Facilities evaluation under uncertainty: Pricing a refinery

During a period of volatile oil prices and of refining margins that were frequently negative, an oil company was considering selling a large refinery that had already been shut down because of unfavorable economics. As a basis for price negotiations, management needed a ballpark figure for what the refinery would be worth to a potential buyer whose economic circumstances and utilization of the refinery might differ substantially from those of the current owner. An inital attempt at conventional economic analysis proved inadequate because of the large uncertainties involved. A quick, straightforward analysis using probability trees and simple approximations from decision analysis identified a reasonable range of values for the refinery, thereby providing significant insights to management. This approach has potential for a variety of facilities-evaluation problems and for other engineering economic-evaluation problems involving substantial uncertainties.