Grassroots Refinery Project: Planning, Construction & Challenges

Grassroots Refinery Project

Introduction

A Refinery is a facility where crude oil is processed into finished products, which are incredibly important in today’s life. It comprises multiple process plants/units, associated facilities, buildings, infrastructure, etc. Grassroots Refineries are those which are constructed right from the scratch. In this article, I will be elaborating on Grassroots Refinery Project and cover the associated aspects. The question that is popping up now is why I have chosen the topic of Grassroots Refinery Project. The reason is to give a glimpse of how the Refineries up, noting that Grassroots Refinery Projects are extraordinarily complex, spread over years, requiring huge resources in terms of manpower and equipment, involving huge investment, enormous procurement, encompassing multiple agreements and contracts, having multiple risks and uncertainties, to name a few.

Simple Illustration of Refinery Process

Like with any other project in the oil and gas industry, lifecycle of Grassroots Refinery Project also passes through different stages, having gates, which may be concept, feasibility, project definition, investment decisions, tendering process, site implementation, commissioning, and closeout. However, managing this type of project require high level of project management acumen and expertise. A very robust plan is required to implement this type of project, which in turn requires vast experience. Setting up a Grassroots Refinery, i.e., Project is full of challenges and uncertainties at every stage/step. Reiterating again, very adept handling can only mitigate these challenges, which otherwise has quite adverse impact in terms of schedule and cost overruns, claims and disputes.

Before proceeding further, let me describe few attributes of any Refinery hereunder:

  • Capacity: It is the capacity of refining crude in the refinery and measured as Barrel Per Stream Day (BPSD) or Ton Per Annum (TPA). The figure being big is defined as KBPSD or MMTPA, where K is thousand and MM is million. It is simply the processing capacity of the Crude Distillation Unit(s) in the Refinery.
  • Configuration: It is the combination of process units to process the crude and produce finish product.
  • Type: There are mainly four types of refinery, viz., topping, hydro-skimming, conversion, and deep conversion.
  • Feedstock: It is the raw crude to the Refinery.
  • Product: There are various products, either intermediate or final, from refineries like diesel, kerosene, reformate, fuel gas, naphtha, sulfur, vacuum gas oil, lube oil, etc.

Planning

“If you fail to plan, you are planning to fail.”

The project starts with an idea to set up a Refinery, which may be the outcome of business proposal. It needs to be highlighted that the Refinery may be owned by a private entity, public/partnership entity or a government body. The business proposal for new Refinery may be based on various factors which may be either the need for petroleum product, enhanced requirement, investment in a venture which gives good return or existing business expansion plan amongst others. Proposal may provide a high level of guidelines like investment range, capacity, location, market requirement, etc. The proposal may put forth different options, which need further study, to ascertain the most feasible one. Why I termed this stage as planning? Reason is that it defines the project implementation at site and the operation/production, post-commissioning.

Project Lifecycle, Challenges, Risk, Uncertainties

It is always desirable to have a cross-functional experienced team to handle this phase, which may be from the owner side as well as the specialized consultant side. As any project is a unique endeavor, setting up a grassroots refinery too falls within that endeavor. Though the previous experience is incredibly useful, proper focus is necessary on the uniqueness.

Simple Illustration of Specific Process

Planning phase or stage has different components as broadly described hereunder:

Feasibility Study

The reason that this study is feasibility study is that it assesses the feasibility and provides report. It may study one or more options and may recommend the most suited one. Feasibility study involves a wider range of factors before coming to conclusion and providing a report. These factors are spread over different aspects and include technical, economic, social, environmental, regulatory, infrastructure, market amongst others. Though I will not go into depth to elaborate on the stated factor, however, I will describe them briefly. It is to be noted that the aspects be interdependent and influence each other.

Technical aspects include adopting particular technology, type of refinery, turnarounds, configuration of the refining process, where feedstock type and specification may have influence. Economic aspects cover many things, including the technical aspects; comprising both projects, and post-project costs, including expenses, payback period and rate of return amongst others. Examples to consider the economics are the refining cost, transportation/shipping cost for the product, sourcing cost of feedstock, project cost, tax regime, cost for licenses/fee/approvals, etc.

