CASE

4.1 AMARCO, I NC . 10

audi Arabia is a kingdom in the Middle East with

an area of 865,000 square miles, occupying about
four-fths of the Arabian Peninsula. With a population of about 10 million, this Muslim and Arab state is
generally recognized as being formed in 1927 when
Ibn Saud united the country and was acknowledged
as the sovereign independent ruler. Summer heat is
intense in the interior, reaching 124F, but it is dry
and tolerable in contrast to coastal regions and some
highlands, which have high humidity during the
summer. Winters (December through February) are
cool, with the coldest weather occurring at high
altitudes and in the far north. A minimum temperature recorded at at-Turayf in 1950 was 10F, and it
was accompanied by several inches of snow and an
inch of ice on ponds. Average winter temperatures
are 74F at Jidda and 58F at Riyadh (the capital city),
which has an annual precipitation of 2.5 to 3 inches.
After oil was discovered in Bahrain in 1932, many
companies turned to Saudi Arabia and started exploring. Thus, in 1937, the American Arabian Oil Company, Inc. (AMARCO), was formed as a joint venture
between Standard Oil Company of California
(SOCAL) and the Government of Saudi Arabia to explore, produce, and market any petroleum found in
the country. The year before, a geologist from
SOCAL had discovered a small quantity of oil in the
Eastern Province at Dammam Dome, on which the
oil company town of Dhahran is now built. It was just
beginning to be developed when another discovery
was madeof what was to prove to be the largest
oil eld in the world. Called the Ghamar eld, it
would start Saudi Arabia on the road to becoming a
highly developed country in just a generation. Located
about 50 miles inland from the western shores of the
Persian Gulf, the Ghamar eld is a structural accumulation along 140 miles of a northsouth anticline. The
productive area covers approximately 900 square
miles, and the vertical oil column is about 1,300 feet.
It is generally considered to have recoverable reserves of about 75 billion barrels of oil. Total proven
reserves in Saudi Arabia are estimated at more than
500 billion barrels, enough for more than a hundred
years of production.
10

This case was written by William D. Whisler, California State

University, Hayward.

Since 1950, Saudi Arabia has experienced greater

and more rapid changes than it had in the several
preceding centuries. For example, during this time, as
skilled nationals became available, more and more of
the exploration, drilling, rening, and other production activities came under the control of the country.
SOCAL was left primarily with the marketing and
transportation functions outside the country.
During the 1960s, AMARCO increased its
protability substantially by hiring Dr. George
Dantzig, then of the University of California, as a
consultant. He supervised the development and
implementation of LP models to optimize the
production of different types of crude oils, their
rening, and the marketing of some of their principal
products. As a result of this effort, an operations
research (OR) department was started in the
company with the responsibility of continuing to
review the rms operations to nd other areas
where costs might be decreased or prots increased
by applications of OR.
Now attention is being focused on another
aspect of one of the companys small California
renery operations: the production of three types
of aviation gasoline from the Saudi Arabian crude
oil available. Recently, the marketing of petroleum
products to the airline industry has become a rather
substantial portion of AMARCOs business. As
shown in Figure 4.45, the three aviation gasolines, A,
B, and C, are made by blending four feedstocks:
Alkylate, Catalytic Cracked Gasoline, Straight Run
Gasoline, and Isopentane.
In Table 4.14,TEL stands for tetraethyl lead,
which is measured in units of milliliters per
gallon (ml/gal). Thus, a TEL of 0.5 means there is
0.5 milliliter of tetraethyl lead per gallon of
feedstock. Table 4.14 shows that TEL does
inuence the octane number but does not
inuence the Reid Vapor Pressure.
Each type of aviation gasoline has a maximum
permissible Reid Vapor Pressure of 7. Aviation
gasoline A has a TEL level of 0.5 ml/gal and has a
minimum octane number of 80. The TEL level of
aviation gasolines B and C is 4 ml/gal, but the former
has a minimum octane number of 91, whereas the
latter has a minimum of 100.

Case 4.1 AMARCO, Inc.

207

Assume that all feedstocks going into aviation

gasoline A are leaded at a TEL level of 0.5 ml/gal and
that those going into aviation gasolines B and C are
leaded at a TEL level of 4 ml/gal. Table 4.15 gives the

aviation gasoline data. A nal condition is that

marketing requires that the amount of aviation gas
A produced be at least as great as the amount of
aviation gas B.

