Oil refineries
This publication is intended for Valuation Officers. It may contain links to internal resources that are not available through this version.
1.1 This section applies to premises used for refining crude oil into products such as petrol, diesel and aviation fuel.
1.2 History of the industry
1.2.1 When the 1973 Valuation List came into effect, the main profits in the refinery industry were made at the well heads by the owning international oil companies. The raw material was cheap and readily available and refineries had expanded to cope with the ever increasing demands for gasoline (petrol) and fuel oil. The result of this expansion was refineries with vast tank capacities to store this low cost raw material, and production units geared towards the heavy end of the oil barrel (i.e. fuel oils and bitumen). By the end of that year developments in the Middle East led to significant changes in the industry:
| October 1973: | World crude oil prices doubled, and OPEC member states seized equity control of oil and gas resources within their borders. |
| January 1974: | World crude prices doubled again. |
| 1974-1975: | The fuel oil market in Europe experienced a sharp decline. European refinery capacity installed and about to be installed totalling some 1,000 barrels/day were designed for 45 per cent fuel oil production. Refineries began to lose profitability because of the fall in demand for these "heavy ends". |
| 1976-1977: | Origination of plans across Europe to install catalytic crackers, visbreakers and hydrocrackers to convert heavy ends to lighter products. |
| 1977-1982: | Heavy oil conversion units were designed and installed but proved to be an expensive solution to financial losses. |
1.2.2 With North Sea oil production increasing, refiners began to move away from maximising atmospheric distillation towards higher value products such as gas oil and gasoline, taking advantage of the different economics which North Sea feedstock introduced.
1.2.3 During the 1990s the UK refinery industry had to invest in order to comply with more exacting environmental specifications for its products. Such specifications have led to the need to install enhancements such as isomerisation and octane-enhancing MTBE (methyl tertiary butyl ether) units and desulphurisation equipment.
1.2.4 Most UK refineries are configured to use a fluidised catalytic cracker (FCC) which helps to maximise the gasoline yield from each oil barrel. A refinery which possesses a hydrocracker (HC) can maximise the diesel yield per barrel.
1.2.5 In the 2000s there was a move away from petrol cars to diesel cars with a consequent change in the demand profile for those products. Given the optimisation of British refineries for gasoline production, the UK became a net importer of diesel and a net exporter of gasoline. However, in the late-2010s sentiment towards diesel vehicles became more negative, and the balance of UK demand as between diesel and gasoline began to reverse.
1.3 Loading terminals and jetties
1.3.1 Coastal refineries are equipped to handle both crude and product tankers. In order to handle crude oil deliveries from the Middle East in Very Large Crude Carriers (VLCC) of 250,000 dead weight tonnes (DWT), unloading facilities were required in deep water.
1.3.2 North Sea crude oil is delivered in carriers of 100,000 DWT and very deep water berthing is less important for this service.
1.3.3 The terminal will have tankage for crude oil products and the ability to provide all services to tankers such as fresh water, fuel oil, stores, etc.
1.3.4 A typical deep water jetty may comprise a series of berthing heads designed to accommodate tankers of varying sizes, with connecting links to sea and shore arms possessing both roads and pipeline connections to shore.
The jetty heads will carry all the loading, tanker access and fire fighting equipment. The type and strength of construction will vary considerably but will in the main depend upon the size of tanker to be accommodated and whether berthing dolphins designed to take the side thrust of the tanker are separate from the head, or form an integrated part of it.
2.1 List description: Oil refinery and premises
2.2 SCAT code: 205 Suffix V
3.1 Responsibility for the valuation and referencing of this class of property lies with National Specialists Unit Industrial, Commercial and Crown team.
4.1 Responsibility for ensuring effective co-ordination lies within NSU I&C team.
5.1 There are no specific legal matters which will impact on the valuation of oil refineries.
The basis of measurement for buildings at oil refineries is GIA.
Guidance in respect of plant and machinery and civil items should be taken from the VOA Cost Guide.
