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Why Capacity and Utilization Are the Keys to Refining Revenue

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Refining capacity and utilization rates in 2014

Key factors influencing refining revenues are refinery capacity and utilization rates. The below chart shows the integrated energy companies’ refining capacity and utilization rates in 2014. Exxon Mobil (XOM) had the highest refining capacity at 5.1 MMbpd (million barrels per day) in 2014, followed by Royal Dutch Shell (RDS.A) at 3.2 MMbpd. The refining capabilities of Chevron (CVX) and BP (BP) stood at 1.9 MMbpd and 2.0 MMbpd, respectively, in 2014.

The higher the refining capacity and utilization rates, the higher the production of refined products. So, refining capacity and utilization rates directly impact the revenues of refining segments.

The utilization rates remained almost the same for Exxon Mobil (XOM), Chevron (CVX), and BP (BP) at ~87%-88%. But the utilization levels for Shell (RDS.A) were higher at 95%. At the stated utilization level, Exxon Mobil (XOM) processed 4.5 MMbpd of crude oil in 2014.

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Significance of refinery complexity

Shell (RDS.A) processed 2.9 MMbpd of crude oil purchased at an average cost of $83 per barrel in 2014. The cost of crude oil processed by a refinery depends on market prices for crude oil, and the type of crude oil processed. Crude oils can be classified as heavy or light and sweet or sour, depending on the density, viscosity, and sulfur content. Lighter and sweet crude oils are expensive and trade at a premium over heavier and sour oils. For example, Brent currently trades at $43.7 per barrel, a premium of $3.9 per barrel over the OPEC Crude Oil Reference Basket. The higher the refinery complexity, the heavier the crude oil it can process. Thus, high complexity refineries will have higher operating margins on account of lower crude oil prices.

Refinery complexity also affects the output of the refinery unit, which is usually referred to as “product slate.” In the next part, we will examine types of products produced and their price realizations.

The iShares Global Energy ETF (IXC) has ~7% exposure to oil refining and marketing stocks.

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