Figure 4.45
The Production of
Aviation Gasoline

Aviation
Gas B

Aviation
Gas A

Aviation
Gas C

Alkylate

Catalytic
Cracked
Gasoline

Straight
Run
Gasoline

Isopentane

Refinery

Crude Oil

Table 4.14

Stock Availabilitiesa

Characteristic
Reid Vapor Pressure
Octane Number
If TEL is 0.5
If TEL is 4.0
Available (Bbl/day)
Value ($/Bbl)

Feedstock
Straight
Run
Gasoline

Alkylate

Catalytic
Cracked
Gasoline

20

94
107.5
14,000
17.00

83
93
13,000
14.50

74
87
14,000
13.50

95
108
11,000
14.00

Isopentane

Some of the data in this case have been adapted from Walter W. Garvin, Introduction to Linear Programming (New York:
McGraw-Hill, 1960), Chapter 5.

Table 4.15

Aviation Gasoline Data

Aviation Gasoline

Characteristic
Minimum requirements (Bbl/day)
Price ($/Bbl)

208

Chapter 4

12,000
15.00

13,000
16.00

12,000
16.50

Linear Programming Models

Questions
1. AMARCOs planners want to determine how
the three grades of aviation gasoline should be
blended from the available input streams so
that the specications are met and the income
is maximized. Develop an LP spreadsheet
model of the companys problem.
2. Solve the linear programming model formulated in Question 1.
The following questions should be attempted only after
Questions 1 and 2 have been answered correctly.
3. Suppose that a potential supply shortage of
Saudi Arabian petroleum products exists in the
near future due to possible damage to
AMARCOs oil production facilities from Iraqi
attacks. This could cause the prices of the
three types of aviation gasolines to double
(while the values of the stocks remain the
same, because they are currently on hand).
How would this affect the renerys operations? If, after current stocks are exhausted,
additional quantities must be obtained at
values double those given in Table 4.14, how
might AMARCOs plans be affected?
4. Suppose that because of the new Iraqi crisis,
the supply of alkylate is decreased by 1,800
bbl/day, catalytic cracked gas is decreased by
2,000 bbl/day, and straight run gasoline is
decreased by 5,000 bbl/day. How does this
affect AMARCOs operations?
5. AMARCO is considering trying to ll the aviation gasoline shortage created by the new Iraqi
crisis by increasing its own production. If additional quantities of alkylate, catalytic cracked
gasoline, straight run gasoline, and isopentane
are available, should they be processed? If so,
how much of them should be processed, and
how do their values affect the situation?
6. Due to the uncertainty about both the U.S.
economy and the world economy resulting
from the Iraqi crisis, AMARCOs economists
are considering doing a new market research
study to reestimate the minimum requirement
forecasts. With the economy continually
weakening, it is felt that demand will decrease,

possibly drastically, in the future. However,

because such marketing research is expensive,
management is wondering whether it would be
worthwhile. That is, do changes in the minimum
requirements have a signicant effect on
AMARCOs operations? What is the change in
prot from an increase or a decrease in the
minimum requirements? Over what ranges of
demand do these prot changes apply?
7. Suppose that the Middle East crisis ends and a
ood of oil lls the marketplace, causing the
prices of aviation gasoline to drop to $10.00,
$11.00, and $11.50, respectively, for A, B, and C.
How would this affect the companys plans?
8. Suppose that the U.S. government is considering
mandating the elimination of lead from aviation
gasoline to decrease air pollution. This law
would be based on new technology that allows
jet engines to burn unleaded gasoline efciently
at any octane level. Thus, there would no longer
be any need for constraints on octane level.
How would such a new law affect AMARCO?
9. The Environmental Protection Agency is proposing regulations to decrease air pollution. It plans
to improve the quality of aviation gasolines by
decreasing the requirement on Reid Vapor
Pressure from 7 to 6. Management is concerned
about this regulation and wonders how it might
affect AMARCOs protability. Analyze and
make a recommendation.
10. The Marketing Department indicates that
AMARCO will be able to increase its share of
the market substantially with a new contract
being negotiated with a new customer. The
difculty is that this contract will require that
the amount of aviation gas A plus the amount of
B must be at least as great as the amount of C
produced. Because aviation gasolines A and B are
least protable of the three, this could cause a
big decrease in prot for the company. However,
marketing indicates that this is a short-run view,
because the large increase in market share
with the concomitant long-run prot increases
will more than offset the temporary small
decrease in prots because of the additional
restriction.What do you recommend? Why?
Case 4.1 AMARCO, Inc.

209