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Designing of integrated system-dynamics models for an oil company

Article  in  International Journal of Computer Applications in Technology · December 2012

DOI: 10.1504/IJCAT.2012.051122

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220 Int. J. Computer Applications in Technology, Vol. 45, No. 4, 2012

Designing of integrated system-dynamics models

for an oil company

Andranik S. Akopov
Faculty of Business Informatics,
Business Analytics Department,
National Research University Higher School of Economics,
Kirpichnaya str. 33, 105679 Moscow, Russia
Email: aakopov@hse.ru

Abstract: This paper presents a new approach to designing integrated simulation models for
large corporations. This approach is based on the use of system-dynamics methods for
implementing models of segments of the vertically integrated company taking into account the
available direct and feedback links. All models have been designed with the help of power
simulation tool – Powersim Studio. In addition, the designed simulation system has been
integrated with created genetic algorithm and the corporate data warehouse.

Keywords: computer modelling and simulation; VIOC; vertically integrated oil company;
investment activity; Powersim Studio; genetic optimisation algorithm; system dynamics.

Reference to this paper should be made as follows: Akopov, A.S. (2012) ‘Designing of
integrated system-dynamics models for an oil company’, Int. J. Computer Applications in
Technology, Vol. 45, No. 4, pp.220–230.

Biographical notes: Andranik S. Akopov is currently a Professor in Business Informatics

Department, National Research University Higher School of Economics, Moscow. He obtained
his Bachelor and MSc degrees from Moscow Aviation Institute (Technical University), Moscow.
He obtained his Dr.Sc. in Engineering from Dorodnicyn Computing Centre of Russian Academy
of Science in 2009, Moscow. His main research interest is in the area of evolutionary
computations, system dynamics, agent-based simulation and business intelligence systems. He
has published over 50 papers on these topics and provided consultancy to various companies.

1 Introduction The main object of study in this work is the intra-corporate

The purpose of the present study is the development of models,
methods, and the system of optimal investment activity
management of the Vertically Integrated Oil Company (VIOC)
implemented as part of the software system. Such system
consists of models of VIOC segments developed by using
methods of system dynamics and implemented on the
simulation modelling platform Powersim Studio.
It should be noted that the theory of system dynamics is
worked out and introduced in the work of Forrestter (1961),
Meadows et al. (1972), John (2000), Lo Storto et al. (2008),
and Yu et al. (2010).
The developed software system allows us to solve different
management problems. The genetic optimisation algorithm
with fading selection introduced and realised within such
system provides an efficient search procedure of suboptimal
investment decisions for the maximisation of VIOC
shareholder value by various restrictions. The integration of
computer models of VIOC segments implemented on
Powersim Studio with corporate data warehouse is carried out.
investment strategy of the VIOC and its key segments:
 Exploration and oil production.
 Transportation system.
 Oil refining.
 Sales of oil products.
Therewith the investment policy of VIOC is considered with
account of the complex interaction of performance factors
of segments (through the mechanism of cross-connections
and feedback links), the presence of the system of corporate
limits and preferences, the chief being the company
capitalisation with account of infrastructure characteristics
(transportation system).
The developed investment activity management system
of VIOC belongs to the class of BPM systems and at once
essentially differs from all existing systems of such class in
allowing to solve the most important problem of VIOC for
maximising its shareholder value by various restrictions and
scenario conditions.

Copyright © 2012 Inderscience Enterprises Ltd.

 Designing of integrated system-dynamics models 221

The developed investment activity management system where V12 is oil production volume of transition well stock
of VIOC belongs to the class of hybrid systems which are
using both methods of system dynamics and Agent Based W   5 Db11 5 ,if   5
V12   (3)
Modelling (ABM) approach. Note that sample of using only  0,if   5
ABM simulation for the investment planning control is
developed by Zhang et al. (2008). Dynamics of total oil production (thousand tonnes)
V1t  V11t  V13t (4)
2 Extended system-dynamic model of VIOC Dynamics of overall well stock
The extended model is a system of linear finite-difference t

equations describing dynamics of oil production and wells W t  W 0   W  (5)

 1
by various restrictions and scenario conditions.
In contrast to other existing models of VIOC it realises Then on the basis of the received values of oil production
the high detailing rate of influential factors among which volumes and with account of exogene specified values of
the dynamics of well transfer from the new stock into the other influential factors (oil prices, costs, etc) the calculation
old one with corresponding change of production volumes is of financial characteristics is executed for the extended
one of the most important. model.
In the context of this model, the sensitivity of the
selected estimating functional (shareholder value) regarding
influential factors was considered. 2.2 Dynamics of finance indicators
Such extended model proves to be adequate under Let us introduce the following symbols: I1t – infrastructure
conditions of absence of investment capital deficit.
Thus, in the extended model all assets of raw materials investments (million roubles) – exogene; I 2t  I wt W t – well-
are differentiated into two well stocks: drilling investments – exogene; I wt – costs for drilling of one
 New stock, production volume of which is increased due well (million roubles/hard currency) – exogene; Cwt – semi-
to wells newly put into operation with specified initial fixed costs for one well (thousand roubles/hard currency) –
flow rate, and then adjusted due to the influence of the so-
exogene; Cst – labour costs (thousand roubles/hard currency)
called average skin factor reducing the total productivity.
– exogene; CHt H t – semi-variable costs for liquid (million
 Old stock, production volume of which goes evenly
t
down with set paces. roubles) – exogene; Pr * – other receipts gained from sales
The dynamics of well transfer from the new stock into the of natural and petroleum gas (thousand tonnes) – exogene;
old one is described temporally with corresponding change p1t – internal Russian oil price (roubles/tonne) – exogene; 1t
of oil production. – rate of MET (Mineral Extraction Tax) (%) – exogene; t2 –
profit tax rate (%) – exogene; – tax1t – MET, tax t2 – profit
2.1 Dynamics of oil production and wells

