SUPPLY CHAIN MANAGEMENT (MBA723)
PETROLEUM SUPPLY CHAIN
MANAGEMENT(DOWNSTREAM)
SUBMITTED BY
BATCH - D
GROUP 4
INDEX
SERIAL TOPICS PAGE NO
NO
1 INTRODUCTION 3
IMPORTANCE OF SUPPLY CHAIN
2 MANAGEMENT IN THE PETROLEUM 4
INDUSTRY
3 UNIQUE FEATURES OF THE
PETROLEUM INDUSTRY SUPPLY 4
CHAIN
4 THE PETROLEUM SUPPLY CHAIN IN 7
INDIA
4.a TABLE 1: REFINERIES IN INDIA 8
5 SUGGESTIONS TO IMPROVE SUPPLY 11
CHAIN PERFORMANCE
6 ASSET SWAPING IN INDIAN CONTEXT 11
7 REFERENCES 13
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1. INTRODUCTION
An oil refinery or petroleum refinery is an industrial process plant where crude oil is
processed and refined into more useful petroleum products, such as gasoline, diesel fuel, petrol
fuel, asphalt base, heating oil, kerosene, and liquefied petroleum gas. Oil refineries are typically
large industrial complexes with extensive pipelines which carries streams of fluids between
large chemical processing units. These refineries are highly sophisticated and operate
continuously. Oil refineries are large scale processing plants which enables them to process
several thousands of barrel of crude oil every day. An oil refinery is considered as an essential
part of the downstream side of the petroleum industry.
The crude oil is the primary source of industrial, automotive and agricultural fuel; hence its
requirement is huge. India’s crude oil consumption per day in year 2009 is about 3 million
barrels per day (bbl/d) out of which 70 % is imported from abroad. In India there are about 20 oil
refineries and their combined processing capacity is 2.1 million bbl/day. The petroleum industry
in India is dominated by public sector companies and the price of fuel is regulated by
government. The prices of fuels like diesel, kerosene, liquefied petroleum gas are subsidized by
the government hence they do not represent the market price and recently the price of petrol has
been deregulated. India is the fourth largest oil consumer in the world and sixth largest importer
of crude oil. As a developing nation India’s crude oil requirement is increasing while the
domestic production is flat, this makes India to depend on the imports for its fuel requirements.
This sector caters wide range industries like oil, gas, plastics, agro chemicals, pharmaceuticals,
clothing, housing, transportation, communication, healthcare, etc.
The supply chain of the petroleum industry is extremely complex compared to other industries. It
is divided into two different, yet closely related major segments: the upstream and downstream
supply chains.
The upstream supply chain involves the acquisition of crude oil, which is the specialty of the oil
companies. The upstream process includes the exploration, forecasting, production, and logistics
management of delivering crude oil from remotely located oil wells to refineries. The
downstream supply chain starts at the refinery, where the crude oil is manufactured into the
consumable products that are the specialty of refineries and petrochemical companies. The
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downstream supply chain involves the process of forecasting, production, and the logistics
management of delivering the crude oil derivatives to customers around the globe. In this report
downstream supply chain issues are analyzed.
2. IMPORTANCE OF SUPPLY CHAIN MANAGEMENT IN THE PETROLEUM
INDUSTRY
All process industries are asset intensive and so is the petroleum industry. In case of chemical
companies, the supply chain can account for up to 70% of the company's overall costs. This
emphasizes the need for substantial improvement in the supply chain which will in turn boost the
company’s bottom line. Since 1994, the average industrial profit margin, according to Standard
& Poor's, has been 14.2%. For the same period, oil companies have earned just 7.2%. This
clearly indicates that supply chain of petroleum industry has to be improved. Supply chain
optimization at a strategic and operational level is a value creating opportunity for chemical
companies and a potential source of competitive advantage. The same holds true for petroleum
companies, which are also very complex, and supply and demand are affected by relationships
and cost pressures.
3. UNIQUE FEATURES OF THE PETROLEUM INDUSTRY SUPPLY CHAIN
The petroleum industry has certain distinguishing features, which differentiate it from the supply
chains of other products. These features are discussed below:
Raw Material Supplies: The petroleum industry has limited choice of suppliers for raw
material. Supplies in petroleum industry are dominated by cartels. It is a seller’s market as far as
supply of raw material is concerned. This puts manufacturers at the mercy of the suppliers to a
large extent. This certainly complicates the pricing of petroleum products like countries in India
which depends on imported crude oil. Moreover, international pressures may further increase
uncertainty about raw material supplies.