Social aspects consist of the social and political conditions including long-term stability in the region. Environmental aspects include specific adherence including the flaring and discharging. Regulatory aspects include the conditions set forth by the government. Infrastructure includes the roads, nearness to sea, nearby airports, power and water availability, facilities like accommodation, school, shopping, medical facilities for employees. Market conditions determine the requirement and hence decide the refining capacity, products, keeping in mind the low, average, and peak demands.

Feasibility Study Illustration

Feasibility study is a particularly important phase of the project which affects both the project and thereafter. This phase lays the roadmap for the entire project and production. Once this phase is over with the report, implementation is which may include pre-work like establishing the infrastructures for housing, offices, sourcing power and water, defining project including lining up of process technology licensors, lining up consultant for Front End Engineering & Design (FEED), and performing the same. At this time, during FEED, contracting strategy is finalized which depends on the appropriateness to the particular & prevalent conditions. As these projects are excessively big in size and extraordinarily complex too, they are quite often broken up into packages for the sake of handling by contractors, where they are lined up for implementation/construction. These packages may be based on different aspects. Reiterating, it is to be kept in mind that these tasks require robust planning by a highly experienced team as anything not going its normal way has big impact on the project.

Generally, feasibility study is done by a specialized consultant experienced in this field. They are lined up by tendering process, where the costing is done mainly on the man-hours estimated to be expended to provide the deliverables. Each deliverable requires a particular number of man-hours which are proprietary to each consultant and vary from consultants to consultants. Man-hours have associated costs. It may be noted that total man-hours may comprise different categories of manpower, having different hourly rates.

Defining

Defining is done based on the outcome feasibility, that is recommendation from feasibility study. By defining, we may mean selecting the technology providers, establishing the scope, firming up an implementation plan, procurement strategy, finalization of tender packages, estimating the cost, determining the duration, and enlisting the risk for addressal. A major part of the definition is Basic Engineering or Front-End Engineering & Design (FEED), which may be preceded by Pre-FEED. FEED start with Process Simulation and ends up providing the output as described at the end of this paragraph. FEED may have varying level of details depending on the project and requirement and it is done by a specialized consultant. Here, the inputs are provided by various selected process technology providers or licensors, as they are commonly known. FEED is mostly man-hours based, which may be followed by validation. Definition phase provides the outputs which may include the following:

  • Scope of Work
  • Cost Estimate for Project Implementation
  • Project Duration in form of high-level schedule
  • Tender Packages for Bidders
  • Procurement Strategy
  • Risk Mitigation Plan
  • Stakeholder Management Plan
  • Quantitative Risk Analysis
  • Environmental Impact Assessment
  • HAZOP Report

Illustration of Defining Phase - FEED

Elaborating further, cost estimate is required to obtain funds for the project. Schedule determines the duration. Scope is the work required to be implemented by the project team. Tender packages consist of specific work and conditions applicable for the contractors. Procurement strategy may include purchasing of long-lead items. Risk mitigation is a list of all risks and their addressing strategy. Stakeholder management plan consists of list of all stakeholders, their involvement, level of information to be disseminated, their impact on project and handling strategy.

During this stage as a part of FEED, various reviews are done. They may be Design Basis Review, P&ID Review, Cost Estimate Review, Implementation Schedule Review, etc. There may be benchmarking of Cost and Estimate Review by any third party and/or Cold Eye Review.

Hence, the output from the FEED is not only tender packages but they also maybe contracting strategies too. Few examples of site implementation contracting strategies are hereunder:

  • Engineering, Procurement and Construction (EPC), which is quite widely used.
  • Cost-plus converted to fixed price.
  • Reimbursable cost contract.

Further, it may so happen that there is a common contract for FEED and Detail Engineering, which is followed by Procurement and Construction contracts. The contracting strategies are wide and varied, where the selection is defined by the client’s organization, project size, complexities, etc.

Many organizations hire Project Management Consultant (PMC), specialized in managing large and complex projects. These consultants may themselves do FEED and then supervise the implementation contractors or they supervised both the stages etc.