tax, tax t3 – other taxes (million roubles) – exogene; At –
Let us introduce the following symbols: Db11 – initial flow
depreciation (million roubles) – exogene.
rate of new wells (tonnes/day) – exogene; Db130 – average flow Investments (capital expenditure) (million roubles)
rate of an old well (tonnes/annum) – exogene; W  –
CAPEX t  I1t  I 2t (6)
development rate (wells/annum) – exogene; W 0 – well stock
at the beginning (wells) – exogene; KC – degradation factor of Operating expense (million roubles)
well productivity – exogene; V13 – oil production decline rate
OPEX t  Сwt W t  CstW t  CHt H t (7)
for old wells (%/annum) – exogene; t = 1,2,…,T,   1, 2, ,T
– time (by years). Oil sales receipts (million roubles)
Dynamics of oil production volume for new well stock
(thousand tonnes) Pr t  p1tV1t  Pr t * (8)
t
Total tax contributions (million roubles)
 [V  11
1
 W  Db11  V12 ]
V 
t
11
1
, V 0
0
11 (1) Tax t  tax1t  tax2t  tax3t (9)
КС
Dynamics of oil production volume for old well stock where
(thousand tonnes) tax1t  1t p1tV1t ,
t
V13t   V13 1  V13t V13  V12 , V130  W 0 Db13 (2) tax2t  (Pr t  OPEX t  At ) 2 .
 1
222 A.S. Akopov

2.3 Dynamics of shareholder value
t control variable as matrix elements of ‘cut-off’ of oilfield
Let us introduce the following symbols: DMA – reserves sale
yield (million roubles) – exogene; Lt – loan capital (million
roubles) – exogene; Dt – estimated dividends to shareholders
(million roubles) – exogene; Qat – quantity of shares issued
(pcs) – exogene; B – coefficient (is equal to planning horizon T)
– exogene.
Cash flow before financing (million roubles)
CF0t  DMAt  Pr t -OPEX t  Capex t -Tax t
Cash flow with account of financing (million roubles)
within the oil production segment, with the separation of
investments.
3 Integrated system-dynamic model of VIOC
An important characteristic of the control system of VIOC
is the integration of all its subsystems (see Figure 2) realised
by using system-dynamics methods for accounting the
(10)
interdependence of VIOC segments and their subsystems by
means of feedbacks.

CF1t  CF0t  Lt (11) Figure 2 Integrated model of VIOC

Income per share – shareholder value (roubles/pc) Oil production

subsystem
CF  Dt t
Prices Oil
Pat  B 1
(12) calculated by production
Qat using net volume by
back method oilfields
The diagram segment of the developed extended system-
Transportation
dynamic model of VIOC is shown in Figure 1. subsystem
Delivery
Figure 1 Segment of fishbone diagram for the extended model Demand for volume of
of VIOC (see online version for colours) oil stock of oil stock-tank
refineries oil
Shareholder value Oil refining
of oil company
subsystem
+
Delivery
Net profit of oil company volume of
Demand for
+ B1. oil products
oil products
Reinvestments +
Other receipts + + -
into new well Sales subsystem
(oil products sales, Reinvestments (from
stock
assets, etc.) Total oil profit) into drilling of
(CAPEX)
production volume new wells
Operating
+ + expense Investments into oil
(OPEX) production projects
Oil prices, dollar rate, etc. -
+ Investments into transportation
infrastructure

B2. Dynamics of well Investments into oil refining

Old well stock + New well stock (Construction and reconstruction of plants)
transition between
well stocks
Investments into sales
channels

In the developed extended model of VIOC (see Figure 1)

there is a very important balance feedback ensuring
continuous increase of shareholder value due to reinvestments
(from profit) into drilling of new wells (B1, Reinvestments
into new well stock). The growth of new wells’ number
results in increase of oil production volume and consequently
in growth of profits at the next time step.
Then with the developed extended model of VIOC by
using the Monte Carlo method the estimation of the
sensitivity of the selected functional was carried out for each
of pre-selected number of factors. Note that Monte Carlo
methods are very useful for the risk analysis (Wang, 2011).
As a result of investigations conducted it was revealed that
the shareholder value is mostly influenced by characteristics
directly connected with assets of raw materials (existing well
stock, initial flow rate, etc.) and by relevant investments.
Therefore, the further line of development for the shareholder
value model is detailing of assets of raw materials by oilfields
Consequently, there arises an intricate problem of controlling
the very large pool of data flows including all VIOC
segments. Solving this problem required the construction
of corporate data warehouse integrated with developed
computer models of VIOC segments and the development of
the necessary integration software.
Then an integrated control model of VIOC shareholder
value was developed.
The integrated control model of VIOC value is a system of
non-linear equations describing the dynamics of characteristics
of VIOC segments with account of influence of scenario
conditions, restrictions and various control parameters.
The distinctive feature of the integrated model of VIOC
comprises:
 Integration of all most important segments of VIOC
allowing to assess the efficiency both of VIOC segments
and the system in whole;
 Designing of integrated system-dynamics models 223

