Economics of crude oil refining and importance of value-added products
August 04 2020 05:28 PM
Saad al-Kuwari
Saad al-Kuwari

By Saad al-Kuwari

* How oil markets — crude oil and refined petroleum products — work
* Economics of crude oil refining and its conversion into value-added products
* Encouraging increased refining capacity to meet the needs of local market and making surplus for export

Crude oil and petroleum products are commodities traded in global commodity markets, such as London, New York and Singapore. It can be said that crude oil is the most traded and controlled commodity in the world along with refined petroleum derivatives, such as gasoline, diesel, Jet fuel and fuel oil.

It is actively and transparently traded on the global energy exchanges — on a daily basis.

Market prices for crude oil and refined products at any time are a function of current and future supply and demand conditions, and are evaluated according to a variety of scenarios.

For crude oil, this includes general economic conditions, natural disasters and geopolitical or military events, especially in major oil-producing areas.

The price of crude oil affects the price of the refined product, but the primary balance of supply and demand for specific refined products (such as LPG, gasoline, jet fuel, and diesel) is often more important in influencing trade decisions and setting the selling price, depending on the specifications and pricing mechanism.

The advantages of more complex refineries compared to typical refineries are as follows:

1. Increasing the value of high-value products such as gasoline, middle distillates such ‘Jet A1’, diesel and household heating oil, to reduce dependence on low-value products, such as heavy fuel oil, asphalt and waste.

For example, a refinery typically produces 20% of gasoline, 30% of medium distillate products (jet fuel and light diesel) and 50% of heavy waste from light crude oil. In the most complex refineries, it reaches 60% of gasoline, 35% of medium distillates (aircraft and diesel fuel), and 5% of heavy waste (fuel oil, asphalt, bitumen).

2. The ability to process a larger group of crude oil types means that refineries can use cheaper heavy crude oils to produce products that are lighter in demand, and increase profit margins by increasing sales volumes instead of exporting it as a virgin crude.

3. The flexibility to adapt to changing markets and local fuel specifications:

This flexibility allows refiners to adapt production to changes in market demand and fuel specifications (for example, increased demand for lighter products, diesel gasoline, and blended component gasoline) is appropriate for blending ethanol.

Therefore, since 2003, more sophisticated refineries have generated higher profit margins, especially if the oils produced in their countries are refined instead of exporting and then exporting refined products that are higher than the price of crude oil, thus achieving an excellent profit margin (after deduction of the operational cost of refining and optimisation).

The refinery's ability to adjust its product list to meet changes in demand has a major impact on its profitability — products such as gasoline, diesel, jet fuel and lubricants are the most profitable. However, the refinery's flexibility to adapt to market demand is constrained by the availability, composition and complexity of available types of crude oil, and different regional markets differ according to demand.

Types of crude oil and its refining:

There are more than 150 different types of crude oil in the world, but the primary option in which crude oil is refined is between lighter and heavier grades. Heavy grades have a higher percentage of heavy hydrocarbons consisting of longer carbon chains.

Heavy crude oils are cheaper and more abundant, but they are more expensive because they require significant investment and have higher processing costs (higher energy inputs and additional processing to meet environmental requirements).

Lighter grades require a lower upgrade at the refinery, but lower supply. Lighter oils tend to contain less sulfur content, making their sales more in demand.

Processing cheaper heavy crude to lighter products of higher value usually improves profit margins — if the refiner has the configuration to do so.

Cost is not the only reason for choosing a certain degree of crude oil:

Each grade of crude produces a different set of refined products, each with a different price that also varies by region.

The value of "net recovery" reflects the value of each type of product in terms of the value of the products it produces.

The demand from refineries also affects the price difference for different grades of crude. Refineries encourage refining of oil produced within their countries based on an economic feasibility study.

Ironically, even with the increased supply of heavy crude oil, the demand for refined petroleum products has shifted to a greater proportion of lighter and higher quality products (from heavy fuel oil and marine fuel to diesel and gasoline and lighter products).

This has resulted in the so-called "quality gap", resulting from the increased availability of heavy crude oil in the global market, which makes its prices not large compared to light oils.

For example, in Qatar, the ‘Qatar Land Crude’ is produced in the oil fields in Dukhan and transported through pipelines to the Refinery and Crude Terminal located at Mesaieed, where approximately 80,000 barrels of oil and approximately 50,000 barrels of condensate oil are produced, where refined petroleum products are produced.

It is distributed to the local market and the surplus is exported, for example gasoline, jet fuel and diesel, and the rest of crude oil is also exported as light crude oil to the entire world.

As for other oils, such as Marine and Al-Shaheen of high density (API), the production is fully exported. The production of Al-Shaheen oil is about 300,000 barrels per day (bpd) with an increase in production expected in the near future.

Knowing that Al-Shaheen Crude Oil is priced through Platts Oil Pricing Agency, it is considered one of the Middle East’s crudes that is important for enhancing liquidity in the daily evaluation of Dubai Index in Asia since 2016.

Refining these oils locally, and establishing refineries internally and externally to maximise the financial returns from a barrel of crude oil is strategically and economically important in future. In the region, there is competition for exports of petroleum products.

This is despite the variation in refining capacity from one country to another and an increase in the proportion of importing those products in the Arab Gulf and the Middle East.

Competitive advantages include modern refineries, the low cost of a barrel of crude oil and the possession of large logistical capabilities such as huge storage capabilities in the tanks inside the refineries, in addition to a modern and flexible fleet of refined products tankers and liquefied petroleum gas (LPG).

Building refineries must be studied economically and strategically in Qatar or to study the investment abroad in crude oil refining by doing a strategic partnership with end-users in the developing Asian countries and emerging market in the near future to maximise revenue.

* Saad Abdulla al-Kuwari graduated in Chemical Engineering from Qatar University and obtained an MBA in Oil & Gas from Liverpool University. He was appointed CEO of Tasweeq in 2010. During his career, he has occupied several key positions in refining projects and processing, oil, gas and refined products, storage tanks and export terminals operation. He also has considerable experience in the field of Gas Processing Operations. He was also manager of Gas, Oil Petrochemical Marketing in QP Marketing Directorate for several years.

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