In this type of project there are various contracts and agreements and may include the following:

  • Implementation Contracts (like EPC, Reimbursable, etc.)
  • PMC Contract
  • Licensor Agreements
  • Catalyst Supply Agreements
  • EIA Study Agreement
  • QRA Study Agreement
  • FEED Contract
  • Feasibility Study Contract
  • Statutory Approval Consultancy Contract
  • Third Party Inspection Contract
  • Training and Operations Support Contract

Stressing further, FEED is the phase where the project is defined, and the long-term visibility becomes clear. During this phase, the scope is very adequately defined to let the contracting companies bid. Together with an estimate, schedule, tender packages, etc., roadmap of the project is well defined.

Continuing further, the scope is generally divided into packages at this stage for better handling by contractors. However, breaking of work into executable packages throw a big challenge which will be discussed later in this article. It is worth mentioning that if the packages are not planned properly, they may result in claims, disputes, delays, etc.

Few examples of determining the packages may be as follows:

  • Process units like Crude, Vacuum, Hydrotreaters, Hydrocrackers, Coker, etc.
  • Utilities like Cooling Water, Boiler, Air System, Water System, Amine System, Fuel Gas System, etc.
  • Supporting like Flares, Sulfur, Gas Plants, Amine, Sour Water, Firewater, Wastewater Treatment Facilities, etc.
  • Storage Tank farms, Piperacks, Underground facilities, etc.
  • Buildings, Substations, Central Control Rooms, Laboratory, Training Centers, Warehouses, Roads, Fence, Lighting, etc.

Tendering Process Example

Construction

Construction, which is site implementation, and in our discussion, we will include in it the Detail Engineering and Procurement, Commissioning/closeout too. This stage has the longest duration and highest cost associated. Here the work is physically done on ground. During this time, we see the coming up of things on ground, which previously existed on drawings and sketches. It is a high-risk phase having a lot of uncertainties and challenges.

Construction is done by specialized Contractors. The selection of Contractors is done by tendering process. Here the costing is done based on the components of contract. However, any Contractor is cannot participate in tendering, rather those who are pre-qualified. Client/Refining Companies generally have their approved supplier/contractor list for various categories and value. However, companies may go for special pre-qualification exercises in few cases and this may include the grassroots refinery project as it is not a quite common project.

Components of the Implementation Contract may comprise partly or completely the following:

  • Detail Engineering
  • Procurement
  • Construction
  • Commissioning & Start-up
  • Performance Testing

Due to the reason of proper handling, as stated earlier, the scope is generally divided into different packages to be done by different contractors. If anyone would like to know my preference of Contract type, it would surely be EPC type. However, it is to be noted that all EPC types of contracts are not identical and defining the following variances in scope would provide more clarity:

  • Engineering, Procurement, Construction, Commissioning and Performance Test under the responsibility of Contractor.
  • Engineering, Procurement, Construction, Commissioning under the responsibility of Contractor. Performance Testing by Client/Owner with support from contractor.
  • Engineering, Procurement, Construction under the responsibility of Contractor. Contractor to support in Commissioning and Performance Testing.
  • Engineering, Procurement, Construction, Commissioning and Performance Test under the responsibility of Contractor. Long lead items procurement by client/owner.
  • Engineering, Procurement, Construction, Commissioning and Performance Test under the responsibility of Contractor. Long lead items procurement by another contractor.

Contractors are responsible either until Mechanical Completion or Provisional Turnover or Turnover or Acceptance as per the stipulations in the contract.

This stage starts with Detail Engineering, followed by Procurement and then the activities at the site. It may be noted that Detail Engineering, Procurement and Construction are sequential, however, there are big overlaps too. Site starts with bulk construction which is then transited to systemized construction. The reason being that the establishment and firming up of systems take some time. Since there are many units and parts involved, it is desirable to have separate Mechanical Completion, Provisional and Final Turnover for each. As each unit or scope part comprises multiple systems, and upon construction transition, which is earlier to Mechanical Completion, they each get completed over the period. When the last system is complete, walkdown is conducted at unit level. As the scope is big, these walkdowns take number of days, followed by generation of punch items. Then another number of days are required to close the punch items prerequisite for Mechanical Completion (‘A’ Punch Items) and then the Mechanical Completion milestone for that unit is achieved. This process is followed by Pre-commissioning, which again takes good number of days/more than a month as the activities may include the following:

  • Air blowing
  • Water flushing
  • Chemical Cleaning
  • Functional Tests
  • Run in test
  • Site Acceptance Tests
  • Dry out 
  • Tightness test
  • Equipment box-up
  • Reinstatements

These Pre-commissioning activities, when completed and the prerequisite Punch Items (‘B’ Punch Items) are closed, lead to another major milestone of Provisional Turnover. Upon achieving this milestone, readiness is ensured, and the unit is “Ready for Commissioning”.