6.1 Safety on Site
- All oil refinery sites contain serious safety hazards, so extreme care is required when carrying out inspections
- Members of the VOA visiting this type of property for any reason should check in advance with the site what Personal Protective Equipment (PPE) is required and what may be supplied by the site.
- Staff should ensure they are aware of all VOA guidelines on health and safety and as a minimum requirement attend with safety boots, gloves and glasses, high viz clothing and hard hat.
- Sites will have a formal health and safety induction process, this is mandatory and so should be allowed for when fixing appointments. Individuals should comply with all safety rules and precautions prescribed by the site operator without exception.
- The site will provide guidance concerning mobile phones, electronic measuring tapes and other devices with batteries - normally it will be necessary for the visitor to leave these in their vehicle. Similarly, modern car keys may have to be left in the gatehouse on arrival.
- Visitors should avoid walking through any pools of liquid encountered in production or storage areas as its character (slipperiness, corrosiveness, etc.) will be unknown to them; similarly no exposed surfaces should be touched (they may be very hot or very cold) apart from handrails, which should always be used. Numerous trip hazards may be encountered – for example, shallow bunds. Particular care should also be taken when crossing roads and yard areas as heavy vehicle movement on site is common.
6.2 Plant and machinery
6.2.1 There are a small number of items peculiar to oil refineries and these are mainly confined to Class 4 of the Plant and Machinery Regulations.
6.2.2 They include:
Large plant structures
Large plant structures are to be found in three main forms; steel, with or without fire proofing, or reinforced concrete and a mixture of both.
Steel structures can be valued by calculating the erected weight derived from the survey details and then applying the appropriate price per tonne - this will vary according to complexity and height.
Fireproofing can be added according to the measured section of the covering material (usually concrete) or by reference to the Rating Cost Guide 3050F series.
It is important not to miss the foundations below the structure stanchions, ground sited plant within the structure and over-site concrete with its associated drainage channels.
Heaters
Before processing crude oil it is necessary to heat it - this is done in two types of furnace:
1.Cabin heater. As the name suggests, this looks like a rectangular cabin with a pitched roof. The oil passes through a series of tubes joined together and mounted in the furnace which is lined with firebrick. Burners are located at each end, fueled by volatile material produced on the refinery. 2.Upshot heater. Cylindrical in construction with a chimney mounted on top, standing on legs and fired from the bottom. The heating principle is the same as for cabin heaters.
Columns
These tall cylindrical vessels appear frequently on a refinery. They are found in their simplest form at the beginning of the process where the vapourised crude oil is converted into fractions by distillation at atmospheric pressure. They are made of carbon steel with a series of perforated trays in the length of the cylinder for the collection of the condensed products. In most instances the trays are removable but they can be welded to form part of the column.
The cylinder is bolted or welded to a supporting skirt which in turn is bolted to the foundations. The skirt is then fireproofed either by brickwork inside and out (usually carried over the join on the outside) or by sprayed on concrete or refractory material. The degree of attachment is important and in determining rateability - see BP Refinery (Kent) Ltd v Walker (VO) 1957.
At later stages columns will operate under aggressive conditions and although carbon steel may be the load bearer, linings (known as cladding in the trade) may be added. Such claddings may be of metal ranging from lead to stainless steel or ceramics, refractories, plastics, etc. Being integral, they greatly increase the cost and can also contribute to the problems of moveability and re-erection in their original state - this needs to be considered when deciding on rateability under Class 4.
The following points should be noted:-
1.Crude distillation columns are usually clad with stainless steel containing 11 to 13 per cent chromium at the bottom end where the operating temperature is above 260°C. Top sections may well be clad with a nickel-copper alloy with high tensile strength and resistance to corrosion.