 High differentiation of segments and their subsystems, by the specified oil production plan
particularly portfolios of investment projects; J

 Accounting the influence of feedbacks between certain V

characteristics of VIOC segments.
Such integrated model proves to be adequate enough under
conditions of investment capital deficit.
Under the real conditions of investment capital deficit
the oil company determines its strategy of oil production.
For the realisation of the chosen strategy of oil production
the VIOC makes an investment portfolio in all segments for
the maximisation of shareholder value.
The models of the following key segments of VIOC are
developed in this work:
 Model of the upstream segment (oil production).
 Transportation model.
 Model of the downstream segment (oil refining).
 Model of oil products sales.
The shareholder value of VIOC has two most important
components (see Figure 2):
 DCF1 – discounted cash flow from oil production (calculated
with account of transportation system influence);
 DCF2 – discounted cash flow from oil refining and sales
(calculated with account of oil production influence).
For further description of models of VIOC segments the
control variables will be highlighted with bold upright font
and the variables formed in models of other VIOC segments
(regarding the considered segment) will be highlighted with
bold italics.
3.1 Model of oil production segment
The model of oil production segment is a controlled system
of distributed material and financial flows of OGPC (Oil-
and-Gas Production Corporation) with specified scenario
values of material flows in whole by oilfields. Such model
is a segment in an integrated investment management
system of VIOC.
3.1.1 Oil production volume
Let us introduce the following symbols: t  1, 2,..., T – time
by years; j  1, 2,..., J – index of enterprises (OGPC);
i  1, 2,..., N j – index of investment project (oilfield);
 t
j ,i  0;1 – matrix elements of investment projects cut-offs;
v t
j ,i – oil production volume for i-oilfields of j-OGPC
t Nj
(thousand tonnes/annum) – exogene; V – oil production plan
(thousand tonnes/annum) – exogene.
Total oil production volume for the group of producing
oilfields of VIOC
Nj
j 1
j
t
V .
t
(14)
Then on the basis of the received values of oil production
values and with account of exogene specified values of other
influential factors (oil prices, costs, etc.), the calculation of
financial characteristics is carried out for the model of oil
production segment.
3.1.2 Finance indicators of oil production segment
Let us introduce the following symbols: p tj ,1 , p tj ,2 – oil price
on the internal market (roubles/tonne) and on the foreign
market (dollars/tonne), respectively, with account of
transportation costs;  tj ,i – oil delivery share on the foreign
market (%); Et – dollar rate – exogene; s1t (V jt , ωtj ) ,
s2t (V jt , ωtj ) , – unit transportation costs calculated by using the
transportation model; htj ,i – oilfield investments – exogene;
c tj ,i – operating expense (roubles) including variable and fixed
costs (without transportation costs) – exogene;  tj ,i – total
tax contributions: Mineral Extraction Tax – MET, export
duties, etс. (without profit tax)  tj ,i   t2 vtj ,i p tj ,1 
 t3 v tj ,i tj ,i E t p tj ,1  tax tj ,i where  t2 – rate of MET (%) –
exogene;  t3 – export duty (%) – exogene; taxtj ,i – other taxes
(%) – exogene; a tj ,i – depreciation charges – exogene; g tj ,i –
costs (roubles) for exploration work – exogene; r * – discount
rate – exogene; 1t – profit tax rate (%) – exogene.
Oil delivery share on foreign market from j-OGPCs
Nj
v t
j ,i  tj ,i  tj,i
j  i 1
. (15)
V jt
Net profit (before profit tax) for i-oilfield of j-OGPC
 tj ,i  v tj ,i (1   tj ,i ) p tj ,1  vtj ,i tj ,i E t p tj ,2
(16)
c tj ,i   tj ,i  a tj ,i  g tj ,i .
Oil prices on internal and foreign markets for this OGPC
p tj ,1  pˆ1t  s tj,1 (V jt , ωtj )
(17)
p tj ,2  pˆ 2t  s tj,2 (V jt , ωtj )
Total net profit of this OGPC
Pjt    tj ,i  tj,i . (18)
i 1
Total investment expenditure of this OGPC
Nj

V  v 
j
t t
j ,i
t
j,i (13) I tj   htj ,i  tj,i . (19)
i 1 i 1
224 A.S. Akopov

Total operating expense of this OGPC c 2tm 2 – unit costs of deliveries on internal and foreign routes,
Nj respectively, accordingly; m1  1, 2,..., M 1 – dispatching
C tj   c tj ,i  tj,i . (20) points (cities where OGPCs are located) – exogene;
i 1
m2  1, 2,..., M 2 – terminals (oil refineries) – exogene;
Cash flow from operations b  1, 2,..., B – index of the city;
otj ,i  ( tj ,i  1 tj ,i )  g tj ,i  a tj ,i . (21) mi
z1,1 mi
z1,2 ... z1,miB
mi mi
Total cash flow from operations z z ... z2,miB
Z mi  2,1 2,2
– set of internal (i = 1) and
Nj ... ... ... ...
Otj   otj ,i  tj,i . (22) z Bmi,1 z Bmi,2 ... z Bmi, B
i 1
foreign (i = 2) routes linking OGPC and oil refineries –
Net present value of finance flows for j-OGPC and i-project.
exogene; zbmi,b  1;0 , i  1, 2 , b  1, 2,..., B ; y1tm1 , y 2tm 2
T (otj ,i  htj ,i )  tj,i .
NPV j ,i   . (23) delivery volumes on internal and external routes (thousand
t 1 (1  r*)t tonnes); x1m1 t
– demand at terminals on internal routes
Total net present value for all projects of this OGPC calculated in the downstream segment model (oil refining);
Nj x 2tm 2 – demand at terminal on foreign routes – exogene;
NPV j   NPV j ,i  tj,i . (24) S1(m1), S2(m2) – points of internal and foreign routes
i 1
(where OGPCs are situated) – exogene; E1(m1), E2(m2) –
Discounted cash flow of the upstream segment (the first terminals of internal and foreign routes (where oil refineries
element of shareholder value): are situated) – exogene; tr1bmi1 ,b2 – segment throughput

