Fuel value chain management in petroleum industry: crude procurement strategy under uncertainties at BPCL

Abstract

The process of crude procurement for an oil refining company like Bharat Petroleum (BPCL) is an extremely complex process involving hundreds of decision variables. Broadly, the problem involves three steps of term procurement, spot procurement and term to spot ratio determination. Not only is this task of crude procurement a problem of supply chain management, but also has significant strategic importance. Rising crude prices and the associated high volatility in crude prices can make a sound crude procurement strategy provide immense value to the oil company. The report focuses on developing one such model for crude procurement. The model developed is a three step process. It first decides on which term crudes to purchase by using expected spot crudes for the year. Based on the term crudes procured, it decides the optimum spot crudes to be purchased each month. Finally it iterates the process, for different term to spot ratio and calculates the optimum term to spot ratio that is most profitable for the firm. The model is capable of handling a variety of decision variables and uncertainties. Some significant variables and uncertainties the model considers are price variation of crudes, availability of new crudes, demand uncertainty for each product, and variability in refinery closure days among others. The model is a generic model, leaving scope for inclusion of new constraints or incorporating different distributions of variability in the model. In the end, we provide a sample run of the model and the generated results based on available data from Bharat Petroleum.