Quantifying Refinery and Petrochemical Business Losses: What is the Correct Methodology?

A petroleum refinery experienced an emergency power outage that caused equipment damage and a prolonged time to return to normal operation. Engaged to review the damages claim, Baker & O'Brien assessed: (1) plant economics; (2) the validity and achievability of the "production plan"; and (3) the typical on-stream performance of the plant. Our expert report outlined the categories of loss and quantified the damages, which would place the plaintiff in the same position it would have been but for the incident.

A large petroleum refinery experienced an emergency power outage that caused an abrupt shutdown, equipment damage, and a prolonged time to restart the refinery and return to normal operation. Baker & O'Brien was engaged to review the resultant damages claim.

In such events, petroleum refineries and petrochemical plants, both of which have continuous process plant operations, incur losses that typically fall into the following categories: (1) lost processing profits; (2) increased commercial costs related to distressed sales of feedstocks and emergency purchases of products; (3) increased vessel demurrage costs; (4) equipment cleaning/repair/replacement costs; and (5) additional costs for labor overtime charges required for restart. In our experience, the lost processing profit is typically the largest category of damages.

Feedstock purchases and sales of commodity products are often transacted on a relatively short-term basis. Also, production is not usually planned to meet specific customer orders but to supply fungible products to sell into markets that are liquid in nature. Due to the nature of these operations, it is important to rely on the correct methodology for calculating lost profits.

Most parties and experts agree on the fundamental proposition, i.e., to quantify the damages that, if awarded, would place the plaintiff in the same position it would have been but for the incident. However, computing lost profits for a refinery or petrochemical plant requires a fundamental understanding of several factors, including: (1) the plant's economics (pricing) at the time of the incident; (2) the validity and achievability of the "production plan" that forms the basis for damages; and (3) the typical on-stream performance of the plant. Other factors also typically come into play, such as impact to the market resulting from the plant outage - i.e., is the claim inflated due to market effects directly resulting from the outage. The above factors are often the main points of contention due to the complexities inherent in linear program models and the dynamic nature of commodities market pricing.

Baker & O'Brien submitted an expert report that outlined the categories of loss and quantified the damage amounts, which would appropriately place the refiner in the same position as if the loss had not occurred.