DCF1   NPV j .
J
(25) b1 , b2  of i-route (i = 1,2) – exogene; tr 2bmi1 ,b2 – oil pumping
j 1
costs at the segment b1 , b2  of i-route (i = 1,2) – exogene;
It should be noted that in contrast to existing oil production ωtj – oil delivery share on the foreign market of j-OGPC
models of VIOC mainly intended for the calculation
of processing characteristics of the upstream segment (for determined in the upstream segment model (oil production);
example, flow rate estimation of wells and oilfields on the basis V jt – oil production volume for OGPC calculated in the
of reserves estimation) and being isolated the developed model upstream segment model.
is destined for investment management and aimed at the
maximisation of shareholder value. 3.2.1 Transportation problem of VIOC
It is required to minimise total transportation costs:
3.2. Transportation model of VIOC
 M1 t M2
t 
  c1m1 y1m1   c 2m 2 y 2m 2   y1min
The transportation model of VIOC is a controlled system t t
(26)
 m11 
t t
describing the distribution of oil stock by routes. m 2 1 m1 , y 2m 2

In contrast to other existing transportation models of

VIOC: by balance relations
M1
 it takes into account the system of active constraints
considerably affecting the final transportation costs
  y1
m11
t
m1 | j  S1(m1)   V jt (1  ωtj ) (27)
including the constraints on throughput, transportation
M2
costs by route segments, etc., as well as the dynamics
of demand and supply at input and output of the
 Y 2
m 2 1
t
m1 | j  S 2(m2)   V jt ωtj for all j  1, 2,..., J (28)

transportation system accordingly;

and restrictions
 it is also integrated with investment management
B B B B
models of oil production and oil refining segments. y1tm1    zbm1 1,b2 tr1bm11,b2 , y 2tm 2    zbm1 ,2b2 tr1bm1 2,b2 (29)
It is a typical transportation problem of VIOC with a b1 1 b2 1 b1 1 b2 1

functional in form of total transportation costs for deliveries

on internal and foreign routes accordingly by balance
relations and restrictions. As a result of solving this problem
the values of phase variables y1tm1 , y 2tm 2 can be determined
which are volumes of delivery distributed on internal (m1)
and foreign (m2) routes accordingly.
Let us introduce the following symbols: j  1, 2,..., J –
index of OGPC; k  1, 2,..., K – index of oil refineries; c1tm1 ,
y1tm1  x1m1
t
, y 2tm 2  x 2tm 2 (30)
for each of routes m1 = 1,2, …, M1,…,m2 = 1,2,…,M2.
After solving the transportation problem by using a
well-known potential method and after determining values
of phase variables { y1tm1 , y1tm 2 } unit transportation costs,
volumes and prices of oil delivery to oil refineries are
calculated.
 Designing of integrated system-dynamics models 225

Calculation of unit transportation costs and oil delivery 3.3.1 Oil refining volume by types
volumes to oil refineries.
Let us introduce the following symbols: k = 1,2,…,K – index of
Unit costs of oil delivery on routes (roubles/tonne and
oil refinery; r = 1,2,…,T – regions; u = 1,2,…,U – types of oil
dollars/tonne)
products; t = 1,2,…,T – time (by years);  – variant of oil
B B B B
refinery reconstruction, ψ  1,2,..., Ψ ;  k,t ψ  1;0 – matrix
c1tm1    zbm1 1,b2 tr 2bm11,b2 , c 2tm1    zbm1 1,b2 tr 2bm11,b2 . (31)
b1 1 b2 1 b1 1 b2 1 elements of ‘cut-offs’ of equipment investments corresponding
to different variants of oil refinery reconstruction; fnkt –
Unit transportation costs for OGPC
control function of oil refinery (established technological
M1

  y1 t
m1 c1tm1 | j  S1(m1)  parameters) – exogene; tk – oil refinery utilisation (%) –
s t
j ,1  m11
M1
, exogene; Θ kt – delivery volume of stock-tank oil from OGPC
  y1 t
m1 | j  S1(m1)  to k-oil refinery calculated in the transportation model (tonnes);
m11
(32)  t – delivery volume of oil purchased from third-party
Θ k
M2

  y 2 t
m2 c2 t
m2 | j  S 2(m2)  vendors; x r,u
t
– demand for oil products by regions calculated
s tj ,2  m 2 1
M2 in the sales model; w1,t k , r ,u , w2,t k , r ,u – delivery volume on
  y 2
m 2 1
t
m2 | j  S 2(m 2)  internal and foreign markets.
Production function of oil refinery
Net back prices on routes
 t ); fnt )
Gkt ,u (ψ, tk , (Θtk  Θ (36)
k k
p1  pˆ  c1 , p 2
t
m1
t
1
t
m1
t
m2  pˆ  c1
t
2
t
m2 (33)
by the execution of balance relations
Oil price delivered to oil refineries
 t ); fnt )
Gkt ,u (ψ, tk , (Θtk  Θ k k
M1

