Keywords: real options, distillation process, downstream processes, stochastic dynamic programming, earning at risk, profit at risk, financial optimisation, risk management, oil markets, hydrocarbon markets, decision making, refining, refinery industry, financial risk, energy finance
Financial optimisation and risk management in refining activities
The real options approach has become a benchmark in real assets evaluation and optimal management problems, especially in liberalised and competitive markets such as the oil and hydrocarbon markets. This paper describes how the same approach can be a useful tool for both risk management decisions and the financial optimisation problem. Refineries are black boxes, which can be used for the transformation of crude oil into more refined hydrocarbon products. These black boxes are characterised by operational flexibilities and constraints, which should be optimally managed in order to maximise the refiner's economic goals. Stochastic dynamic programming represents the right mathematical instrument employed to solve the decision-making problem in such an economic environment.