Raw Material Prices: Raw material prices in the petroleum industry are highly unstable and
fluctuating on weekly or even daily basis. In contrast, the manufacturing sector enjoys rather
stable prices of raw material. Fluctuating raw material prices directly affect the supply chain
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costs and prices of final product. Moreover, fluctuations in prices of crude oil may take a long
time to finally manifest as increase in price of the finished product because it may take several
weeks before the oil tanker reaches the shores for unloading.
Prices are affected by trading considerations-political stability, OPEC rulings and terrorism.
Often prices are affected by what traders believe will happen in the future.
Non-discrete Inventory: Inventory does not exist as discrete packages. Inventory is not
packaged and typical techniques for tracking inventory, such as Stock Keeping Unit (SKU) or
part numbers, bar codes, radio frequency do not yet apply to crude or refined products. Products
like petrol, diesel and kerosene are measured in kilolitres whereas products like natural gas are
measured in cubic meters.
Reverse Production Flow: Compared with other industries, the production flow is reversed in
petroleum industry. In downstream petroleum companies, inventory starts from one product, i.e.,
crude and creates many products like petrol, diesel, naphtha, bitumen, etc.
High Transportation Costs: In the petroleum industry, transportation costs occupy a sizeable
portion of total cost of the product. There are various means of transportation: ships, railway
wagons, road tankers and pipelines. In the petroleum industry, transportation costs about 20% of
the production cost.
Manufacturing Process and Capacity Flexibility: Process industry operates continuously
hence operations are less flexible. The refineries need to run twenty four hours in a day, seven
days in a week with hardly any scope of changing capacity in the short-term. As a result,
refineries are marked with high capacity utilization. In contrast, discrete manufacturing industry
is in a better position to change output by reducing number of hours of operation or by resorting
to overtime.
Length of Supply Chain: The petroleum industry has a long supply chain commencing from the
dispatch of crude by ship from a supplying country, which may take several weeks to reach the
Indian shores. During this long supply chain petroleum is traded several times. Unlike other
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supply chains, the supply chain path from crude oil to the consumer is extremely complex, and
the linkages between raw crude and consumer must be managed over many weeks.
Integration of Supply Chain Partners: Integration of suppliers as well as customers and
distributors is more difficult in the petroleum industry supply chain. Cost pressures are the
driving force in the supply chain.
Risk of Product Contamination / Adulteration: The finished products like petrol and diesel in
the petroleum industry are at higher risk of contamination/ adulteration. For example, kerosene is
easily miscible with diesel and hence, diesel can easily be adulterated with kerosene. As
kerosene is cheaper than diesel, this can give huge financial losses to the oil companies while at
the same time providing the customer with impure product. This makes it necessary to perform
quality checks at various stages.
Flexibility: Process industry supply chains are highly inflexible both in terms of volumes
handled and in terms of product variation/customization. Transportation is in bulk as
transportation costs represent a large percentage of total production cost. Hence, small volumes
for distribution are impractical from a financial point of view. Products being highly
standardized on account of continuous production at the plant, there is not much scope for
product variation. Neither is there any flexibility in transportation as the tankers and equipment
used for one product cannot be used for another for fear of contamination.
Inventory Carrying Costs: In the petroleum industry, inventory holding costs are very high for
various reasons. First of all, the product is moved in bulk whether it is raw material or finished
product. For example, petrol or diesel is moved from refinery to the storage installations in rail
wagons or through pipelines. Thus, inventory moved is in massive amounts. Secondly,
commodities like petroleum are critical to the economic activity of any country and so it
becomes imperative to maintain adequate stocks. Thirdly, visibility in the supply chain is lower
than in case of other products. Finally, the long supply chain also gives rise to increased
inventory holding costs in the supply chain. Thus, the petroleum industry is stuck with high
inventory carrying costs. Majority of the crude oil produced is from deep ocean hence the natural
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phenomenon like cyclones, storms affect the extraction as well as movement of ships. This also
forces the companies to maintain the adequate stock to meet the requirements.
Physical Risks: The petroleum industry is prone to higher physical risks. This is because it often
deals with high temperature, pressures or inflammable material. Risk management costs are,
therefore, higher in the petroleum industry supply chain. This could be in the form of insurance
costs or costs incurred in the form of safety measures like maintaining safety distances or having
fire fighting facilities.
Type of Supply Chain Required: The petroleum industry deals with highly standardized
products, which have very long product life cycles. The petrol and diesel are highly functional
products. The functional products require efficient supply chains. The focus of supply chain in
this industry has always been efficiency. However, the petroleum industry supply chain is full of
uncertainty regarding supply of raw materials and decision-making is very complex.
