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Oil Refining, Oil Products and Pricing


Refining
• Refining is the process of purification of a
(1) substance or a (2) form.
• The term is usually used of a natural resource that is
almost in a usable form, but which is more useful in
its pure form.
• For instance, most types of natural petroleum will
burn straight from the ground, but it will burn poorly
and quickly clog an engine with residues and by-
products. The term is broad, and may include more
drastic transformations, such as the reduction
of ore to metal
What is oil refinery?
• An oil Refinery is a process plant where crude oil is
produced and refined into more useful products like
petrol, diesel, naphtha, kerosene, LPG, etc.
• The process for refining the crude oil is known as
fractional distillation process.
• Oil refining is downstream side of petroleum
industry.
Types of Refineries
Topping
Hydroskimming
Cracking
Coking
Integrated
Flow Diagram of a modern refinery
Ability of Refinery to process various
type of crude
Crude oil types are typically differentiated as below.
• Density (measured as API gravity)
• Sulphur content

Crude oil is called sweet (low sulphur) if its sulphur level is


less than a threshold value(e.g., 0.5 wt% (5,000 ppmw))
• Sour ( high sulphur) if its sulphur level is above a
higher threshold. Most sour crudes have sulphur
levels in the range of 10-20 wt% but some have
sulphur level > 4 wt%
• In Western Canada and Ontario, almost 50% of the
crude oil processed by refiners is conventional light,
sweet crude oil.
• 25% is high quality synthetic crude oil.
Types of crude oil
Crude Oil Class Property Range

Gravity Sulfur
(°API ) (wt.%)

Light Sweet 35-60 0-0.5

Light Sour 35-60 > 0.5

Medium Sour 26-35 > 1.1

Heavy Sweet 10-26 0-1.1

Heavy Sour 10-26 > 1.1


Sweetening Up the Sour Crude oil
• The stabilization process(partial distillation)
• It sweetens "sour" crude oil (removes the
hydrogen sulphide)
• Reduces vapour pressure, thereby making the
crude safe for shipment in tankers.
• Weathering of Sweet crude oil
• Evaporation
Output
• The output is broken down into five main product groups:
• Gasoline
• Propane
• Butane (C3/C4)
• Cat feed
• Distillate
• Residual fuel

• Distillate products are usually grouped into three categories:


• Light distillates (LPG, gasoline, naphtha)
• Middle distillates (kerosene, diesel)
• Heavy distillates and residuum (heavy fuel oil, lubricating oils,
wax,asphalt).
Standard Refinery product output
• Oil refineries also produce various intermediate
products such as hydrogen, light hydrocarbons,
reformate and pyrolysis gasoline

• These are not usually transported but instead are


blended or processed further onsite. Chemical plants
are thus often adjacent to oil refineries.
Type of distillate Product Usage pricing Consumption
LPG Cooking fuel(49 %) 60 - 70 US$ 265 million
A petrochemical tons(2012)
industry (21.6 %)

Light distillates
Gasoline Fuel stabilizers 2.48 $ per gallon 136.78 billion
Combustion engines (2015) gallons (2014)
Detergents
Naphtha Refineries usage. 471.18 USD per 363
tonne MMT(milion
metric ton)
Kerosene Jet engine of aircraft Rs 33.47. 1.2 million
cooking and lighting barrels per day
Middle distillates fuel

Diesel Transportation 2.86 $ per gallon 90340


(2015) thousand
barrels per day
Heavy fuel oil heats homes and 368.5 $ per Ton 8935 thousand
fuels ships. (2015) barrels per day

Heavy distillates Wax Canndle,Rubber,Packag $60 - $75 3025 KT


ing,Make up
Prices of Oil Refining Products In India
Oil Accounting
• In case of Oil Companies inventory accounts for
about 30-40% of the total assets of the company.

• Inventories are defined as assets held for sale in the


ordinary course of business or in the process of
production for such sale or in the form of materials
or supplies to be consumed in the production
process or in rendering of services.
Gross Refinery Margin
• GRM is the difference between crude oil price and
total value of petroleum products produced by the
refinery.

