PERFORMANCE

OF

COMPUTER INTEGRATED MANUFACTURING

OF

FUELS AND PETROCHEMICALS

BY

TECHNOLOGY SOLUTION SUPPLIER

Author Pierre R Latour, CLIFFTENT Inc Houston, Texas 77079

281 556-8179clifftent@hotmail.com 18Jan07

[SR]2

Shared Risk and Shared Reward

Business Relationships for Sustained Profit Performance

[SR]2™

Shared Risk and Shared Reward

Alternative performance-based CIM technology licensing arrangement designed to address long term success

of both

▪ HPI operating company

▪ CIM solution supplier

by properly aligning commercial risk with know-how, experience and value added performance.

Overview1. Supplier’s Mission

2. Problem Statement

3. Principles of Solution

4. Solution

5. Potential

6. Specific Proposal

7. CIM Supplier Commitment

8. HPI Opco Commitments

9. Actions

Mission Statement

Provide a business partnership that will allow HPI Opcos to:

▪ Identify operating benefits properly,

▪ Capture these benefits quickly and effectively,

▪ Sustain and enhance the benefits over the life of the plant,

through proper application of CIM techniques like multivariable control, closed-loop optimization, scheduling, integration, information technology

and performance measurement.

Problem Statement

Generate maximum benefits from CIM solutionsover the long term (say 10 – 30 years) with minimal risk and low capital cost.

▪ Ensure best available technology▪ Ensure maintenance of system

▪ Ensure retention of talented support▪ Ensure Opco benefits are sustained

Maintain full competitive advantage by operating to economic objectives safely and reliably.

Principles of Solution1. Performance

▪ Supplier should determine his system performance and assessment of financial benefit properly.

▪ Opco provides accurate data for benefit

2. Sources of Value

▪ Optimize risky profit tradeoffs for Controlled Variables and Key Performance Indicators that affect

capacity, yields, operating costs, maintenanceand limit violation penalties.

▪ Business arrangement that fosters cooperation and minimizes adversarial relations by teaming to prosper

together by creating more value from process operation.

Principles of Solution Continued

3. Risk

CIM Supplier assumes risk commensurate with contribution, performance, knowledge and experience

in exchange for appropriate opportunity for reward.

Preferable to pay for performance:

▪ Supplier is paid from benefits he creates.

▪ Opco takes little risk for technologies and activities for which he chooses not to become an expert.

▪ Opco avoids significant capital investment when he is not in good position to evaluate its returns.

Principles of Solution Continued

4. Future Technology Integration

Performance is maintained by the Supplier and the system is upgraded as:

▪ New proven technology becomes available▪ Plant is modified

▪ Business objectives evolve

5. Split of Benefits

The split of benefits between the Opco and the Supplier is set to:

▪ Optimize Opco net present value of long term benefit and risk for maximum assured NPV expected profit rate.

▪ Provide Supplier sufficient incentive to sustain Opco’s profit rate.

Principles of Solution Continued

An appropriate Split of Benefits is required to ensure the long term viability and performance of the installed system solution.

If the Supplier % is too high, Opco is short-changed and will loose interest.

If the Opco % is too high, the supplier is short-changed and will loose interest.

Commercial HPI CIM experience since 1970 indicates the best split to maximize Opco

expected value profit rate increases to Opco for larger plants with higher profits from economy of scale.

Fig. 1 Optimum Benefit Split %

SolutionMeasure Performance Improvement Properly!

Traditional fragmented approach; three performance claim areas:

Yield. Improve yields of higher valued products (recovery, upgrades, conversion), dYld

Capacity. Increase throughput or production rate, dCap

Operating costs. Reduce energy, utilities, inventory, manpower, maintenance, reprocessing, downtime, dOpc

Three CV/KPI Performance Claims:

Closer approach to product quality specs from variance reduction, dQ

Closer approach to equipment limits from variance reduction, dL

Change in operating consumables like reflux, recycle, reboil,regeneration, repair, dR

Three Process Model Factors:dYld, dCap, dOpcdQ dL dR

Three Economic Drivers:d$Yld, d$Cap, d$Opc

T T T

Benefit rate, $/day = Flow, T/day *

[ dQ * dYld * d$YlddQ T

+ dL * dCap * d$CdL T

+ dR * dOpc * d$Op ], $/TdR T

Flow is feed or main product rate.

This arbitrary, imprecise, linear method relating Controlled Variables and Key Performance Indicators,

CV/KPI, to profit without risk is not satisfactory for [SR]2.

The Right Way

The key is a method of reliably and accurately measuring the performance benefits continuously on all CV/KPI.

If Opco actually runs plant by setting targets aligned to his economics, Supplier is assured data and method is best available.

Bad data causes quantifiable losses.

The rigorous CLIFFTENT™ method for optimizing risky tradeoffs and showing CV/KPI profit meters is required. Each CV/KPI has an associated profit function tradeoff shaped like a tent, often with a

discontinuity cliff at a limit.CIM claims are variance reduction.

Reference, Latour, P.R., “Process control: CLIFFTENT shows it’s more profitable than expected”, Hydrocarbon Processing, Dec 1996

Benefits Assessment Policy

Supplier and Opco work together to determine the value-added performance of the system using:

▪ Statistical data analysis▪ Rigorous process models

▪ Accurate economics▪ Losses from limit violations

▪ Periodic test runs

Test runs with the CIM system or components disengaged or replaced by alternate, manual means will quantify losses that

would have been avoided had the system or component been used.

Accurate base and improvement comparison is essential.

Opco Profit PotentialMajor Oil Refiner

Location, Process, ThroughputHouston, five refineries, 1 kkbpd

Free, no risk variable annuity:

$/bbl feed = 1.5kk$/day = 1.5

kk$/yr = 548PV(10yr, 10%), kk$ = 3704PV(10yr, 20%), kk$ = 2757PV(30yr, 10%), kk$ = 5682PV(30yr, 20%), kk$ = 3274

Source of benefit, %Yield 45Capacity 35Op cost 20

Specific Proposal

Supplier offers to license, install and maintain its CIM solution technology for ____________ facilities

of Opco to maximize long term benefit to Opco at no cost or risk to Opco,

in exchange for SR% of the gross benefit created.

Opco realizes 100 - SR%, less minor out-of-pocket administrative costs to coordinate business with Supplier.

Supplier Commitments

1. Maximize solution benefit.2. Install best technology.3. Maintain and upgrade.

4. Assume all expense risk.5. License rights to technology, software and know-how on a unit application basis, as long as solution equipment and software is used for original process purposes at original site.

6. Retain right to terminate or withdraw. This would naturally happen if Supplier split becomes inadequate to cover support costs.

Opco Commitments

1. Maximize solution benefit.2. Provide economic information.

3. Supply or confirm performance measure input data.4. Provide plant, system access.

5. Staff cooperation.6. Pay Supplier share of benefit.

7. Retain right to terminate solution and discontinue payments.

This would naturally happen if Opco split becomes inadequate to cover support costs.

Actions

1. Opco and Supplier agree to embark on a [SR]2™ business relationship based on financial performance

of Supplier’s CIM solution.

2. Opco will execute Supplier’s [SR]2 agreement.

3. Opco and Supplier appoint business representatives to lead, manage and execute for results.

4. Supplier to devise a scope, plan, requirements and schedule for prompt implementation.