Baker & O'Brien, Inc.

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Refinery LP Models – Intimidating but Necessary

Refinery Business Interruption Claim, North America

May 1, 2019

Petroleum refiners typically use Linear Program (LP) models for optimizing the operation of a refinery.  These same LP models can also be used for evaluating lost profit from business interruption (BI) events.  When a refiner carries BI insurance, the submitted BI losses are carefully scrutinized and, in some cases, disputed by the Insurer.  Such a case arose following a fire in a major process unit which led to a downtime of several months for the process unit.  To identify the monthly BI loss, the refiner used an LP model to estimate what the refinery yield of each product would have been but for the fire event.  Baker & O’Brien was retained to opine on the appropriateness of the LP model and the assumptions therein.

Baker & O’Brien was initially provided historical monthly LP model plan charge and yield data and actual monthly charge and yield results for a relevant historical period.  Upon further discussions with the refinery personnel, it was learned that a new LP model had been developed just prior to the occurrence of the fire.  Therefore, any analysis of the old historical monthly LP model data would not be meaningful since the prior LP model had been revised.  Subsequently, it was agreed that a “backcast” analysis would be developed using the new LP model.  This analysis provided information on how the new LP model accounted for seasonal variations in product specifications and operating modes.

Baker & O’Brien assessed the effectiveness of the new LP model to estimate the actual refinery performance as if the fire event had not happened. Then we reviewed the “backcast” results and issued an expert report that was used in subsequent negotiations between the parties.