Presentation on 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 oilCrude Oil Class Property Range

Gravity (°API )

Sulfur(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

Light distillates

LPG Cooking fuel(49 %)A petrochemical industry (21.6 %)

60 - 70 US$ 265 million tons(2012)

Gasoline Fuel stabilizersCombustion enginesDetergents

2.48 $ per gallon (2015)

136.78 billion gallons (2014)

Naphtha Refineries usage. 471.18 USD per tonne

363 MMT(milionmetric ton)

Middle distillates

Kerosene Jet engine of aircraftcooking and lighting fuel

Rs 33.47. 1.2 million barrels per day

Diesel Transportation 2.86 $ per gallon (2015)

90340 thousand barrels per day

Heavy distillates

Heavy fuel oil heats homes and fuels ships.

368.5 $ per Ton (2015)

8935 thousand barrels per day

Wax Canndle,Rubber,Packaging,Make up

$60 - $75 3025 KT

Prices of Oil Refining Products In India

Oil Accounting

• In case of Oil Companies inventory accounts forabout 30-40% of the total assets of the company.

• Inventories are defined as assets held for sale in theordinary course of business or in the process ofproduction for such sale or in the form of materialsor supplies to be consumed in the productionprocess or in rendering of services.

Gross Refinery Margin

• GRM is the difference between crude oil price andtotal value of petroleum products produced by therefinery.

• Suppose a refinery has purchased crude at $130 perbarrel and have realized $145 barrel on sale of petrol,diesel, ATF, Kerosene, LPG and Naphtha etc., hence, inthis 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% in2006 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 haveflexibility 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 morediversified as a 3:2:1 or even 5:3:2 crack spread Crackspreads can be calculated using either a singleproduct or multiple products:

• Single-product crack spreads: A single-product crackspread reflects the difference in value between abarrel of the specified product and a barrel of crudeoil.

• Multiple-product crack spreads: The most commonmultiple-product crack spread is the 3:2:1 crackspread. A 3:2:1 crack spread reflects gasoline anddistillate production revenues from the U.S. refiningindustry, which generally produces roughly 2 barrelsof 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

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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 PricingReform 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