1. The document proposes an alternative licensing arrangement called [SR]2 for computer integrated manufacturing (CIM) technology suppliers and hydrocarbon processing industry (HPI) operating companies to share risks and rewards. 2. Under this arrangement, the CIM supplier would install and maintain CIM solutions at no upfront cost to the HPI opco, and be paid a percentage of the quantified financial benefits achieved over the long term. 3. The proposal aims to properly align the commercial interests of the CIM supplier and HPI opco to maximize benefits over 10-30 years through accurate performance measurement and an optimized split of the financial gains between the two parties.

1. PERFORMANCE
OF
COMPUTER INTEGRATED MANUFACTURING
OF
FUELS AND PETROCHEMICALS
BY
TECHNOLOGY SOLUTION SUPPLIER
Author Pierre R Latour, CLIFFTENT Inc
Houston, Texas 77079
281 556-8179
clifftent@hotmail.com 18Jan07

2. [SR]2
Shared Risk and Shared Reward
Business Relationships for
Sustained Profit Performance

3. [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.

4. Overview
1. 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

5. 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.

6. Problem Statement
Generate maximum benefits from CIM solutions
over 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.

7. Principles of Solution
1. 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, maintenance
and limit violation penalties.
▪ Business arrangement that fosters cooperation and
minimizes adversarial relations by teaming to prosper
together by creating more value from process operation.

8. 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.

9. Principles of SolutionContinued
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.

10. Principles of SolutionContinued
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.

11. Fig. 1 Optimum Benefit Split %

12. Solution
Measure 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

13. 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, dOpc
dQ dL dR
Three Economic Drivers:
d$Yld, d$Cap, d$Opc
T T T

14. Benefit rate, $/day = Flow, T/day *
[ dQ * dYld * d$Yld
dQ T
+ dL * dCap * d$C
dL T
+ dR * dOpc * d$Op ], $/T
dR 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.

15. 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

16. 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.

17. Opco Profit Potential
Major Oil Refiner
Location, Process, Throughput
Houston, five refineries, 1 kkbpd
Free, no risk variable annuity:
$/bbl feed = 1.5
kk$/day = 1.5
kk$/yr = 548
PV(10yr, 10%), kk$ = 3704
PV(10yr, 20%), kk$ = 2757
PV(30yr, 10%), kk$ = 5682
PV(30yr, 20%), kk$ = 3274
Source of benefit, %
Yield 45
Capacity 35
Op cost 20

18. 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.

19. 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.

20. 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.

21. 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.