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Understanding the refining business

Sep 27, 2003

The black crude is fed to the refineries and we get various clean fuels like petrol, diesel, etc. For a layman, it is hard to believe all this but science has gone to such an extent that we can separate the crude oil into various useful products. This is just one thing. The science does not stop here. It can further alter this product mix by other processes to get even more value added products. By this time, you must be wondering what’s an article with scientific connotations doing on a financial website. The reason is simple. In the world of investing, apart from the numbers, the income statements and projections, an investor also needs to understand the ‘ins and outs’ of a specific industry that you are looking to invest in (i.e. what goes in and what comes out).

In the refinery sector, companies have made an optimum utilisation of science to get more value added products. Various companies are trying to upgrade their refineries to get more value added fuels (light and middle distillates). Some refineries have done this before and others are continuously trying to upgrade their product mix. Here we take a look at the product mix of various refineries in India.

Before getting into specific companies we would first take a look at different products coming out from the refineries. These products are classified into various segments - light distillates, medium distillates and heavy distillates. Light distillates include mainly LPG, naphtha and petrol. Major products in middle distillates are ATF, kerosene and diesel, while in case of heavy distillates, the same include furnace oil, bitumen and LSHS (low sulphur heavy stock). Products at the middle and light distillates end are more important to the companies as they are high margin products and find use directly. Generally, distillate yield is calculated on the basis of these products as a percentage of total products.

A Comparative View...
'000 tonnes  HPCL BPCL Reliance
Refinery Location Mumbai Visakh Mumbai Jamnagar
  FY99 FY03 FY99 FY03 FY99 FY03 FY03
Light distillates 728 1,115 863 1,588 2,648 2,485 1,100
Middle distillates 2,460 2,682 2,115 3,554 4,736 4,233 1,730
Heavy distillates 1,507 1,562 658 1,243 1,190 1,503 550
Total distillates 4,696 5,359 3,636 6,386 8,574 8,221 3,380
*Distillate Yield 67.9% 70.9% 81.9% 80.5% 86.1% 81.7% 83.7%
*Distillate yield = (Light+Middle)/ Total distillates

What is the rationale for getting higher distillate yield? More the light and middle distillates, higher is the margin for the company. Heavy distillates do not find any major use in the industry and hence are not desired. Thus, we see why the companies are trying to continuously upgrade their refineries or use additional and advanced chemical processes to improve the distillate yields.

We see that HPCL has upgraded its distillate yield from 68% in FY99 to 71% in FY03. While its Visakh refinery has witnessed a decline in the distillate yield of about 1% during the same time, its yield is high as compared to the Mumbai refinery. BPCL’s Mumbai refinery has witnessed a decline in distillate yield though it remains at higher level as compared to that of HPCL. Distillate yield of Reliance refinery remains at the highest levels at about 84%. Reliance had got the benefit of having a refinery of high capacity at a single place. It can further process the heavy distillates and its technology is also superior as compared to other players, which result into higher distillate yield.

We have produced various products from the refinery and improved our product mix also. Do we stop there only? The companies have to sell these products through various measures. The major constituents of their business mix are retail and direct sale to the industries. We now have a look at how the companies sell these products to the end user.

Is it that the company sells only what they produce through their refineries? No. There are only four players in the marketing segment (HPCL, BPCL, IOC and IBP) while we have a large number of standalone refineries. The marketing players enter into an agreement with the refineries to supply their products through the retail networks. For example, Reliance is into refining only and does not have its own retail outlets currently. Thus, they enter into an agreement with the retail players like HPCL and BPCL. For instance, both BPCL and HPCL sell about 1.5 MTPA of Reliance products.


While marketing companies sell various petroleum products, it becomes imperative to look at their business mix of different products. The reason being margins, are different for different products. For example, the more the products are sold through direct sales, the lower the margins, while the more the products are sold through the retail network the higher the margin. Thus companies like HPCL and BPCL, which have higher revenues coming from retail segment, are in an advantage as compared to IOC whose major chunk of revenues comes from direct sales.

The companies have realised this fact and are slowly increasing their capex towards the retail side in order to increase their profitability coming from retail segment. We can easily visualize this through new retail outlets. If we go back ten years from now, no one could have imagined a retail store chain, electronic card payment facility for petrol and diesel consumption. However, increased competition and an attempt to increase their business mix more towards the retail side have driven companies to take up innovative steps in marketing. Thus we can now recognize the marketing jargon in this commodity business also that ‘the consumer is (finally becoming) king’.

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