ECONOMICS TECHNICAL

PROGRESS

IN T H E O I L R E F I N I N G

AND THE PROFITABILITY PETROLEUM

E. A.

PRODUCT

Shapiro

IN DUS TRY

OF

PRODUCTION

UDC

665.6:658.155

The high rate of growth of the refining industry makes necessary an overall study and the development of practical recommendations for increasing the efficiency of use of basic capital. In this connection a system of interrelated, scientifically-based, and practically-applied technical and economic indicators is of importance. In considering the indicators by which the work of the enterprises is evaluated, it is necessary to take into account how much they promote continuous scientific and technical progress, high rates of growth of production, and the most efficient stimulation and improvement in the production-economics activity of the enterprises. Particular attention must be paid to arguments against the use of individual indicators and to the validity of assertions that these indicators restrain the introduction of new techniques and the increase in the economic efficiency of production. On these bases let us consider the validity of the position expounded by M. M. Umanskii in his paper "Effect of the growth in refinery technology on profits and profitability" [1]. It is stated there that an increased investm e n t in the productive capital of the refining industry in order to improve petroleum product quality and increase the production of chemical raw material slightly reduces profitability in this sector (increasing, to a certain extent, the national economic profitability). It is said that, as the flow sheet of a factory becomes saturated by new processes, the profits and total net income per ton of refined crude increase while the profitability tends to drop. Also, the introduction of additional processes into the plan for refining Romashkino crude increases the net income per ton of refined crude by a factor of 1.42 (and profits by the factor 2.1), with simultaneous decreases in the profitability of refining production (by 185) and in the relative value of the net income (by 40%). On this basis it is concluded that technical development is a two-sided phenomenon, a decrease in profitability being coupled with a simultaneous increase in the absolute sum of profits and total net income. All this is illustrated by a graph which distorts the picture of the growth of relative profits and net income in that the increases in them (obtained by the introduction of additional secondary processes into the refinery plan) are related only to the unchanged capacity (the volume of original crude refined without taking into account the additional capacity introduced in subsequent processes). In order to prove the reduction in profitability the absolute value of profits and net income are related to yet another (increased) quantity, the value of all the fixed capital of the refinery, with the result that their relative values (compared with profit related to the unchanged quantity of refined crude) are inevitably reduced. It seems to us that such a method of analysis of profits and profitability is not sufficiently well-founded, since in applying it the profits for all the technological installations, including profits obtained from the additional processes introduced into the flow sheet, are taken into account, but in estimating capacities only the capacities relating to initial crude refining are considered, leading to an artificial growth in total net income and profits per ton of refined crude. In determining the profitability all the profits are related, not to the same unchanged value of the fixed capital for the primary process, but to the total value of the fixed capital for all the refinery site, including also the additional secondary processes introduced into the flow sheet, leading to a relative reduction in profitability.

Translated from Khimiya i Tekhnologiya Topliv i Masel, No. 4, pp. 29-33, April, 1972. I @1972 Consultants Bureau, a division of Plenum Publishing Corporation, 227 g/est 17th Street, New York, N. Y. 10011. All rights reserved. This article cannot be reproduced for a n y purpose whatsoever [ without permission of the publisher. A copy of this article is available from the publisher for $15.00.