Commissioning and Start-up is the phase where the plant becomes life and the subsequent step is the operation, where the success of performance test certifies that objective of the unit/plant is achieved. This phase may be spread over couple of weeks, varying with the type of unit/plant.

In the preceding paragraphs we have seen that the Mechanical Completion, Pre-commissioning and Commissioning are done at unit/plant level. However, this process is not quite desirable. Rather, Mechanical Completion onwards shall be performed on systemized scale as they lead to schedule gain, better handling, optimum resource utilization amongst others. In this approach, as soon as any system’s construction is done, it goes for walkdown, Mechanical Completion, Pre-commissioning and provisional Turnover. It also helps in aligning the Commissioning of interdependent units.

Commissioning and Start-up is followed by Performance Test which is done when the unit/plant is operating as per the design to establish that objectives are met. 

Post successful Performance Test, the Project Closeout activities start, and it depends on many things which include generation of asset tables consisting of components like cost centers, associated percentage cost, depreciation, etc. 

Next topic is the challenges, which are quite big and particularly important.

Challenges

As stated before, Grassroots Refinery Project is full of challenges and uncertainties, I would elaborate them under this section. Challenges and uncertainties exist in every stage and step of the project and hence I would like to categorize them for developing a better plan to handle them at appropriate time, for optimum effectiveness.

Planning Phase Challenges: During this phase, the challenge starts with process of selecting the right option, i.e., the most feasible option. As the feasibility depends on many factors, each has its own challenges and they even are overlapped.

Feasibility Stage Challenges: The first and foremost challenge under this stage is the selection of the right team and right consultant. Else it would be like planning something short of planning for failure. It is the right team selection that drives the whole project and beyond.

I will continue with the technical challenges, which starts the selection of technology. It impacts/overlaps with other challenges too. It needs to be ensured that the technology is proven one and most suited for the available feedstock and to give the output product as per the required specification. If the product specification is not achieved, it would result in loss in market share, revenue and return on investment. Until what I explained was the process point of side. We must then address the challenges that the installed equipment is robust to support the adopted technology and they are suitable to work under that condition and that environment. Technological challenges include the aspect that the emissions are within the prescribed range.  Further, there are discharges that cannot be disposed of without treatment and hence require a treatment facility that serves the purpose adequately. Another challenge under this topic is the utility consumption, which must be minimized and they too have multiple direct or indirect impact.

As in the previous paragraph, interdependencies have been observed, I would move on to the social challenges. Under this, we study how the new Refinery impacts the life of the people. Whether we can get the resources to run the plants in nearby area or not. What are the facilities available for the workforce etc?

Environmental challenges are another one, which determines the effect of the new Refinery, its emissions, and discharges which in turn affect the life of flora, fauna, human health, and natural resources. It has both short-term and long-term impacts as they contribute to global warming too. These challenges are best addressed by adopting suitable technology.

Under the regulatory topic, I would also include something more like insurance amongst other. In general, as per the regulation, Refineries cannot be established in the populated area or where it has the potential to negatively impact environment. Hence a suitable location must be selected which fulfills all the criteria, some of which would be elaborated later in this article.

The next topic is the infrastructure, and it is quite important for many regions where they are not up to the requirement. By infrastructure, it is meant that proper connection by road, air and/or sea is available. This is to ensure that access for personnel as well as supplies of equipment and material are unhindered. It also includes supply of feedstock by pipeline and shipping of product by pipeline/road or sea. 

Marketing challenges are that the demand for the product in the market is stable over the period and it is quite insulated to the surrounding impact.

Another challenge is that the location is not prone to natural calamities like cyclone, tsunami, floods, earthquakes, etc.

As we can see that selection of feasible option throw a lot of challenges which needs to be considered, even if they may be by having a mitigation plan, before coming to any conclusion.