Manufacturing decisions may be influenced by operating efficiencies, transportation costs and
production schedules. In such a case, what is required is a supply chain that is able to adjust itself
to the changing environment. In other words, an Adaptive Supply Chain (ASC) is required.
Major strategic decisions in the process industry, supply chain could be regarding what products
to be manufactured for which markets and customers or about using assets for minimizing cost
of product. At the operational level, decisions could be regarding what assets to be used for
making a particular product, minimum inventory requirements to maintain a particular service
level or transport routes to minimize cost while maintaining delivery promises. In order to take
these decisions, immediate access to detailed information about balance between supply and
demand is required.
4. THE PETROLEUM SUPPLY CHAIN IN INDIA
Our 70 % of fuel requirement is met through imported crude oil and they are shipped to Indian
ports from the oil producing countries. In order to reduce the transportation cost the refineries
are located either near the ports or near the crude oil sources since the raw material is bulk and
requirements are in millions of barrels. The huge capacity of refineries has enabled them to
realize the economies of scale.
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The finished product is transported from the refineries to the installations through pipelines or
railway tank wagons. From the installations the finished product is further distributed to retail
outlets for sale to customers. Transportation costs in India account for about 20% to 25% of the
total cost of the product.
Currently in India, the share of railways is about 40%, the share of road transportation is about
18% and the share of coastal transportation is about 12%. Pipelines account for about 30% of the
share.
From the 20 refineries located around India the products are shipped through rail wagons,
dedicated pipelines, trucks etc to major storage depots in the cities. There are dedicated pipelines
available between refineries and major cities. The initial cost for deployment of pipeline is high
but it’s the cheap mode when we consider the total quantity that has to be shipped and life cycle
of the project. The operating cost is also low when compared to shipping through rail wagons.
Refineries of Oil marketing companies are given in Table 1
4. a- TABLE 1: REFINERIES IN INDIA
No. Name of the company Location of the Capacity,
Refinery MMTPA*
Indian Oil Corporation Limited
1. (IOC) Guwahati, Assam 1.00
2. IOC Barauni, Bihar 6.00
IOC Koyali, Vadodara,
3. 13.70
Gujarat
4. IOC Haldia, West Bengal 6.00
6. IOC Digboi, Assam 0.65
7. IOC Panipat, Haryana 12.00
8. IOC Bongaigaon, Assam 2.35
8
Mumbai,
9. Hindustan Petroleum 5.50
Corporation Limited (HPCL) Maharashtra
HPCL, Visakh Visakhapatnam,
10. 7.50
Andhra Pradesh
Bharat Petroleum Corporation Mumbai,
11. Limited (BPCL) 12.00
Maharashtra
12. BPCL, Kochi Kochi, Kerala 9.50
Chennai Petroleum Corporation
13. Limited (CPCL) Manali, Tamil Nadu 9.50
CPCL, Nagapattnam Nagapattnam, Tamil
14. 1.00
Nadu
15. Numaligarh Refinery Ltd.(NRL) Numaligarh, Assam, 3.00
Mangalore Refinery & Mangalore,
16. Petrochemicals Ltd. (MRPL) 9.69
Karnataka
Tatipaka Refinery (ONGC) Tatipaka, Andhra
17. 0.066
Pradesh
Reliance Industries Ltd. (RIL);
18. Private Sector Jamnagar, Gujarat 33.00
Reliance Petroleum Limited
19. (SEZ); Private Sector Jamnagar, Gujarat 29.00
Essar Oil Limited (EOL); Private
20. Sector Jamnagar, Gujarat 10.50
Total 179.956
These commodities are produced in specific and limited regions of the India, yet they are
demanded all over the country since they represent an essential source of energy and raw
material for a large number of other industries. Several weeks lead-time from the shipping point
to the final customers’ location is very common in this type of industry.
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The oil and petrochemical industries are global in nature. As a result, these commodities and
products are transferred between locations that are—in many cases—continents apart. The long
distance between supply chain partners and slow modes of transportation induce not only high
transportation costs and in-transit
Inventory, but also high inventory carrying costs in terms of safety stocks at the final customer
location.The great distances between supply chain partners presents a high variability of
transportation times that can hurt suppliers in terms of service levels and final customers in terms
of safety stock costs.
The logistics function is only one of many areas that affect supply chain performance in the
petroleum industry. Integrated process management, information systems and information
sharing, organizational restructuring, and cultural reorientation are as equally important.