  y1 t
m1 p1tm1 | k  E1(m1)  R
   w1,t k , r ,u  w2,t k , r ,u 
(37)
p t
k ,1  m11
M1
(34) r 1

  y1tm1 | k  E1(m1)  K
m11
w
k 1
t
1, k , r , u  xr,u
t
, r  1, 2..R, u  1, 2..U (38)
Volumes oil delivery to oil refineries
M1
Consumption characteristic of oil stock.
  t
k   y1
m11
t
m1 | k  E1(m1)  (35) Oil consumption at terminals of internal routes
K
x1tm1    Θtk  Θ
 t | k  E1(m1) 
 (39)
It should be noted that in contrast to existing transportation k
k 1
models of VIOC the developed model is a segment in the
integrated investment management system of VIOC and
takes into account the dynamics of demand and supply at 3.3.2 Finance indicators of oil refining segment
input and output of the transportation system. Let us introduce the following symbols: hkt   –
t
equipment investments of oil refinery – exogene; pˆ ,
3.3 Model of oil refining segment t
1, r , u

pˆ1, r , u – transfer value of oil products on internal and foreign

The model of oil refining segment is a controlled system of
distributed material and financial flows of an oil refinery by markets (cost price) – exogene; pk1
t
– oil price delivered by
specified material balances. VIOC to k-oil refinery calculated in the transportation
The used parametric production function is a linear form model; pt~ – oil price purchased from third-party vendors
by the specified system of balance relations. The calculation
of production function values is carried out by specified pt  pk1
t
– exogene;  kt – total tax contributions (without
material balances describing the static interaction of oil profit tax) – exogene; Ckt – operating expense – exogene; akt
refining plants. The production functions used for the
– depreciation of oil refinery equipment exogene; trkt, r –
calculation are described in detail in the work of Akopov
and Beklaryan (2009). foreign transportation rates ($/tonne) – exogene; Et – dollar
In contrast to other existing model this model of an oil rate – exogene; r* – discount rate – exogene.
refinery: Net profit of oil refinery (before profit tax)
 Allows to reconfigure the layout of an oil refinery U R
 kt    w1,t k , r ,u pˆ1,t r ,u  E t w2,t k , r ,u pˆ 2,t r ,u
depending on dynamics of demand for oil products and u 1 r 1
deliveries of oil stock at input and output of the
 t )  E t tr t
R U

enterprise accordingly. ( pk1
t
Θtk  pt Θ k  
r 1 
k , r 
u 1
w2,t k , r ,u  

(40)
 It is integrated with transportation and sales models of
VIOC.  Ckt  akt   kt
226 A.S. Akopov

Cash flow from operations of oil refinery refinery calculated in the model of oil refining unit (thousand
tonnes); pˆ1,r,u,c
t
– transfer value of oil products delivered from
Okt  ( kt  1 kt )  akt (41)
oil refinery calculated in the model of oil refining unit
Cash flow from investment activity of oil refinery (thousand tonnes);  rt ,u – predictable market volume of oil
t products with account of share of competitor VIOC – exogene.
I kt    k,ψ
t
hkt , . (42)
 1
3.4.1 Sales problem of VIOC
Net discounted cash flow of oil refinery
To calculate the couple  
xrt ,u , c , p1,t r ,u , c  by which the excess
Ot  I t
T
NPVk   k kt (43) demand for oil products is equal zero.
t 1 (1  r *)
C

It should be noted that in contrast to existing oil refining

t
w r,u    r,c
t
xrt ,u ,c  0 (44)
c 1
models of VIOC mainly intended for the optimisation of
internal equipment operating practices of oil refinery and xrt ,u1,c
being isolated the developed model is destined for xrt ,u ,c   r ,u ,c
(45)
management of investments into various variants of oil  p1,t r ,u ,c / p1,t r1,u ,c 
refinery reconstruction with account of demand for oil
products and oil production investments. Such model is a by restrictions
segment in the integrated investment management system of С

VIOC. 
с 1
t
x t
r , c r ,u , c   rt ,u (46)

