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Basic Refinery Economics: Global, Regional, and Local Supply and Demand Changes. Refineries Must Find The

Oil refining is a capital-intensive business that requires billions of dollars to build new medium-sized refineries over 5-7 years. Refineries also have high fixed and variable operating costs. To be profitable, refineries must maximize the difference between the volatile costs of crude oil inputs and the prices received for refined products through operational efficiency and innovation. This involves selecting optimal crudes, maximizing product yields, minimizing downtime, and developing valuable by-products. Refinery profitability depends on "crack spreads," or the difference between crude and product prices.

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54 views

Basic Refinery Economics: Global, Regional, and Local Supply and Demand Changes. Refineries Must Find The

Oil refining is a capital-intensive business that requires billions of dollars to build new medium-sized refineries over 5-7 years. Refineries also have high fixed and variable operating costs. To be profitable, refineries must maximize the difference between the volatile costs of crude oil inputs and the prices received for refined products through operational efficiency and innovation. This involves selecting optimal crudes, maximizing product yields, minimizing downtime, and developing valuable by-products. Refinery profitability depends on "crack spreads," or the difference between crude and product prices.

Uploaded by

Abdo Majid
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Basic Refinery Economics

In many businesses, profits or losses result primarily from the difference between
the cost of inputs and the price of outputs. In order to have a competitive edge, a
business must make higher-value products using lower-cost inputs than
competitors ‫ المنافسين‬. In the oil refining business, the cost of inputs (crude oil) and
the price of outputs (refined products) are both highly volatile, influenced by
global, regional, and local supply and demand changes. Refineries must find the
sweet spot against a backdrop of changing environmental regulation, changing
demand patterns and increased global competition among refiners in order to be
profitable.

New Builds vs. Improvements

Oil refining is a capital-intensive business. Planning, designing, approving and


building a new medium-sized refinery is a 5-7 year process, and costs $7-10
billion, not counting acquiring the land. The cost varies depending on the location
(which determines land and construction costs), the type of crude oil to be
processed and the range of outputs (both of the latter affect the configuration and
complexity of the refinery).

After the refinery is built, it is expensive to operate. Fixed costs include personnel,
maintenance, insurance, management and depreciation ‫ اإلدارة واالستهالك‬. Variable
costs include crude feedstock, chemicals and additives, catalysts, maintenance,
utilities and purchased energy (such as natural gas and electricity). To be
economically feasible, the refinery must keep operating costs such as energy,
labour and maintenance to a minimum.
Figure: Refinery Value Drivers

Cost of Inputs vs. Price of Outputs

Since refineries have little or no influence over the price of their input or their
output, they must rely on operational efficiency for their competitive edge.
Efficiency is measured by the ratio of output to inputs, and increases through
constant innovation, advancement and optimization to produce more outputs from
fewer inputs in other words, the refinery‟s capacity to maximize the difference
between the cost of the crude oil and the price received for its refined products .
Examples include:

• selecting appropriate crudes to fulfill anticipated product demand;

• increasing the amount and value of product processed

from the crude oil;


• reducing down-time for maintenance, repair and investment;

• developing valuable by-products.

“Crack” Spreads

The term “crack” comes from how a refinery makes money by breaking (or
„cracking‟) the long chain of hydrocarbons that make up crude oil into shorter-
chain petroleum products. The crack spread, is the difference between crude oil
prices and whole sale petroleum product prices (mostly gasoline and distillate
fuels).

Global Trends of Petroleum Refineries

Market Overview

The global refining capacity is expected to register a CAGR of around 1.25%


during 2020-2025, with a majority of refinery expected to come from Asia-Pacific
and the Middle East. With a current global refining capacity of around 100 million
barrel per day (mbd), Asia-Pacific dominates the market with around 35% of
global refining capacity. The growth in refining capacity is mainly driven by the
demand of petro-products in a region and runs parallelly with the growth of human
and vehicle population.

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