Financial risk management integrated with operational planning in a refinery process

Abstract

A refinery faces uncertainties when planning purchase of raw materials and production. A stochastic programming model is developed with a detailed process for taking responsive action to the fluctuating market condition. It is optimized based on various scenarios of prices and product demands. The proposed model contributes to decreasing profit volatility and escalating the operational flexibility of a refinery. However, the results indicate that financial risk management is needed to complement the stochastic model. Futures contracts helps a refinery minimize the financial risk involved in the purchase of raw materials due to varying prices. Consequently, risk management model with futures contracts is developed. The selection of a risk measure is important factor for successful risk management. An average, a variance, risk-return ratio, and downside risk are selected as the objective function in this thesis. The risk measures are also used for analysis and visualization of the financial risk. As a result, financial risk is substantially reduced with spot and futures contracts. The proposed model is expected to benefit refineries by enabling them to determine the optimal sizes of contracts depending on market conditions.