2.Pressure vessels at low temperature require special attention because the susceptibility of ferritic steels to brittle fracture increases considerably with reduction in operating temperatures - such fractures are abrupt and catastrophic, and usually initiates without noticeable deformation. For this reason it is more likely that the vessels will be made of nickel alloys (or even more expensive austenitic stainless steel) than of carbon steel.
a. Hydrogen service will usually entail a departure from basic carbon steel because atomic hydrogen reacts with carbon in steel to form methane, reduces its ductility and in time produces abrupt brittle fracture. Selection of the proper steel depends largely on operating pressures and temperatures but alloying elements, particularly molydenum, or cladding may be found where the service is also corrosive. b. Caustic service can cause stress corrosion, vessels being particularly vulnerable where residual stresses have been induced, say by welding. The vessel will be stress relieved thus adding to cost and in severe conditions nickel alloys will be found. c. Acid service has broadly the same consequences as caustic service.
The Regenerator and/or the Reactor which form part of catalytic cracking units will be clad if they are made of carbon steel and there will usually be some form of cladding if made of stainless steel mainly because of the abrasive effect of the catalyst in motion. Within the main body of these particular vessels will be a number of cyclones welded to supporting framework - unless it can be shown that these can be easily dismantled, and later taken out through the manways, they should be accounted for in the valuation.
Additional value will accrue on all columns from insulation, platforms, ladders, lifting davits and of course, foundations.
Storage tanks
Tanks are specifically mentioned in Class 4 of the Regulations and are rateable provided they satisfy the size (400cu.m) and structure requirements of the Class.
For most purposes vertical tanks are preferred and these are of all-steel construction with butt welded shells and lap-welded bottoms and roofs. They are constructed in capacities up to 160,000cu.m (35 million UK gal).
Non-volatile, high flash point products, such as gas oil, and lubricating or fuel oil, are stored in tanks at normal atmospheric pressure but in the case of volatile, low flash products such as gasoline or certain chemicals, it is necessary to reduce the vapour space of the tank by the use of an internal floating roof (IFR) (effectively blankets). The IFR is considered non rateable as not being an integral part of the tank as a structure.
Fixed roofs of standard tanks are conical and self-supporting. Where there are no internal columns supporting the roof this generally restricts their size to less than 50,000cu.m.
Access to the roofs of tanks is required for inspection and maintenance and is provided by either spiral staircase, back cage ladder or walkway from adjacent tanks. The costs in the VO Cost Guide are inclusive of access and no further addition is required.
Crude oil and certain limited other low flash products are stored in tanks with external floating roofs (EFR). The roof structure is supported by pontoons or a double deck over the whole surface of the tank. The roof floats on the surface of the liquid and rises or falls with the level of the product in the tank. The EFR is considered rateae as being an integral part of the tank as a structure.
Situations will be encountered where an aluminium domed roof (ADR) has been used to span the diameter of large crude oil tanks as part of a repair and refurbishment programme.
These standard tanks are not suitable for the storage of liquid petroleum gas (LPG) owing to the very high pressures to keep it liquid - about 85lb/in2 (6kg/cm2) for butane and 250lb/in2 (18kg/cm2) for propane. Pressure vessels are used, either long, heavily built small diameter tanks known as “bullets”, or larger spheres. For bulk storage of LPG there is an increasing use of large cylindrical tanks although these are more likely to be found on terminals rather than refineries. These are vertical cylinders with a domed roof, double skin, heavy foundations and a thermal blanket. The inner tank will be made of a cryogenic metal either of aluminium alloy or 9% nickel steel. Foundations are likely to include piling, and a ring beam. A stressed reinforced concrete bund wall will surround it.
Similar tanks will be found on refineries for the storage of ammonia.
Where chemicals have to be stored, tanks may be constructed in stainless steel or with stainless steel or other special linings. Often the linings are only to the base and bottom 1m depth of the tank. Costs for linings can be found in (RCG series 215X01-24)
To facilitate pumping of viscous products, such as bitumen, tanks are often fitted with steam heated coils near the base of the tank and the tank itself will probably be lagged or insulated. Strap on lagging and insulation should not be treated as a rateable as it not an integral part of the tank.