• Suppose a refinery has purchased crude at $130 per


barrel and have realized $145 barrel on sale of petrol,
diesel, ATF, Kerosene, LPG and Naphtha etc., hence, in
this case GRM is at $ 15 per barrel.
Indian Refinery Margins
• Indian refiners have been having a bull run of late,
with margins for most refineries running above $5 a
barrel. It depends on the type of crude oil that a
refinery processes.
• The profits have boosted the bottom lines of large
refiners like Indian Oil (which has seven refineries)
and Reliance Industries.
Factors Affecting GRM
• Cost of sourcing crude oil
• Demand – Supply mismatch of the products
• The duty structure for crude & petroleum products
• Crude Mix(API & Sulfur) processed in the refinery
• Refinery Complexity i.e. Nelson Complexity
• Fuel & Losses incurred in the production process
Comparison of
RIL GRM and Singapore GRM
• RIL continued to outperform regional benchmarks
RIL refining margins outperformed Singapore
benchmark yet again, with a premium of $ 2.3/bbl
over the benchmark during FY 2014-15.
• Relative performance versus benchmarks was built
on advantaged configuration to secure higher value
product yields, wider selection of crudes, operational
efficiency and record throughputs.
GRM comparison for the 4th quarter
Current factors affecting GRM
• Slowdown in global economic growth from 5.3% in
2006 to 4.2% (2007 -2015)
• Gas Substitution in developing economies
• Reduction in light-heavy crude differential
• Moderation in crude prices
• Additional capacities coming on stream that have
flexibility to process heavy/sour crude
• Nature of new oil discoveries in the future
Crack Speed
• It is a term used by oil traders to describe the spread
(difference) between prices of raw materials and
finished goods.
• It is the same as refining margins as it denotes the
spread between crude and refined oil prices.
• Oil companies typically hedge these spreads in the
futures market to insure themselves against volatility
of petroleum prices.
• Prices have been very volatile in the last two years
mainly because of political problems in the Middle
East.
Types of Crack Speed
• There can be a simple 1:1 spread, or something more
diversified as a 3:2:1 or even 5:3:2 crack spread Crack
spreads can be calculated using either a single
product or multiple products:
• Single-product crack spreads: A single-product crack
spread reflects the difference in value between a
barrel of the specified product and a barrel of crude
oil.
• Multiple-product crack spreads: The most common
multiple-product crack spread is the 3:2:1 crack
spread. A 3:2:1 crack spread reflects gasoline and
distillate production revenues from the U.S. refining
industry, which generally produces roughly 2 barrels
of gasoline for every barrel of distillate.
3-2-1 Crack speed
Factors Affecting crack speed
• Geopolitical issues — politics, geography,
demography, economics and foreign policy
• Crude oil supply (Crack weakens initially — higher
crude oil prices relative to refined products.) (Crack
strengthens later, as refineries respond to tighter
crude oil supply and reduce product outputs.)
• Winter seasonality Increase in distillate demand
(Crack strength)
• Slower economic growth Decline in refined products
demand (Crack weakness)
• Strong sustained product demand High refinery
utilization (Crack strength)
• Environmental regulation on tighter product
• Specifications (Crack strength)
Overview of India Refining Sector
• India imports crude oil in huge quantity, and about
79% of it is used to produce petrol, diesel, kerosene,
and cooking gas.
• India’s current refining capacity is 215 MMTPA.
• The major Refineries of India are IOCL, HPCL, BPCL,
RIL.
Petroleum Refining Capacity in India
Import/Export of Crude Oil, LNG and
Petroleum Products
6

4
Series 1
3
Series 2
Series 3
2

0
Category 1 Category 2 Category 3 Category 4
Gross Imports Of Crude oil, Petroleum
Products and LNG
200000

180000

160000

140000

120000
Crude Oil Qty
100000
Petroleum Products Quantity
LNG Qty
80000

60000

40000

20000

0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Petroleum Products Export Qty

Petroleum Products Export Qty


80000

70000

60000

50000

40000
petroleum Products Export
30000 Qty

20000

10000

0
Import availability ratio of Crude Oil
and petroleum products
Import/export of crude oil and
Petroleum products
Imports for the year 2013-14

Imports Of Petroleum Products in TMT


7000

6000

5000

4000

3000 Imports Of Petroleum


Products

2000

1000

0
Exports for the year 2013-14

Exports Of Petroleum products in TMT


30000

25000

20000

15000

10000
Exports Of Petroleum products
5000

0
Trends in India's overall Trade balance and Trade
balance with OPEC Countries
Import and Export parity price
• Import Parity Price (IPP) – IPP
represents the price that
importers would pay in case of
actual import of product at the
respective Indian ports.

• Export Parity Price (EPP) – EPP


represents the price which oil
companies would realize on
export of petroleum products.

• Trade Parity Price (TPP) - TPP


consists of 80% of Import Parity
Price and 20% of Export Parity
Price.
Fuel Prices Component Break Up
• Raw Crude Oil Cost - 55%
• Refining Cost - 6%
• Transportation, Freight, Dealer Commission etc -
7.5 - 8%
• Taxes - Excise, VAT, Cess etc - 30 - 32%
Petrol Pricing
• Fuel Component-52%
Customs Duty – 4%
Excise Duty -25%
Sales VAT -17%
Dealer Commission-2%
Diesel Pricing
• Fuel Component-66%
Customs Duty – 7%
Excise Duty -13%
Sales VAT -12%
Dealer Commission-2%
Consider this situation
• Brent crude oil prices have declined by 18.3%
in November. But since the rupee, too, has
declined against the US dollar, the Indian
basket of crude oil has dropped at a slower
pace of 12.3% to Rs.4,355.87 per barrel in
November.
• And yet, retail petrol and diesel prices in Delhi
have dropped a much lower 1.4% and 1.6%,
respectively, from 1 November to 1 December.
Glaring Gap
• So how is it that consumers gained much less
even through petrol and diesel pricing is
supposed to be set by markets (By virtue of
deregulation) ?
• How is it that retail prices of the state-run oil
marketers are almost similar?
• Why is the entire benefit not passed on to
consumers?
Exchange Rate
Price Build Up
Mark up charged by OMC’s to dealers
• To be sure, every company has the right to
charge what it wants and increase its profits.
But what explains the fact that all three state-
owned OMCs have the same mark-up, which
implies similar costs and margins, despite
being of different sizes?
• Clearly, despite deregulation, the benefits of
competition are being denied to Indian petrol
consumers.
Subsidies Provided by the Government and
Oil Companies on PDS SKO & Domestic LPG
Under-Recoveries
Product wise breakup
Sharing of Under-Recoveries
Impact of the Recent Petroleum Pricing
Reform Initiatives
• On the petroleum sector
• On the economy
• On dieselization and changing consumption patterns
• On refineries: Why the use of EPP is not a good idea
• On adulteration