How Refineries Make Money

Petroleum Refineries make money upgrading crude oil to higher value products like gasoline, jet fuel, and diesel. A refiner’s profit is the difference between the revenue generated from selling refinery products minus the cost of crude and purchased intermediates, energy, and operating costs like equipment maintenance, personnel, and office supplies, etc.

Refinery Profit = Product Value - Crude/Intermediate Cost – Energy – Operating Cost

Gross Refinery Margin is the most important component of the Profit Equation and is the difference between Product Value and Crude and Intermediate costs. Crude is typically the highest cost for a refiner. A 100,000 barrel a day refinery at $70/bbl of crude will spend $70/bbl x 100,000bbl/day=$7mln/day on crude oil or $2.56 billion on crude alone in a single year (at a theoretical 100% utilization). That means that a refinery must make at least that much plus the cost of energy and operating costs on its finished products just to break even...but of course they and their shareholders all want to operate at a profit.

Consider a refinery with the following simple yield profile:

Feed

Crude: 100,000 bbls/day

Products

Gasoline: 40,000 bbls/day

Jet: 20,000 bbls/day

Diesel: 35,000 bbls/day

Other Products: 12,000 bbls/day

(Notice total refinery products is 107,000 bbls/day versus 100,000 bbls/day crude intake. Many chemical processes in the refinery result in a volume gain e.g. Fluidized Catalytic Cracking, Hydrocracking, Delayed Coking. Volume gain is an important contributor to refinery profitability. Mass is always conserved but volume can increase or decrease across the various units. But more on that later)

Prices

Crude Cost: $70/bbl

Gasoline Price: $90/bbl or $2.14/gallon

Jet Price: $92/bbl

Diesel Price: $95/bbl

Average Price Other Products: $82/bbl

Given the yields of a refinery plus feed and product costs it is simple to calculate gross refinery margin. As a convention I’ll use MBPD to indicate 1000 bbls/day.

(40 MBPD Gasoline x $90/bbl) 

   + (20 MBPD Jet x $92/bbl)

   + (35MBPD Diesel x $95/bbl) 

   + (12MBPD x $82/bbl) 

   – (100MBPD Crude x $70/bbl)    =    $2.749 mln in gross refinery margin per day.

$2.7mln-not bad but we still have to subtract energy and operating costs. Let’s say that energy e.g. natural gas for fired heaters and steam generation will cost us $150,000 per day. Now we’re down to $2.6mln in profit but we also need to account for operating costs like maintaining equipment, paying staff salaries and benefits, catalyst, water and chemicals usage, IT costs, office equipment, etc for $200k/day. This means our final profit is $2.3mln/day before taxes. But that is assuming the refinery runs at full rates 365 days/year.

However, few refineries can achieve this given that typically a portion or all of the refinery is periodically down for planned maintenance or unplanned equipment outages or refinery economics dictates some underutilization. Let’s assume that the refinery runs at about 80% crude unit utilization or around 80MBPD capacity on average for the year. Say, this under utilization is due to a planned turnaround as well as an outage for a major piece of equipment failure which impacts the site by100k/day of margin and 50k/day of additional maintenance cost.

For simplification purposes we’ll assume 80% utilization X $2.749mln Gross Refinery Margin = $2.2mln margin. Likely our energy usage will be higher due to inefficiency associated with idling units but we’ll assume the same cost for energy as well as base operating costs:

$2.2mln Gross Refinery Margin - $150k/day energy - $200k/day OPEX leave us with $1.85mln of profit. But now we have to pay for the unscheduled repair of our failed equipment minus another $50k/day so our profit is now $1.8mln/day versus $2.3mln/day at perfect rates. As you can see, optimizing planned maintenance and equipment reliability are key to optimal refinery profitability as subpar performance impacts both the top and the bottom lines.

Anyway we’ve just scratched the surface of refinery economics. Check back in periodically as I explore more of this fascinating area in future blog posts.