A large modern tank will be constructed of plate varying in thickness from bottom to top depending on pressures to be resisted. Whilst costing is affected by the weight of steel employed in construction, adjustments should only be made in exceptional circumstances where supporting evidence substantiates doing so.
Whenever new tanks are encountered costs should be pursued via the prescribed statutory procedure.
Tank foundations
Historically vertical storage tanks did not usually require concrete foundations and were built upon what is known as a ‘bitsand base’ (RCG series 215J). This will usually consist of consolidated rubble covered with a layer of sand about 10 inches thick finished off with a 2 inch layer of sand bitumen mix which seals the foundation against weather erosion and protects the underside of the tank bottom against corrosion. More substantial settings comprised a ring of concrete around the perimeter of the tank. It was only upon the very poorest soils, where concrete rafts and/or piling was added.
However, it has been a requirement for some time to install tanks on ‘’appropriate and sound foundations.’’ Thus concrete rafts with an impermeable bentonite membrane are now the norm (RCG series 215V).
There are a variety of options in Rating Cost Guide to enable the valuer to cost tank foundations. Site circumstances will dictate which is the most appropriate.
Additions for piling should be in accordance with RCG series 3000F1-9.
Tank compounds or bunds
A bund is an enclosure designed to contain fluids should they escape from a tank or vessel inside the bund. Bund walls offer what is known as secondary containment on sites and tend to be constructed of concrete or clay.
Regulations require that the bund should have sufficient capacity to contain the secondary containment and will also provide limited storage capacity for firewater management. Typically this is 110% of the capacity of the largest tank within the bund and is required to be constructed of fireproof impermeable materials. The floor of the bund should be concrete or other material substantially impervious to the liquid being stored, and with drainage where necessary to prevent minor spillage collecting near tanks. Stone chippings and similar materials may be used providing the underlying ground is impervious.
The actual cost of retrospectively upgrading bunds to modern standards is very high, however the rating hypothesis assumes a greenfield site. Accordingly RCG series 33U40A-Z should be applied.
Internal pipelines
Internal pipelines, which are required for moving products from points of discharge to storage tanks and from storage tanks to filling points are usually laid above ground both to save cost and to simplify maintenance. They are not rateable as under P & M Regulations Class 3 (g) they are pipelines wholly situate within “relevant premises”. However piperacks and bases supporting the pipelines are rateable.
Pipelines which convey products to or from the refinery
Such a pipeline will be rateable to the extent to which it lies outside of the refinery boundary but will also include the length of pipeline within the boundary up to the first control valve encountered
The valuation of pipelines is dealt with in more detail in RM 5:780.
7.1 Survey data for oil refineries is recorded manually in binders in the custodianship of the NVU’s Industrial, Commercial and Crown (ICC) team.
8.1 The preferred method of valuation is the contractor’s basis.
8.2 In the mid 2000s the major oil companies went through a phase of selling North West Europe refineries in order to concentrate their efforts on “upstream” activities (exploration and production). Consequently some UK refineries are now owned and operated by specialist refining companies.
8.3 Management accounts for a refinery operation should be available. It may be possible to conduct a receipts and expenditure valuation for a refinery either as a standalone valuation method or to assist the Stage 5 “stand back and look” part of the contractor’s basis approach.
8.4 Issues to be aware of in valuing an oil refinery include:
a. Works originally designed for a crude oil intake from a specific part of the world which is no longer appropriate (eg. jetties designed for VLCCs of 250k DWT when the refinery currently deals with North Sea crude in carriers of 100k DWTs) b. Units demolished within refineries leaving gaps c. Excess tankage d. Imbalance of services e. Excess capacity
9.1 Valuations for all oil refineries are held on the Non-Bulk Server (NBS).
1. Market appraisal
1.1 Following the closure of three refineries in the first half of the decade, the number of major oil refineries operating in the UK remained unchanged (at six) between the Antecedent Valuation Dates of the 2017 and 2023 Rating Lists (1 April 2015 to 1 April 2021). The increased popularity of diesel cars has led over the years to a progressive change in the balance of demand as between petrol and diesel fuel, though this trend has been reversed recently. Increasing demand for biofuels is also evident, but this remains only a small segment of the road fuels market.