FEED Stage Challenges: The next challenge is Front-End Engineering or FEED. This itself is a challenge. To start the FEED, there should be a clear basis for design. Further, process technology licensors are to be onboard to provide the inputs. Level of the accuracies for the deliverables should be adequately prescribed so that the depth of conducting FEED is adequately planned. It needs to be ensured that technologies from various licensors are aligned with each other. The challenges during FEED not only impact themselves, rather they have long term effects, both during and post-project completion. The following paragraphs will elaborate more on challenges during FEED taking into consideration its deliverables.

As we are aware that FEED results in the scope of work as deliverable amongst others. Hence, the scope should have high level of accuracy and clarity. This will enable the contractors to bid properly, construct accordingly and avoid any later stage claims. A very well-defined scope also results in avoiding schedule and cost overruns. It eliminates any ambiguity open to different interpretations, resulting in multitudes of changes, claims and disputes.

Next is the cost estimate which is required for investment decisions and securing the funds. A high level of accuracy is desired as it helps in securing the right amount at one point of time, including provisional amount and contingencies. A very high-cost estimate also results in more process of review, validation, benchmarking and even revisiting/reframing of FEED, thereby having an adverse impact on schedule, which in turn affect the cost in the wrong way.

The other one is the schedule. This defines the duration. If the duration is not adequate or short, it offsets everything. It leads to an extension of time for contractors and associated cost claims. Then the revenue generation is also pushed further, which increases the interest on borrowed money. In short, if the schedule part of the FEED output has low level of accuracy, they lead to cost impact too in short and long term.

Another output is the tender document and tender packages. Well-defined contractual terms and conditions reduce the claims and disputes on this account. Then, there split of scope under different packages also throw up challenges if they are not done in an appropriate manner. The question that arises is what is termed as an appropriate manner here? Answer is that the packages should be formed in such a way that it has following attributes as minimum:

  • It should be aligned according to the expertise of contracting companies. An example that contractors have their field of expertise like some are specialized in roads, infrastructures, fence buildings, etc., while others maybe in storage tanks, piperacks, offsite piping, etc., yet another in constructing process units, plants, etc. 
  • The package should be formed based on a completion sequence to support Pre-commissioning and Commissioning. Examples of sequence are Road, buildings, power sourcing, substation, water sourcing, firewater system, cooling water system, air system, steam system, etc., followed by flaring system, process units, etc.

Yet another challenge is to have a risk register and a mitigation plan. The more comprehensive it is the more beneficial. It should be very structured according to the later stages and in a sequential manner. If possible, it may have more than one mitigation option.

To address the challenges during the FEED, many reviews are carried out at different time duration, at a different level of completion, both internally and by third-party external agencies. Some of the reviews are listed hereunder:

  • Design Basis Review
  • P&ID Review
  • Risk Analysis
  • Cost Estimate Review by third party at different point of time
  • Schedule Review by third party at different point of time
  • Cost & Schedule Risk Analysis by third party at different point of time
  • Cold Eye Review by third party
  • Cost and Schedule Benchmarking by third party
  • FEED Validation

Construction Phase Challenges

Under the construction phase, I would also include the tendering cycle. This phase will also encompass the detailed engineering, procurement, apart from commissioning and acceptance/closeout.

Tendering Challenges: It may so happen that we do not get enough bidders for the tendering. This may be the result of unattractiveness of tender with respect to the location of work, reputation of client, applicable laws, and regulations amongst others. In this case, those who bid, do it with higher cost to cover the associated risk stated earlier in this paragraph. If the cost of bids received are much beyond the internal estimate, it may result in requirement of more funds, which may not be that easy. This risk is not to be addressed at this point, rather in the earlier stage of planning, by appropriate selection of location, bringing a PMC to handle contractors, amongst others.

Detail Engineering & Procurement Stage Challenges: Detail Engineering provides inputs for procurement and construction. During this stage, the 3D model reviews are done, and systemization is mostly firmed up. If this stage is delayed, as it requires review approval cycle for huge numbers of drawings and documents, the subsequent phases would also slip from the schedule. Detail Engineering provides Material Requisition, which is the starting point for procurement.

This phase has its own challenges like evaluating the offers, issuing purchase orders, inspections at vendor/manufacturer’s locations, Factory Acceptance Tests (FAT) and many times integrated Factory Acceptance Tests (iFAT), where the components are at different locations. These all process provides a big challenge to handle which is done by having contract with third-party specialized agency to do the inspections on owner’s behalf, arrange for iFAT etc. Apart from the above, close monitoring of detail engineering and procurement is to be done.

