Petroleum Refining
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Industry Overview
About 150 petroleum refineries operate in the US, owned by about 90 companies, with combined annual revenue of about $580 billion. Large refiners include Chevron, ConocoPhillips, Exxon Mobil, Valero, and BP's US-based subsidiaries. Annual revenue fluctuates substantially because of the shifting price of crude oil. The industry is highly concentrated: the eight largest refiners hold about 70 percent of all US refining capacity.
The global petroleum refining industry processes about 88 million barrels of crude oil each day compared to the 18 million barrels per day refined in the US. The countries with the largest refining capacity are the US, China, Russia, Japan, and South Korea. Major oil refiners outside the US include Sinopec (China); Rosneft (Russia); Nippon Oil (Japan); SK Innovation (South Korea), and Indian Oil Corporation (India).
Competitive Landscape
Demand is driven by US consumption of gas and diesel fuel. The profitability of refineries depends on efficient operations and the best mixture of products. Although there are significant economies of scale in refinery operations, a small refinery can compete effectively with large ones if it's located in a favorable market area, or if it produces specialty products that are in high demand. The industry is capital-intensive: average annual revenue per worker is about $8 million.
Imports of refined petroleum products account for about 12 percent of the US market. Major sources of refined products are Canada, Russia, UK, and Mexico. Major export markets for US refined petroleum products include Mexico, Canada, the Netherlands, Singapore, and Brazil. Exports account for about 12 percent of US refined petroleum production.
About half of crude oil processed by US refiners comes from foreign sources. Top foreign suppliers of crude oil processed by US refiners are Canada, Saudi Arabia, Mexico, Nigeria, and Venezuela.
Products, Operations & Technology
Major products are gas (50 percent of revenue), diesel fuel (25 percent), and jet fuel (8 percent). Diesel fuel and heating oil are jointly called "distillates." A refinery uses crude oil as raw material. The output of a particular refinery depends on the grade of crude oil it uses and the downstream processing operations it has installed.
Refineries come in many different sizes, from 5,000 barrels per calendar day (BBL/CD) of distillation capacity up to 350,000. A typical refinery has a capacity of about 125,000 BBL/CD.
Crude oil is composed mainly of hydrocarbons of various weights. When the crude oil is heated, the different hydrocarbons boil at different temperatures and can therefore be drawn off and re-liquefied. Refineries are rated according to this crude distillation capacity. Since lighter hydrocarbons are usually more valuable than heavy ones, most refineries further process the middle and heavy distillates in various "downstream" operations that extract further light hydrocarbons ("cracking" long hydrocarbons into smaller pieces) and turn heavier ones into usable products. Common downstream operations include vacuum distillation, catalytic cracking, hydrocracking, and coking. In addition, to remove the sulfur that is a common contaminant in crude oil, many refineries use a hydrodesulfurizing process. All of these processes occur in separate production units that are interconnected and that generally operate on a continuous-flow basis. Most refineries also operate gasoline-blending processes and have significant storage facilities. Small refineries may run only a distillation operation, with no downstream processing.
Crude oil may arrive at a refinery by pipeline, oceangoing tanker, barge, truck, or tank car. The composition of the crude oil (gravity and sulfur content) partly determines its cost. Light (high-gravity) and intermediate crude oils, like West Texas Intermediate (WTI) and Nigerian Bonny Light, have a high natural yield of light and middle distillates. Crude oils from the Middle East, including Saudi Arabian Light, have a lower yield of light and middle distillates. Crude oils from Mexico and Venezuela are generally heavy and have a high sulfur content. (Low-sulfur crude oil is called "sweet"; high-sulfur oil is "sour.") The difference in price between light and heavy crude oils is the "light/heavy spread," and is important to refineries that can efficiently process heavy crude oil.
Crude oil costs vary according to origin because of transportation costs and the grade of the oil. US refinery prices for WTI crude are usually lower than prices for oil from Nigeria, and higher than oil from Saudi Arabia, Mexico, and Venezuela. Crude oil costs can change as much as 50 percent or more within a 12 month period.
While large integrated oil companies, like ExxonMobil and BP, supply their refineries with oil from their own exploration and production operations, many refiners must buy oil from other producers or wholesalers. To ensure adequate supplies, anticipated need is filled under short or long-term supply contracts (that typically contain a price adjustment mechanism) and through purchases on the spot market. In view of the volatility of crude oil prices, refiners may engage in futures contracts on commodity markets like the New York Mercantile Exchange. Refiners are very sensitive to market prices of crude oil and can adjust their refineries to accept oil of varying grades, depending on availability and comparative prices.
