The capital employed refers to all of the capital tied up in owning and running the refinery. Refining is a very capital-intensive business, so the difference between good and bad management of capital employed can mean the difference between earning returns on capital above or below the cost of capital.
The main categories of capital employed in refining are:
- Plant and equipment (PP&E) – This is the capital tied up in the actual hardware and infrastructure in the refinery, including all processing units, tanks and supporting utilities, road, docks, buildings, etc. Typically, this value is set based on either the capital spent directly on building and upgrading the plant (less depreciation), or the capital invested in buying the plant from another party (less depreciation)
- Hydrocarbon inventory – This is the value of the crude oil, intermediates, and finished products held in tanks at the refinery on average over time. A refinery will hold inventories of both crude and products for periods ranging from several days to several weeks-worth of operation. Valued at market prices, these inventories can easily equal or exceed the amount of capital in PP&E. The amount of inventory a refiner holds will be affected by a number of factors including: refinery size, number and variety of crude grades run, number and variety of products/grades made, shipping constraints (delivery timing and sizes), individual tank capacities, and “heels”
- Equipment inventory – A refinery will typically maintain warehouses of equipment that is frequently replaced as part of day-to-day operations and maintenance. How much equipment inventory is held will depend on factors such as: refinery size, refinery complexity, length of equipment supply chain
FIND OUT MORE
The Refinery Reference Desk includes content derived from our industry experts as well as from public data sources such as company websites. Nothing herein is intended to serve as investment advice. This material is based on information that we believe to be reliable and adequately comprehensive, but we do not represent that such information is in all respects accurate or complete. McKinsey Energy Insights does not accept any liability for any losses resulting from use of the content.