1.2 In relation to supply, crude oil is traded in dollars and consequently exchange rate fluctuations have an impact on feedstock costs for UK refineries. Over the period in question, the cost of crude oil in sterling terms initially continued to fall, before rising to higher levels by late in the decade. The Covid pandemic had a substantial effect in reducing demand for oil refinery products, something which was also reflected in a substantial fall in crude oil prices – however, by April 2021 these prices had recovered to a level which, though below the late-2010s peak already noted, was markedly in excess of April 2015 levels.
1.3 Having regard to the wide range of factors influencing refinery profitability, it is inappropriate to read across general market trends into the valuation of any particular refinery. Rather consideration must be given to the evidence discussed in paragraph 4 below.
2. Changes from the last practice note
2.1 There is no substantive change to the approach to valuation of these hereditaments for the 2023 Rating List.
3. Ratepayer discussions
3.1 There have been no discussions with the industry.
4. Valuation scheme
4.1 This is a class dealt with exclusively by the National Valuation Unit Industrial Commercial and Crown (NVU ICC) team.
4.2 Oil refineries are normally valued on the contractor’s basis. However, refinery management accounts may be considered in the valuation process – this can be either as a standalone valuation method or to assess the qualities of the particular refinery at the contractor’s basis Stage 5 “stand back and look”.
4.3 Once a valuation is arrived at, to assist in securing consistency between assessments it may be compared with that of other hereditaments in this Special Category Code. Such a comparison should have regard to the refining capacity and complexity of the refineries in question.
1. Market Appraisal
For the 2010 Rating Lists the oil refinery ratepayers via the UK Petroleum Industries Association (UK PIA) made representations to the VOA detailing the difficulties and challenges facing the oil refining industry. UKPIA Presentation to VOA March 2011.ppt. In summary the main challenges at the time were:
a.UK refineries are configured to produce mainly petrol whereas current demand is mainly for diesel b.There is a supply/demand imbalance whereby the UK is a net importer of diesel and a net exporter of petrol. c.The costs of environmental compliance which do nothing to enhance refinery profitability
Those issues persist at the AVD 2015 as is evident from the annual BP Statistical Review for 2015 [bp-statistical-review-of-world-energy-2015 (extract).pdf[(#).
It is a useful yardstick to consider refining margins for late 2014 (bp-statistical-review-of-world-energy-2015-workbook.xlsx) compared to early 2008 for North West Europe (NWE). Whilst refinery margins can be volatile over short time periods it is evident that the general levels of profitability remain similar.
Since 2010:
- Coryton, Essex has closed and is being converted to an oil import facility
- Murco, Milford Haven has closed and is being converted into an oil import facility
- Total, Humberside has reduced refining output by approximately 50%
These reductions in UK domestic supply should assist in correcting the demand/supply imbalance. The extent to which the other UK refineries will benefit will only be revealed by not yet available general refinery margin data and specific management accounts for each refinery
2. Changes from the last Practice Note
The Practice Note for the 2000 Rating List included co-ordination arrangements which are now dealt with in the Rating Manual section for the class.
3. Ratepayer Discussions
There have been no discussions with the industry although there are plans to enter into discussions with UKPIA representatives when initial R2017 valuation effects begin to emerge.
4. Valuation Scheme
This is a class dealt exclusively by the NSU Industrial and Crown team.
Oil refineries are normally valued on the contractor’s basis although there is the potential for refinery management accounts to be considered in the valuation process either as a standalone valuation method or to assess the qualities of the particular refinery at the contractor’s basis Stage 5 “stand back and look”.
At the present time there is ongoing litigation on the 2010 Rating Lists assessments and the above approach is being adopted in negotiations.