Enter your name and Access ID ('aa1234' format) in the cells above. The data required for
this case will not appear until you do so.
You are a Logistics manager for VKT Corp., and energy extraction and production company. An
oil well in the company's portfolio is generating 10,000 barrels of crude oil per day in excess of
present sale commitments. The crude oil can be sold as is on the commodities markets, or
refined and converted into other products which may be sold for higher prices, and potentially
be worth more. You have been assigned to determine the company's best course of action.
Prepare a sell vs. process further incremental analysis for each possible production outcome in
an Excel worksheet. Your grade will be based on the correctness of your answers, as well as
the use of Excel. That is, where possible, you should use formulas and cell references to get
your answers, rather than keyed-in values. See your instructor for help with Excel basics if you
need it. To help get you started, one analysis has been provided in the 'Your solution' tab.
In a Word document, prepare a memo stating which products the company should produce (or
if it should produce none and just sell the crude oil as is). This document should make specific
reference to your incremental analysis, which should be used as the basis for your conclusions.
Attach both files to the Canvas assignment space by the 12:00 noon on March 17.
See the details of VTK's refining process below.
HINT 1: Work backward. That is, before deciding whether to sell crude as is or refine it into
butane, naphthalene, and kerosene, do the analysis for processing butane into propane,
naphthalene into gasoline, etc., to find out what each product is worth in its best use.
HINT 2: A complete analysis will make five comparisons. One for each fully processed output
(propane, gasoline, diesel fuel, heating oil), and one to determine whether the best array of
products are worth more than selling the crude oil as is.
VTK's Refining Process and Market Summary
Crude Oil
The company is producing 10,000 barrels of oil per week in excess of existing commitments.
These barrels can be sold as is on the spot market for $60.01 per barrel. (1 barrel = 42 gallons)
Refining
Refining the crude oil requires heating and distilling it at a cost of $6,200 per week for the
entire excess production. After basic refining, the crude oil is gone, but there are 46,000
gallons of butane, which can be sold for $1.61 per gallon, 198,000 gallons of naphthalene,
which can be sold for $1.56 per gallon, and 60,000 gallons of kerosene, which can be sold for
$3.96 per gallon. A vacuum distiller can also be run (at an additional cost of $1,800 per week)
that will yield 116,000 gallons of heavy gas oil, for which there is currently no market. This
by-product is lost if the vacuum distiller is not run.
Further processing
All of the butane can be treated to convert it into 44,000 gallons of propane. Propane can be
sold for $1.72 per gallon, and the conversion process costs $2,100 per week.
All of the naphthalene can be isomerized and blended to convert it into 193,900 gallons of
gasoline. Gasoline can be sold for $1.48 per gallon, and the conversion process costs $2,000
per week.
Kerosene can be sold for $3.96 per gallon. Alternatively, all of the kerosene and all of the
naphthalene can be run through a hydrotreater at a cost of $3,200 per week to produce
257,000 gallons of diesel fuel, which can be sold for $2.05 per gallon. In this case, since the
naphthalene is used, no gasoline production is possible.
Another use for the kerosene is to run it and the heavy gas oil through a hydrocracker (at a
cost of $800 per week) to produce 174,700 gallons of heating oil, which can be sold for
$1.43 per gallon.