278

From the above it does not follow that we completely reject an indicator calculated per ton of refined crude. It can be used, for example, in comparing capital expenditures and fixed capital of refineries of similar capacity, flow sheet, and extent of extraction of light petroleum products. Thus if, on the basis of the petroleum product requirements visualized for the zone around the region planned for construction of a refinery, the capacity of this refinery, flow sheet, staff, and productivities of its installations are determined, then in order to decide on the most favorable location it is not only possible but advisable to use as an indicator of efficiency the utilization of fixed capital per ton of refined crude. The essence of the stated question can be revealed only on the basis of correctly chosen analytical indicators of the structural changes which occur, taking into account the factors causing reductions in profitability. For an overall interpretation of the question it is necessary to show the actual position (for a given period of time), with the volume of output produced, the absolute amount of profits, the average annual value of fixed capital, the movement of capital returns and profitability, to what extent the changes occurring are connected only with the replacement of old technology with new, and how other factors are changed as a result. This is very important since changes in these factors, which affect profitability, are caused not only by structural displacements in the flow sheets of the refineries and the introduction of new processes, but also by the effect of prices on higher quality petroleum products, by the increased value of equipment, by longer construction times and the commissioning of technological installations and of general refinery services, and by the increased proportion of the latter in the total value of the refinery. It is impossible to consider the tendency of profit norms to reduce in isolation from other factors, and to relate a reduction in profitability only to more complex technology. Only a comparison of the absolute amount of profits and the profit norm, obtained over a given period and separated into the individual factors, which are divided into those parts associated with the development of the technology over the sector as a whole, the particular region, and the enterprise (and not only according to the plans of the individual technological installations), can show how the matter stands with respect to profits and profitability. An analysis of this kind is important for petroleum refining, which is an extremely high-capital sector of industry. In the above paper the tendency to a reduction in profitability (for a given stage of technical complexity) and a rise in profits was considered, without showing these specific quantities, associated with the development of the new technology, among the general changes in capital returns and profitability. For completeness we have considered both of these indicators, each of which in itself characterizes the efficiency of petroleum product production. An analysis carried out by the Central Scientific-Research Institute of Technical Information and Economics of the Petrochemicals Indus~cy (TsNItTEneftekhim) has shown that for the nine year period considered there occurred important shifts in technical developments, consisting of increases in the volumes of gross and disposed-of outputs and of balance-sheet profits in refineries with a complex fuel-oil flow chart, and of decreases in their relative importance in refineries with a fuel profile. Refineries with a fuel-oil profile, as shown in detail in the paper "Increasing production efficiency and capital construction in the petroleum refining industry" [2], are characterized by an undeviating increase in the fraction of secondary processes intended to intensify the refining of petroleum, to broaden the range of petroleum products produced, to improve their quality, and to increase feedstocks for petrochemistry. Although the commissioning of secondary processes is also accompanied by an increased ch argo to the consumer, as discussed in detail in the paper "The effect of introducing new technological installations on changes in capital returns in the petroleum refining industry" [3], this is not reflected in the established, relatively low costs of the petroleum products produced in these installations and cannot help affecting their capital returns and profitability. Investigations have shown that the well-timed commissioning and bringing into production of installations at ten refineries recently under construction should increase the level of utilization of basic capital by 6.5 kopecks per ruble of industrial-production capital, and that the effect which oniy these factors have on changing capital returns is considerably greater than the effect associated with the more complex flow sheet and the exchange of old technology by new. A no less important part is played by the resources inherent in a possible increase in the efficiency of utilization of basic capital. Their realization at only 20 refineries allows an additional development of production worth

