of Standard Sized Tanker
Needed to Deliver 1000 b/d)
Between and Australia Japan
Saudi Arabia 0.11 0.14
Borneo 0.05 0.05
New Zealand 0.04 0.08
Philippines 0.05 0.04
5
It is also possible to charter independent tankers. The rate for this is $8,500 per day for a standard sized tanker.
United States Supply
United States operations on the West Coast expect a surplus of 12,000 b/d of distillateduring Year 2006. The cost of distillate at the loading port of Los Angeles is $74 per barrel.There is no excess gasoline capacity. The estimated variable shipping costs and tankerrequirements of distillate shipments from the United States are:
Variable
costs Tanker
of shipments requirements
New
Zealand 1.3 0.15
Philippines 1.2 0.13
Your Job
Formulate a linear program which can be used to generate a comprehensive plan for thewhole Far Eastern Operations. Clearly define every variable used in your formulation, andclearly write the objective and constraints in algebraic form. Then you need to use EXCELSOLVER (or ANALYTICAL SOLVER PLATFORM) to find the optimal decision and value.
Your entire report should be at most 4 pages long (Times New Roman, 12pt, double spaced).
Please submit your report and Excel file digitally via Blackboard link.