5. SUGGESTIONS TO IMPROVE SUPPLY CHAIN PERFORMANCE
The industry lags behind in using integrated planning across the supply chain. This type of
disintegration in the supply chain can increase the cost of acquiring crude oil, which will
eventually affect petroleum product prices for consumers.
The oil marketing companies in India should look for vertical integration. The companies should
partner with companies like ONGC and other multinational oil industries to locate new oil
reserves. There are few partnerships exist among Oil & Natural Gas Corporation Limited, Indian
Oil Corporation Limited, Bharat Petroleum Corporation Limited, Hidustan Petroleum
Corporation Limited, Oil India Limited to operate the oil reserves in foreign countries. More
partnerships has to be established since the vertical integration has the following benefits
Lower transaction costs
Synchronization of supply and demand along the chain of products
Lower uncertainty and higher return on investment
The Indian companies should outsource their complex logistics functions to improve the supply
chain performance. Over a period they should establish a reliable partnership.
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Companies in the petroleum industry, however, took the outsourcing idea one step further and
found that one way of outsourcing their logistics functions is to ally and collaborate with
competitors. This form of collaboration is referred to as a systematic cooperative reciprocal
barter, also called “swaps” or “exchanges” of supplies, assets, market share, or even the entire
business among competitors. The Indian companies should adopt this model.
6. ASSET SWAPING IN INDIAN CONTEXT
In a commodity-type industry such as oil and petrochemicals, the source of the commodity is
often of no interest to the final customer as long as the commodity adheres to its required
specifications and the delivery of that commodity is made by the promised due date. Therefore,
competing oil and petrochemical companies form supply chain alliances when delivering
commodities to customers in order to reduce transportation and inventory costs and improve
customer service. In return, cost savings for transportation in the overall supply chain are shared
among participating companies. This form of collaboration is referred to as shipment swapping.
This kind of collaboration with competitors creates a shared solution to common supply chain
obstacles.
I.SWAPPING MODEL
HPCL doesn’t own any refineries in Tamil Nadu, Kerala, Madhya Pradesh etc . The company
ships its petroleum products to its depots all over India from its two refineries (Mumbai and
Visakhapatnam) through the dedicated pipelines, rail wagons, trucks etc. This incurs a huge
transportation cost. Instead of shipping products from it’s own refineries HPCL can get the fuel
from Manali refinery, Tamil Nadu, which is owned by IOCL. This will reduce the transportation
cost for HPCL.
IOCL doesn’t operate any refinery in Maharastra . HPCL can supply IOCL depots in Maharastra
otherwise IOCL has to transport the petroleum products from Koyali, Gujarat.The swapping of
petroleum products reduces the supply chain cost. Similar kind of swapping can be worked out
among the OMC.
Under current scenario all oil marketing companies owns oil depots in major cities and towns.
This results in duplication. The companies shall pool the oil depots under an agreement so each
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city/town will have an oil depot operated by one Oil marketing company. This will reduce the
multiple shipments to the depots and operating cost. However each company will have their own
retail outlets. These outlets should be supplied by a common carrier preferably a third party
logistics provider. The pooling of depots will enable the companies to ship large quantity of oil
through rail wagons. This will also help them to deploy dedicated pipelines since they require
large quantities for shipping in order to make the initial investments worthier. This method helps
them to reduce the supply chain cost while maintaining the competition in the market.
In order to combine the depots and use common carrier the companies should use information
technological products effectively. This helps them to track the shipments to retail outlets owned
by different OMC (Oil Marketing Companies).
The OMC should use IT to gauge the stock levels in each and every retail outlets on real time
basis. This will help them to plan the shipments to the combined depots as well us to the
individual retail outlets. The data collected over time will help the companies to plan the
inventory, production, and import of crude oil.
7. REFFERENCES
1. http://findarticles.com/p/articles/mi_qa5483/is_200704/ai_n21295051/?tag=content;col1
“Supply Chain Characteristics of the Petroleum Industry: The Indian Context”
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2. http://www.eia.doe.gov/cabs/India/Oil.html
3. http://economictimes.indiatimes.com/articleshow/8492585.cms
4. www.wikipedia.org
5. http://petroleum.nic.in/refinery.pdf
6. http://www.egr.uh.edu/ie/faculty/Assavapokee/Hussain_Assavapokee_Khumawala_2006.
pdf “Supply Chain Management in the Petroleum Industry:
7. Challenges and Opportunities”
8. dyuthi.cusat.ac.in/purl/128
9. http://jobfunctions.bnet.com/abstract.aspx?docid=276802 “Supply Chain Management In
The Petroleum Industry”
S.No NAME CONTRIBUTION
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