A study in the financial valuation of a topping oil refinery

Abstract

Oil refineries underpin modern day economics, finance and engineering – without their refined products the world would stand still, as vehicles would not have petrol, planes grounded without kerosene and homes not heated, without heating oil. In this thesis I study the refinery as a financial asset; it is not too dissimilar to a chemical plant, in this respect. There are a number of reasons for this research; over recent years there have been legal disputes based on a refiner's value, investors and entrepreneurs are interested in purchasing refineries, and finally the research in this arena is sparse. In this thesis I utilise knowledge and techniques within finance, optimisation, stochastic mathematics and commodities to build programs that obtain a financial value for an oil refinery. In chapter one I introduce the background of crude oil and the significance of the refinery in the oil value chain. In chapter two I construct a traditional discounted cash flow valuation often applied within practical finance. In chapter three I program an extensive piecewise non linear optimisation solution on the entire state space, leveraging off a simulation of the refined products using a set of single factor Schwartz (1997) stochastic equations often applied to commodities. In chapter four I program an optimisation using an approximation on crack spread option data with the aim of lowering the duration of solution found in chapter three; this is achieved by utilising a two-factor Hull & White sub-trinomial tree based numerical scheme; see Hull & White (1994) articles I & II for a thorough description. I obtain realistic and accurate numbers for a topping oil refinery using financial market contracts and other real data for the Vadinar refinery based in Gujurat India