Integrated model for financial risk management in refinery planning

Abstract

An integrated model based on two-stage stochastic programming is developed for operational planning and financial risk management of a refinery. Downside risk, which rationally quantifies financial risk, is selected as the objective function to be minimized. Subsequently, the contract sizes and the operational plan are optimized on the basis of the developed model and the price scenarios. A case study shows that financial risk can be substantially reduced by diversifying Suppliers with spot contracts and by cross-hedging with futures contracts. The former approach is particularly effective for low-target profits, whereas the latter is effective for relatively high-target profits. Furthermore, the target profit is closely related to risk propensity. A high-target profit set in a refinery reflects risk-taking behavior, whereas a low-target profit indicates a risk-averse attitude. The developed model is beneficial for refineries because it aids in decision-making on operational and financial strategies.