Petroleum Refining
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Industry Overview
About 145 petroleum refineries operate in the US, owned by 60 companies, with combined annual revenue of $160 billion. Large refiners include Valero, ConocoPhillips, ExxonMobil, BP, and Chevron. Annual revenue fluctuates substantially because of the shifting price of crude oil. The industry is highly concentrated: the five largest refiners hold about 50 percent of all US refining capacity.
Competitive Landscape
Demand, largely driven by US consumption of gas and diesel fuel, has been relatively flat in recent years. 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 highly automated: average annual revenue per worker is over $3 million.
Products, Operations & Technology
Major products are gas, 60 percent by volume; diesel fuel, 20 percent; propane, 7 percent; heating oil, 5 percent; and jet fuel, 3 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 500,000. A typical refinery has a capacity between 50,000 and 150,000 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 within 12 months.
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.
