What would it look like? Would it be new or old? Large or small?

Would it feature only the latest technologies? What type of crudes would be run to produce the products? What product mix would it choose? What kind of workers would it hire?

You might be surprised to learn the answers.

Every two years, Solomon Associates performs comprehensive benchmarking studies of paraffinic lube refineries around the world. All the worlds refineries are invited to participate, and the participants in each study typically represent about half of the worlds base oil capacity.

Solomon has been performing such studies for more than 25 years, and the database of information on lube refineries reaches back to 1994. In this article, we share insights about the worlds best refineries as determined by their performance in the three most recent studies: 2004, 2006, and 2008.

Selecting the Worlds Best

Our first step was to identify the worlds best, based on performance across key metrics, as well as consistency of performance over time. Solomon uses a number of metrics that rank refineries in different areas of performance. These include:

Energy Intensity Index – a measure that Solomon developed to gauge energy efficiency;

Maintenance Cost Efficiency Index – our measure of efficiency of maintenance expenditures;

Operational availability – percent of time refinery is available to operate, as it is not down for maintenance or operational issues;

Utilization outside of turnaround – measures use of refinery capacity discounting turnaround downtime;

Return on investment – current year cash margin divided by current year replacement value and current year inventory cost.

To be considered among the worlds best, we determined that refineries should rank in the top half of each of these key metrics. We also believe that the best refineries must show consistently good performance year after year. To ensure consistency of performance, only refineries that achieved this benchmark over each of the past three study cycles were considered.

Up to 50 lube refineries have participated in any given Solomon Associates study over the last 15 years. But readers might be surprised to hear how few met the criteria outlined above.

Only four. Lets take a composite look at what makes this handful of refineries the worlds best.

Finding What Matters

Start with geography. Two of the refineries are in Asia; one is in Europe and the other is in North America. So there does not appear to be a clear advantage to operating in a specific region of the world. The refineries include older solvent extraction units and newer hydroprocessing facilities. So there does not appear to be an obvious benefit to using newer versus older technologies. The four top-performing refineries are newer than average, but only slightly.

What characteristics then really do make a difference? Base oil production capacity is one parameter that matters, and it is apparent that bigger is better when it comes to performance. Across categories including solvent extraction, solvent deasphalting, solvent dewaxing, wax deoiling, hydrocracking, catalytic dewaxing, and the volume of high-value products, the top four refineries average between 20 percent and 80 percent higher capacity than the world average. Economies of scale have a direct correlation with better performance.

We also see a pattern when looking at the input and output of the top plants. The worlds best refineries run feedstocks produced from crude oils with higher specific gravity and higher sulfur levels. These characteristics are generally undesirable for base oil production, but the top performing refineries have retrofitted their equipment to leverage the lower prices of such crudes. These refineries produce a significantly higher percentage of high-value products, such as base oils, refined waxes, and white oils. They are able to take a lower-priced input and create a higher percentage of premium-priced output.

But there is more to the story of what makes the best refineries better than the rest.

The Benefits of Efficiency

The top refineries performed better than average across each of the five metrics, with the biggest advantages in Energy Intensity Index, and Maintenance Efficiency Index and return on investment. In each of these metrics, the best plants averaged a ranking in the top quartile of performance.

How did they get there? The data suggests the top refineries have focused programs for improving performance. Analyzing studies going back to 1994, we see that the best performers showed consistent, steady improvement in areas such as energy and maintenance efficiency, while other plants had no consistent pattern – performing well in one study, then poorly in the next. This suggests that the top plants kept their eye on the goal and continually worked toward it.

According to Solomons data, the cost of turnarounds rose by about 15 percent annually from 2000 to 2008 as a result of increases in labor costs, material costs and scope of work. The number of work hours devoted to turnarounds, for example, increased by 10 percent annually during this period.

The trend among refineries has been to extend the interval between turnarounds. The average turnaround interval in 2008 was 4.5 years, with some plants going as long as 11 years between turnarounds. But is this the best strategy for operators?

Looking at the choices of the worlds best, it appears that stretching out turn-around intervals has its limits. The top refineries schedule turnarounds slightly more frequently than the world average, with a focus on optimizing the interval to enhance overall operational and maintenance cost efficiencies.

Turning to workforce issues, the worlds best refineries have seen man-power costs increase by 2.1 percent per year since 1994. This compares favorably to a 3.4 percent annual increase among other plants.

Differences are especially clear among non-maintenance personnel, as the top

four refineries are significantly more efficient in their use of operations, administrative, and technical workers than the world average. Interestingly, compared to other plants, the best refineries employ a higher proportion of engineers, which appears to have a direct impact on plant efficiency.

The Value of Performance

What does all this mean in terms of financial performance? In the period encompassing the last three Solomon Associates studies, the top four refineries had an average cash margin that was 17 percent greater than the average of the rest of the refineries studied.

This margin advantage is chiefly the result of dramatically lower operating expenses. The operating expenses of the worlds best refineries were 49 percent lower than those of other plants in the studies. As we break down this advantage by category, we see that 19 percent comes from superior energy efficiency and 9 percent from better maintenance efficiency. Another 9 percent is the result of greater efficiencies in other areas.

Taken together, we can conclude that 75 percent of the top performers advantage in operating expenses is the direct result of running operations that are more efficient. Only 25 percent of the performance advantage can be traced to other factors unrelated to efficiency, such as plant location or local labor rates. The data clearly show that the best plants are run more efficiently and are characterized by a systematic approach to performance improvement. The top performers emphasize sustainable best practices, which are ingrained in the organizational culture over time.

The Bigger Picture

An obvious question is how this analysis fits into the current global refining situation. Today, there are approximately 660 refineries around the world, and approximately 130 of these have lube plants. As a result of oversupply, petroleum companies are selling more refineries than at any time in history, often for much less than their purchase prices just a few years ago.

A number of refineries are being converted to terminals, including some with lube plants. At least two base oil plants were recently shut down. While these moves will help balance supply with demand, the industry can expect oversupply to continue being an issue for lube plants, as many new plants have been announced for start-up within the next three to five years.

Nevertheless, there is no question that lube plants improve overall refinery performance. In almost every case, a lube plant contributes to the overall cash margin of a refining complex. A high-performing lube facility can have a significant impact on refinery margins; in some cases, it can make the difference in whether the refinery continues to be a viable business.

In todays market, getting the most out of your lube plant is more important than ever. That is why it is important to look closely at what makes the worlds best facilities better than the rest. Solomons analysis shows that some factors often assumed important to superior performance are not. These factors include:

being a newer plant;

utilizing the newest technologies;

having a geographically advantageous location;

having low labor rates.

The worlds best lube refineries are located in markets all over the world, utilize both older and newer technologies, and do not achieve a significant part of their advantage from geographic or labor rate differences.

What the top performing plants do have in common can be summed up in one word: efficiency. Each of these plants has shown consistent, steady improvement in areas such as energy and maintenance efficiency over the past 16 years, while other plants have demonstrated no consistent pattern from one study to the next. This indicates that the top plants are leveraging sustainable best practices aimed at continual improvement.

The payoff for this focus on performance improvement has been lower operating expenses and higher margins. What is the lesson for lube plants? Simply put, there is no magic to becoming the worlds best. With disciplined and concerted effort over an extended period of time, it is possible for almost any refinery to achieve similar performance levels.