Refining industry: A complete overview- I - Views on News from Equitymaster

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Refining industry: A complete overview- I

Dec 20, 2006

Crude oil is a mixture of scores of chemicals and compounds, primarily hydrocarbons. Crude oil must be broken down into its various components by distillation before these chemicals and compounds can be used as fuels or converted to more valuable products. For converting the basic hydrocarbon, crude, into refined consumer products we require refineries. The refined products are then ultimately sold to end-users. Thus on the basis of this, we classify the oil industry into two segments, first upstream i.e. exploration and production, second downstream i.e. refining and marketing. We, in a series of articles, will try to understand the nuances of the refining industry in general and Indian refining industry in particular. Over the next few articles, we will try to equip investors with the basics of refining. We will try to understand the dynamics and history of Indian refining industry along with what future holds for us.

First in this series of articles, we explain the refining process and what is required to convert the basic raw material crude oil into high value products viz. petrol, diesel, ATF etc. Though the write-up may sound a bit technical, it forms the basic building block for understanding of the refining business and key differentiating factors between two refineries.

Refining process
At the heart of refining process is simple distillation, a mass transfer operation that involves separating crude oil into its fractions- called simple distillates. The process is carried out in a 'still'- commonly known as a crude distillation unit (CDU), which takes advantage of different boiling points of different compounds. Light distillates having product output in the form of liquid petroleum gas (LPG), naphtha and gasoline are recovered at lower temperatures. Middle distillate like Air turbine fuel (ATF), kerosene, and diesel come next. Finally, the heaviest products - called residual fuel oil, low sulphur heavy stock and bitumen are recovered.

Separation involves operations such as atmospheric distillation and vacuum distillation. Atmospheric distillation involves separation of desalted crude into specific hydrocarbon groups or fractions. In vacuum distillation, heavy crude residue produced by atmospheric distillation is further separated using lower-pressure distillation process. This converts lower products in distillates, vacuum gas oil (VGO), and vacuum residue. The simplest refineries stop at this point.

Secondary processing is the additional processing following the crude distillation. It encompasses a range of highly complex units designed to upgrade the outputs from the earlier process. The secondary processing is designed to take heavy, low-value feedstock from the earlier process and thereby change it into lighter, higher-value output. The secondary processing involves either changing the molecular pattern (involving conversion activity) or upgrading a fuel type (involving treatment activity). Thus, the refining process majorly involves separation and secondary processing.

Additional processing involves secondary treatment and secondary conversion. Secondary treatment involves linking two or more hydrocarbon molecules to form a large molecule, and processing of petroleum products. Secondary conversion in turn involves cracking or breaking down of large, heavy hydrocarbon molecules into smaller hydrocarbons molecules through application of heat (using thermal cracking) or through use of catalysts (catalytic cracking).

Thermal cracking is done through coking and visbreaking. Coking is a process which coverts low- value oils, to higher value products and marketable coke. The feedstock in the process is generally the residual fuel generated in the vacuum distillation column. While visbreaking reduces the viscosity of the higher distillates and thereby coverts heavy output into the lighter products. Catalytic cracking involves central process in refining where heavy gas oil range feeds are subjected to heat in the presence of catalysts, and convert heavy products into the lighter products.

Given the higher demand for the light distillates, their prices command premium over the middle and heavy distillates. Thus for optimization of yield of light distillates and production of high value products, refinery installs these expensive processing facilities in their refineries.

Also, as the crude varies in quality, the proportion of end products also differs (light and middle distillates). On an average, light-sweet crude has 33% heavy distillates, compared to 63% heavy distillates for heavy- sour crude. (Source: Valero Energy Corporation). However, with the help of secondary processing, the output can be tilted towards production of high value lighter products but this is a costly affair and hence economics need to be carefully looked into. Also, going forward, it is estimated that available crude reserves would increasingly be of the medium and heavy- sour crude type. Thus, the incremental supply of the crude oil will be tilted towards medium- and heavy- sour crude. As per estimates, almost 30% of the world crude reserves are light sweet, compared to 63% of light/medium sour crude. This is likely to increase the price spread between the sweet-light crude and heavy sour crude.

Thus, in order to optimize the product slate, additional conversion facility is required. In the subsequent articles we will analyse the distillation yields of the various Indian refineries.

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