279

360 million rubles annually for a small increase in basic capital, increasing capital returns by 22 kopecks per ruble of basic capital. Thus a change in the efficiency of utilization of basic capital inpetroleum refining is associated not only with alterations in the technology of production, but with other factors affecting the degree of utilization. It is therefore not sufficient to enumerate the economic advantages of new progressive processes already developed or under development at the present time (although it was intended to show the additional profits obtainable and an increase in net income). It cannot be denied that economic indicators of individual technical solutions, and the choice on this basis of the most efficient path to the solution of concrete problems, have great importance. However, they are nosubstitutes for the necessity of analyzing and discovering all the factors determining a change in profitability. The results presented in the paper under consideration would have been justified if it had been shown that with a development in technology the profits norm is decreased simultaneously with an increase in the absolute amount of profits. The process data presented in the paper (with a solitary exception) indicate not only increases in the amounts of profits and net income, but also a simultaneous increase (not a reduction) in the profits norm, or profitability. This conclusion follows from the data presented in the paper on such a progressive process as the hydrofining of a sulfur-containing crude for catalytic cracking, the introduction of which makes possible, in the cracking of a hydrofined vacuum gas oil, not only a 136% increase in profits, but also a two-fold increase in profitability. The conclusion was also based on data from the slow coking process, the introduction of which, compared with thermal contact cracking, permits not only a decrease in capital expenditure (per ton of crude) of 40% and an operational expenditure of 20%, but a 1.7-fold increase in profitability. A further basis was the advantage shown by the process for the isom erization of light gasoline fractions, the introduction of which gives not only an increase in profits (per ~on of special-purpose product) by a factor of 2.4 and a 2.8-fold decrease in funding capacity, but also an increase in the profitability of production by a factor of 6.7. A significant increase in the technical-economic indicators results from the grouping-together of technological processes, the introduction of which increases the profitability of production by 25-30%. Thus the author's assertion that during periods of radical changes in the technology of petroleum refining and in technical complexity the profitability has a known tendency to decrease not only is not supported but is refuted by the data he presents. The latter convincingly show that the introduction of new refining techniques and technology is accompanied not only by a rise in profits, but by an increase in profitability. Evidence for the increase in profitability comes from actual results of work by the Head of Petroleum Chemical Refining, Ministry of the Petroleum Chemical industry of the USSR, showing that the average annual value of its productive basic capital and normed working capital, used in evaluating the profitability, was up by 164.5% in 1970, compared with 1965. The actual profits from the industrial activity of the establishments, calculated by balancing the accounts,* showed a corresponding rise of 222.0%. The more rapid rise in profits compared with the rises in basic capital and working capital had an effect on the increase in the overall profitability of its enterprises, which was (at 1970 prices) 23.4% in 1970 as against 17.4% in 1965. To a certain extent changes in wholesale prices have an effect on these indicators. The greater growth of profits compared with the rise in value of the means of production is, by and Iarge, characteristic of the petroleum refining and petroleum chemical industries of the country. Thus, if the average values of its productive basic capital and normed working capital in 1965 are taken as 100%, their value in 1970 was 164.6%. At the same time profits from industrial activity (at 1970 prices) rose to 200.39. Such a relationship between profits and average annual values of productive basic capital and normed working capital predetermined an increase in profitability from 21.1%o in 1965 to 25.7% in 1970. Thus, statements concerning the two-sided nature of the development of technology, giving a decrease in profitability simultaneously with an increase in profits, do not reflect the true position at the refineries, since they are disproved by our results on the undeviating increase not only of the absolute amount of profits, but also of its relative

*Not including the results from all the work on other forms of activity (transport,supply, planning and scientificresearch institutes,capital construction).