K
3.4 Model of oil products sales t
w r,u   w1,k,r,u
t
(47)
k 1
The model of oil products sales:
 is a system of non-linear equations describing the pˆ 1,r,u,c
t
 p1,t r ,u ,c (48)
dynamics demand and prices for oil products on the
for all r = 1,2,…,R, u = 1,2,…,U, and c = 1,2,…,C.
internal market;
Indicator of total demand by regions and oil products
 belongs to the class of quasi-equilibrium CGE models C
(computable models of general equilibrium); xrt ,u   xrt ,u , c . (49)
c 1
 uses an iterative procedure of function evaluation of
excess demand which determines the transition process It should be noted that the solution of problems (44)–(49) is
of the system to general economical equilibrium. not unique. To choose a solution the heuristic considerations
are attracted which follow from the problem description.
In contrast to other existing ales models of VIOC: Such a heuristic consideration is the tatonnement method of
quasi-equilibrium state of what is going on in real systems
 it is based on the technology of CGE models essentially
occurring within internal fast time (in particular, weekly).
improving the quality of long-range projection;
Thus, the search algorithm of quasi-equilibrium state should
 it is integrated with models of VIOC segments; be indicated with account of the system functionality and
previous quasi-equilibrium state.
 allows us to reconfigure sales channels depending on
demand and investments.
3.4.2 Calculation algorithm of equilibrium prices in
A radically new sales model of VIOC of CGE class is sales model
suggested which describes the transition process of the
system to the state of general equilibrium. For each instant of time t:
Let us introduce the following symbols: r = 1,2,…,R – 1 Let us define the number of iterations –
regions; c = 1,2,…,C – sales channels of oil products (filling Q  1/   Q  1 /   (where [] – integral part,  –
stations, petroleum storage depots, franchise, etc.); c = 1,2,…,U
sufficiently small number), iteration index within internal
t
– oil products by types; γ r,c  1: 0 – matrix elements of ‘cut- t,q 1
fast time – q = 1,2,…,Q, initial prices p1,r,u,c  p1,t r1,u , c ,
offs’ of oil products sales channels by regions; xrt ,u ,c – demand
initial demand x1,t ,rq,u1, c  x1,t r1,u , c and initial excess demand
t 1
for oil products by sales channels (thousand tonnes); x r ,u ,c – C

statistically known demand for oil products (thousand tonnes)
(last-year demand); p1,t r ,u , c – oil products prices (roubles/
tonne);  r ,u ,c – elasticity of demand for oil products – exogene;
t
w1,k,r,u – delivery volume of oil products to r-region from k-oil
E1,t ,rq,u1  wrt ,u1    rt ,c1 xrt ,u1,c (where r,u,c – index of region,
c 1
oil product, and sales channel accordingly, t – time
(by years), p1,t r1,u , c , x1,t r1,u , c – prices and demand for oil
products known for the previous instant of time).
 Designing of integrated system-dynamics models 227

2 Calculate the increment: 4 Problem of shareholder value maximisation

of VIOC
p1,r,u
t,q-1
  E1,t ,rq,u1 , p1,r,u,c
t,q
 p1,r,u,c
t,q-1
 p1,r,u
t,q-1
,

3 Calculate the new excess demand for oil products: Hereunder, we will consider a very important problem of
C VIOC for maximisation of its shareholder value.
E1,t ,rq,u  wrt ,u    rt ,c xrt ,,qu ,c , where The problem defined:
c 1
 belongs to NP-complete problems of mixed programming;
xrq,u1,c
   ,   ,  
t ,q
x r ,u , c  r ,u ,c
.  at input – investment portfolio t
j,i
t
k, ψ
t
r,c and
p1,r,u,c
t,q
/ p1,t ,rq,u1, c 
t ;
volume of additional oil purchases Θ k  
4 Repeat paragraphs 2–3 until   E t ,q
1, r , u   for all r, u
 at output – best value of shareholder value.
( – sufficiently small number).
In contrast to other problems for shareholder value estimation
In this algorithm, the number of iterations Q has an exponent
of VIOC the introduced model:
no less than days of the year. The elasticity of demand for
oil products is r,u,c  0 . The real demand volumes xrt ,u , c are  takes into account characteristics of key units of VIOC;
limited and positive. Therefore, by sufficiently small  the  allows to control a very large pool of investment
prices formed in this algorithm are also positive and the process projects influencing the target function;
itself converges. Thereat it is obvious that the number of
 takes into account the system of competitive limits and
iterations Q for good approximation to the quasi-equilibrium
preferences including all VIOC units;
state depends on the value of .
After calculating the equilibrium (quasi-equilibrium)  is solved by using the technology of Genetic Algorithm
 xr ,u ,c , p1,t r ,u ,c  demand and prices, the financial characteristics
t
(GA).
of sales model are computed.
4.1 Problem of shareholder value maximisation
of VIOC
3.4.3 Financial characteristics of sales model
To build up three groups of control parameters
Let us introduce the following symbols: hrt , c – investments
 
 tj,i ,  k,t ψ ,Θ kt , r,ct  by which the maximum value of
into sales channels – exogene;  rt , c – operating expense of
shareholder value of VIOC is assured.
sales channels – exogene; art ,c – depreciation of sales
DCF1  DCF2  max (54)
channels – exogene;  rt , c – total tax contributions (without  ,
t
j,i
t t 
k,ψ ,Θk , 
t
r,c

profit tax)- exogene. by execution of corporate limits at each instant of

Net profit of sales channels (before profit tax) time t  1,2,.., T :
R
U  limit of investment costs
 ct    r,c
t
xrt ,u,c ( p1,t r ,u,c  pˆ1,r,u,c
t
)  γr,c
t
rt ,c  art ,c rt ,c  (50)
r 1  u 1  N K C

Cash flow from operations generated by sales channels

I I I
j 1
t
j
k 1
t
k
c 1
t
c It (55)

Oct  ( ct  1 ct )  act (51) limit of operating expense

Cash flow from investment activity by sales channels N K С

R
 С tj   Ckt   Cсt  С t
j 1 k 1 с 1
(56)
I   h
t
c
t t
r,c r , c (52)
r 1 minimum required level of cash flow from operations
Net cash flow of the downstream unit (the second element N K C
of shareholder value): O  O  O
j 1
t
j
k 1
t
k
c 1
t
c O
t
(57)
K C T
Oct  I ct
DCF2   NPVk   . (53) minimum level of net discounted cash flow
t 1 (1  r )
t
k 1 c 1
DCF1  DCF2  DCF (58)
It should be noted that the previous sales models of VIOC
were mainly linear and isolated. The developed sales CGE minimum level of profit (before taxes)
model takes into account the transition dynamics of the N K C
system to general equilibrium state and is a unit in the     
t
j
t
k
t
c P
t
(59)
integrated investment management system of VIOC. j 1 k 1 c 1
228 A.S. Akopov

