The refining industry
Refinery configuration and complexity
The configuration of complex oil refineries is typically oriented towards the production of gasoline (catalytic cracking), whereas others focus on middle distillates (thermal conversion and/or hydrocracking) or specialty products, such as naphthenics and bitumen.
Refineries that are configured to have a high conversion and desulfurization capacity can achieve better yields of higher value-added petroleum products by processing heavier crude. More complex refineries can also produce higher-margin products designed to meet specific local specifications, such as gasoline complying with California’s strict environmental requirements and MK-1 diesel for the Swedish market.
Refinery complexity refers to an oil refinery’s ability to process feedstocks, such as high-sulfur crude, into value-added products. Generally speaking, the higher the complexity and the more flexible a refinery’s feedstock slate, the better positioned it will be to take advantage of lower-cost crude and benefit from the gross margin opportunities they offer.
Refinery complexity is commonly measured by the Nelson Complexity Index, which is calculated by the Oil and Gas Journal annually.
The Nelson Complexity Index assigns a complexity factor to each major refining unit based on its complexity and cost in comparison to crude distillation, which is assigned a complexity factor of 1.0. The complexity of each refining unit is then calculated by multiplying its complexity factor by its throughput ratio as a percentage of crude distillation capacity. Adding the complexity values assigned to each unit, including crude distillation, determines a refinery’s complexity. A refinery with a complexity of 10.0 on the Nelson Complexity Index is considered 10 times more complex than crude distillation for the same amount of throughput.
The location of an oil refinery has an important impact on its refining margin, since it determines how well it can access feedstocks and distribute its products. Location also dictates whether feedstocks and products can be transported by sea or via pipelines, rail, or road.
Refining companies aim to maximize their profits by selling into markets where they receive the highest netbacks. Coastal refineries typically have a competitive advantage over those located inland due to their lower logistics costs. Oil refiners with refineries and logistics systems based in areas of high petroleum consumption enjoy a competitive advantage over other suppliers because of their proximity to local demand.
Oil refineries can be owned and operated as part of an integrated oil business or as independent companies. Integrated oil companies have both upstream operations (exploration and production) and downstream operations (refining, wholesale, retail, and logistics services).
Many oil refiners, both integrated and independent, distribute their petroleum products through their own retail outlets. Those without a retail network of their own primarily distribute their products to wholesalers or retailers. Oil refiners that operate as wholesalers principally sell their petroleum products under term and spot contracts.