280

value, the profitability, during 1965-1970, i.e., during the period of continuous scientific and technological process, increasingly complex techniques, and appreciable growth of high-capital, secondary processes. Analogous radical changes are occurring in the ninth five-year plan, in which provisions are made not only for an absolute increase in profits, but also a further increase in the profitability of production. In the face of this manifestation of technical d e v e l o p m e n t - an increase in the absolute amount of profits and a simultaneous increase (not decrease) in profitability-it is completely incomprehensible how it can be said that there is a generally noted tendency for profitability to decrease in the refining industry during a period of radical changes in the technology of production. Indicators of the growth of not only the absolute amount of profits, but also the profitability of both existing plans and of forward plans being introduced, data on changes in capital returns due to individual factors and to revealed resources in the growth of the volume of production (the realization of which appreciably improves the use of basic capitai~, and also the actual indicator of the growth of profits and profitability, atl fail to support the contention of a tendency for profit norms to decrease. It is also necessary to consider, in this connection, that evaluation of the activity of an enterprise only according to the amount of profits, without relating it to the amount of working capital, can lead to technical decisions reducing current expenditures, to a reduction in profits owing to unjustifiably large capital investments, and to a slowing down in the remover of all the enterprise's funds. A profitability indicator is particularly important for evaluating the efficiency of truly progressive technical measures, for which it is permissible to have not an increase, but a decrease in values and prices per unit of output production, and which, at a given commodity price level, can in no way reduce the profitability. An actual reduclion in the latter can take place on the introduction of a new, but low-efficiency technology, by using it below c a pacity, or by fixing unsubstantiated high prices (with relatively low prices for its output production) which appreciably exceed the value of the old equipment and the possible effect of its use. Here an important role may be played by an insufficient linking of the program of capital construction for refineries with the complete delivery of technological equipment, with material and technical resources, and with the capacities of construction organizations erecting the refineries and their technological and service units. There is an appreciable effect on the level of profitability arising from a disparity between current, relatively high prices for improved-quality petroleum products, and the significantly higher-capital and more expensive technological plants introduced on a wide scale in recent years and in which these petroleum products are produced. The constant improvement in current wholesale prices for producible petroleum products, and their conversion into an effective instrument of planning and stimulation of refining, is acquiring (taking into account the effect of price fixing on level of profitability) very great importance. The realization of decisions taken by the Party and government on improving the planning of capital construction and increasing the quality of planning-estimate documentation must also be important in raising the efficiency of utilization of basic capital. Thus the mastery of the production of new petroleum products, the introduction of progressive techniques, and the stimulation of technical progress are at the present time still restricted, not so much by a tendency of the profitability indicator to decrease during a period of radical changes in production technology, as by factors having negative effects on the level of profitability. Surmounting these problems requires the concentrated attention of a broadly-based group in a careful study of the factors favoring an increase in profitability as well as those causing it to decrease. For this purpose analyses should be carried out of the magnitudes of each factor affecting the profitability. The assertion that profitability inevitably tends to decrease (this was not accompanied by stipulations concerning an increase in the national-economic efficiency) will not mobilize enterprise collectives to overcome this tendency,especially ff the size of this factor is not accurately determined, not analyzed, and not considered in conjunction with other factors which determine the level of profitability of the sector, and if at the same time the true causes entailing a reduction in profitability on the introduction of new technology are not made apparent. It is well known that for each designated time period the government has available certain resources set aside for capital construction. Therefore the efficient use of capital investments and basic capital is of great national economic importance. This is why the matching of a constant increase in profits with an increase in the level of profitability was spoken of in the report by A. N. Kosygin to the September, 1965 plenary session of the Central Committee of the Party: "It is important to take into account not only the amounts and growth of profits, but also the level of profitability, i.e., to know how much profit is obtained for each ruble of productive capital [4]. ~

281

Increases in the volume of production and in national income per unit expenditure, as well as increasing the performance of invested assets, were emphasized at the 24th session of the Party. "The essence of the problem," said L. I. Brezhnev in his report, "is that each unit of expenditure - labor, material, and financial - should achieve a substantial increase in the volume of production and national income [8] ." At the same time profits and profitability are not put in opposition to one another, but considered to be factors interrelated and indivisible from one another. "We consider," said A. N Kosygin at the 24th session of the Party, "profits and profitability to be important indicators of production efficiency [6]." That is why, in a period of radical changes in the technology of petroleum refining, it is not only the absolute amount of profits which is important, but also its relative size, which is required per unit of established basic capital at a given level of development of the productive forces. Thus the recommended methods and procedures in use at the present time for the application of one or another indicator, the improvement of earlier indicators and development of new ones characterizing production efficiency and permitting better evaluation of the results of enterprise activities, should be based on, and correlated w ith, the most important criteria of their economic activity, the efficiency of the national economy and the preservation of the basic principle of reform leading to every pessible increase in production efficiency, expressed at the present time by profits, as the main source of income of the state, and by profitability. LITERATURE CITED 1. 2. 3. 4. 5. 6.

282

M . M . Umanskii, Khim. i Tekhnol. Topliv i Masel, No. 11 (1970). E.A. Shapiro, Khim. i Tekhnol. Topliv i Masel, No. 11 (1970). E.A. Shapiro, V. M Kirpichev, L. Sh. Vilenskii, F. A. Samedli, and L. L. Savranskaya, Economics, Organization, and Management in the Petroleum Refining and Pel~ochemicals Industry [in Russian], No. 1 (1971). A . N . Kosygin, Improving Industrial Management, Perfecting Planning, and Strengthening the Economic Stimulation of Industrial Production [in Russian], Politizdat (1966), p. 29. Relevant papers, 24th Session of the CPSU, Politizdat (1971), p. 55. Relevant papers, 24th Session of the CPSU, Politizdat (1971), p. 169.