Construction and Commissioning Stage Challenges: This is the stage that has lots of challenges. Continuing from tendering packages, if they are not properly aligned with both the project requirement and the types of works where the contractor’s specialties/expertise are based, they lead to adverse impact on project and schedule being the foremost victim. If the packages are prepared in a way that caters partially to the specialty, the remaining portions suffer. Secondly, if the packages are not properly done, for example, one package comprises few utilities, few process units and an office building, it will not adequately serve the purpose. The work moves in a proper sequence, water and electrical units/plants are required quite earlier than other plants/units, be followed by air, gases like nitrogen and hydrogen, boiler unit, to support Pre-commissioning and Commissioning activities of the other units.

Alignment of Associated System Commissioning for Pre-Commissioning

It is also a fact that many Pre-commissioning activities can be done using temporary facilities, but they are not desired options, though the contract should address this in multiple ways as follows:

“Company shall provide utilities such as steam, cooling water, plant air, instrument air, nitrogen, and hydrogen to perform Pre-commissioning activities, which is done by Contractor. Pre-commissioning activities shall be performed by the Contractor as per their scope of work defined in …………… and the include ……………….….. defined in………………….. In case of non-availability of one or more utilities stated in this clause, Contractor to arrange the same in a way not to impact the completion schedule and Company shall reimburse the cost for those utilities. Cost of the utilities shall be calculated from their unit rates provided in ………………. Pre-commissioning activities are defined in ……………………”

The above example clause addresses the availability of utilities in following two ways:

  • Utilities shall be supplied by the company/owner.
  • In case one or more of them not available (maybe due to delay by the responsible contractor), contractor to arrange the same and company will pay for them.

There are multiple alignments required more than the one stated as an example above and their mitigation due to slippage in schedule is not always possible, resulting in delay.

Though temporary facilities to an extent mitigate the impact caused by misalignment occurring at later stage of the project where one contractor for example, the one responsible for utility units or piperack or underground facilities gets delayed. However, this scenario would be quite difficult in case of commissioning. Like even if the associated units and utilities are commissioned, and one or more feed stream/utility piping on piperack are not ready, commissioning would get delayed until such time. Another example is that if the tank farm constructions get delayed, the product could not be stored for shipping and hence the completion of the process units would get delayed. There would be numerous similar examples, but the motive is to just give an insight into the challenges during this phase.

Alignment of Commissioning

The above challenges are associated with alignment between contractors of different packages. However, within the scope of any contractor, there is challenge to sequence the activities to support pre-commissioning and commissioning. The systems within a unit have interdependencies and as stated earlier, procurement and construction have lots of uncertainty, any delay in critical procurement pertaining to one or more system would break the alignment for pre-commissioning and commissioning, resulting in delay.

Next in the series is the pre-commissioning challenges. During this stage, for many activities, specialist, manufacturer representatives or licensors are required. Those representatives are far and few, associated with other projects which may be in progress. It is also a challenge to make them available as per the contractor’s schedule for the associated activities. The same challenge exists during commissioning and performance testing. During commissioning and performance tests there may be issues and they pose challenges.

As evident from the above, Grassroots Refinery Projects have more challenges than any other onshore projects.

Apart from the above, there are many more challenges, which leads to changes, delay, claims and disputes, some of their reasons are hereunder:

  • Ambiguity in scope of work.
  • Ambiguity in contractual clauses.
  • Lack of clear demarcation of scope between different work packages contracts.
  • Lack of clear demarcation between contractors’ scope and company’s responsibility.
  • Instability of any contractor during the project (financial or organizational instability as an example).

These challenges can be addressed properly if the team comprising all the stakeholders are highly experienced. These challenges shall be included in the risk register whose preparation shall start early during the project and a Risk Management Plan to be developed. This register should be part of this plan and updated regularly. The exercise should be very immaculate so that all risks are listed, and mitigation plans are ready.

Conclusion

In this article, I have tried to put together the whole process of setting up a Grassroots Refinery. I have covered the process from different angles to provide more clarity. The challenges part makes one ready to face any difficult situation during the project.