   ,  ,   , Θ 

t
oil production plan Individual is a set   t t t t
j,i k, ψ r,c k
N
of acceptable control variables of the model, phase variables
V
j 1
j
t
V
t
(60)
as well as computable characteristics of the integrated
model of VIOC.
   ,    ,    

t
delivery plan of oil products Chromosome is a set   t t t
of
j,i k, ψ r,c
K K

w
k 1
t
1, k , r , u
t
 W 1, r ,u , w
k 1
t
2, k , r , u
t
 W 2, r ,u (61)
and all restrictions of relevant units of VIOC.
Here, the parameters of corporate limits I t , C t ,  t ,
DCF, Pt, Vt, W1,t r ,u , W2,t r ,u are exogenic and the rest of
characteristics are calculated in the relevant models of
VIOC units for all j-OGPCs, k-oil refineries, and c-sales
channels.
The feature of the considered problem is that characteristics
of all VIOC units influencing the shareholder value
(oil production volume, total transportation costs and supply
structure, oil production volumes by types, demand, and prices
for oil products, etc.) are calculated simultaneously at every
point of simulated time t  1, 2, , T  . The most calculated
characteristics and control parameters are multidimensional, i.e.
they have regional, product, and other dimensions depending
on VIOC unit they refer to. Furthermore, to determine a subset
(phase variables of transportation model of VIOC, equilibrium
demand, and prices for oil products in sales CGE model)
special internal iterative procedures are applied (for solving the
transportation problem – algorithm of potential method, for the
sales one – ‘tatonnement’ algorithm of equilibrium prices). The
complexity of procedures mentioned is stipulated by non-linear
dependences. Thus, the considered problem of shareholder
value maximisation of VIOC can be attributed to the class of
NP-complete problems of high dimensionality. Therefore, the
control variables of this individual.
Gen (project) is a destination point of the set of control
variables (chromosomes).
GA has two very important operators: crossing-over
operator and mutation operator.
The function of crossing-over operator is a selection of two
strongest (most adapted) parental individuals from the
population for crossing for the purpose of forming new
stronger individuals. So, the guided search of local extremums
(and the consecutive motion to the maximum) is carried out in
the considered problem.
The function of mutation operator is the value inversion of
one or several genes in the chromosome of the selected
individual with the specified probability, to ensure the leaving
the neighbourhood of local extremums and tatonnement of
other local extremums.
The population size is fixed. Therefore, after its formation
an automatic pulling (fading) of the weakest individual from
the population due to insertion of new stronger individuals
occurs at every next step of GA.
The most important characteristics of considered operators
are:
 Probability of selection of f-individual as a parental
individual when executing the crossing-over operator
fit tf;
p tf;, sel  F
(1  p tf , out )


 fit   / F
t;
(62)
1

genetic optimisation algorithm with fading selection (GA) was f  1, 2,, F ,   1, 2, , R ,

suggested.
where F – population size (external parameter of GA) –
exogene, fit tf; – fitness function calculated for f-
5 Genetic algorithm developed for the problem individual, p tf , out – probability of individual fading
of shareholder value maximisation of VIOC during the selection;  – periods (iterations) of GA.

Further we will consider the developed genetic algorithm with  Probability of executing the mutation operator for g-
fading selection used for shareholder value maximisation of gene of f-individual
VIOC and for the formation of suboptimal investment  pmut , если  tf ,1g  1
decisions. p tf;, g , mut   (63)
 pmut (1  p f ;out ), если  f , g  0
t 1
The theory of genetic algorithms is considered in detail
in works of Holland (1975) and Goldberg (1989). In f  1, 2,..., F ,   1, 2,..., ,
addition, the application of genetic algorithms in control
systems is considered in detail in works of Lau et al. (2007), where
Jagadeeswari and Bhuvaneswari (2009), Kogilavani and g  G  {( j , i ), j  1, 2,..., J , i  1, 2,..., N j ;
Balasubramanie (2011), and Kang et al. (2011) and in other
(k, ),k  1,2,...,K,   1,2,...,; – gene index in the
famous works.
For the considered problem of shareholder value (r,c), r  1,2,...,R, c  1,2,..,C 
maximisation of VIOC there were developed rules of fading chromosome,
selection ensuring an efficient procedure of decision search. pmut – base probability of mutation operator – exogene.
Let us give a definition of a number of notions. The relations (62)–(63) will be called rules of fading
Population is a set of individuals. selection.
 Designing of integrated system-dynamics models 229

Definition of fitness function for f-individual (2011) and Akopov and Beklaryan (2011) and supposes the
organisation of parallelising of calculations during the value
fit tf;  tf;    DCFf (64) estimation of fitness functions for individuals of population by
using the so-called ‘island model’.
where DCFf – target function (shareholder value) for f-
It should be noted that in this case the convergence
individual, tf; – distance assessment of f-individual from the criterion of GA is a stabilisation degree of the population
tolerance region,  – weighting factor, 0    1 – exogene. fitness function in the course of - iterations.
When determining the fitness function value for each f- The feature of the developed software system is the
implementation of automated management of investment
individual it is necessary to know the value tf; . The
applications coming from subsidiaries of VIOC into data
methodology of determination of restriction residual tf; is warehouse (SAP BW) from the level of ERP systems in real
described in detail in the work Akopov and Beklaryan (2009). time.
Such applications are accompanied by detailed
engineering-and-economical data (e.g. data of tens of
6 Software implementation of the thousands of wells). Processing of such applications is carried
developed system out with the developed integrated model of investment
management of VIOC realised on Powersim and integrated
with data warehouse and genetic optimisation algorithm by
The software implementation of the intelligent control system
means of special software library Powersim SDK (solution
of VIOC is an aggregate of models of VIOC segments
development kit). The results of calculations in Powersim are
developed by using system-dynamics methods which are
saved in data warehouse as suboptimal variants of cut-offs of
integrated with genetic algorithm and corporate data warehouse
investment applications, and then they are analysed by users by
(see Figure 3).
means of tools of OLAP class (online analytical processing).
Figure 3 Flow chart of the developed genetic algorithm integrated
An example of the model of DOWNSTREAM segment
with simulated models of VIOC implemented on on Powersim is shown in Figure 4. In this example, the
Powersim (see online version for colours) control action on the system is realised by using the matrix
of cut-offs of oil refining plants.
Formation of
initial Calculati
Расчет
population - on of
характе Figure 4 Model of realisation (on Powersim) of oil refining
character
t
ристик
isitcs for
Estimation segment (see online version for colours)
of
UPSTRE
population
AM ethane-C2
and
model
regulation
Integrated DCF1 of
Scenario
Calculati individuals
Conditions propane-С3
on of by value of
(macroeconom
character fitness
ic indicators:
dollar rate, isitcs for function n-C4
TRANSP Distillation of gases equipment
oil price, etc.) octane number
ORTATI DCF - iso-C4
relationship
ON shareholder
model value of hydrocarbon gases hydrocarbon Reid vapor
gases-C4
System of VIOC propane pressure by
matrix of cutoffs of gases-C2 propylene-C3 products
corporate
Calculati oil refining plants
restrictions and straight-run
on of Pulling naphtha n-butane
preferences (oil isobutylene
character from
production
isitcs for population Calculation of
plan, limit of straight-run oil alkylate and
DOWNS of the least mixes
expenses, etc.). H2 reformate alkylate butane by Reid
TREAM adopted Reforming vapor pressure of
crude oil
model individual cracking gas Alkylation gasoline AI76
straight-run n-butane2
kerosene gasoline AI76
DCF2
Calculati
Realization growth factor alkylate2
on of straight-run light
gasoline
of rules of gasoil heavy cracked
character gasoil
gasoline AI92
isitcs for fading
selection low-octane
sales straight-run heavy gasoline AI76 gasoline AI95
Refining temperature- gasoil light cracked gasoil
model distillation chart
straight-run
cracked gasoline Output of oil refinery
residuum
Crossing isomerization
Compounding of
vacuum residue light end of gasoline
С2- Vacuum distillation vacuum distillation coke
#

Mutation diesel fuel

С4
Hydrofining 1 residual fuel
heavy thermal С3
Pool of suboptimal Thermal cracking gasoil Catalytic cracking jet fuel
cycle gas oil
investment decisions thermal gasoline
butane
Hydrofining 2 #
power kerosene
Assessment of resistance of
suboptimal decisions light thermal gasoil
residue of thermal
cracking heavy product of
Hydrocracking hydrocracking
Result
(total investment portfolio)

It should be noted that models of oil refining plants are also

The solving method of the considered problem of shareholder realised on Powersim. They are low-level sub-models
value maximisation of VIOC is described in detail in works regarding the high-level model shown in Figure 4 and
of Akopov and Beklaryan (2009), Akopov (2010) Akopov operate in the mode of internal (fast) time.
230 A.S. Akopov
7 Conclusion
So, by using methods of system dynamics the intelligent
information system of investment activity management
of VIOC particularly allowing us to solve the problem of
the shareholder value maximisation of an oil company is
created and implemented.
The special software of the investment activity management
system of VIOC is developed.
 the model of investment activity management of oil-and-
gas production corporation integrated with transportation
model and taking into account the differentiated principle of
projects formation by oilfields is developed;
 the transportation model of an oil company the distinctive
feature of which is accounting of key characteristics of an
existing transportation system (including throughput capacity,
different routes), probability of oil price calculation by
using the net back method and the relation with models of
upstream and downstream segments is developed;
 the model of oil refining segment which in contrast to
previously known models allows to reconfigure the
layout of an oil refinery depending on dynamics of
demand for oil products and investments into oil
production is developed;
 the model of oil products sales on internal market (CGE
model) integrated with simulated model of oil refinery and
allowing to estimate more qualitatively the long-term
dynamics of demand and prices for oil products is developed.
The new genetic algorithm with fading selection allowing to
solve most efficiently the problem of the shareholder value
maximisation of VIOC due to integrated procedure of
fading selection is developed.
The structure of the decision support system ensuring in
particular the shareholder value maximisation of an oil
company by various scenario conditions and restrictions due
to efficient investment capital management is developed.
The developed system designed by using methods of
system dynamics and the technology of genetic algorithms
is implemented in the largest corporations (in particular, oil
company, finance corporation, etc.).
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