The profitability of a refinery comes from the difference in value between the crude oil that it processes and the petroleum products that it produces. Most of a refiner's margin comes from the higher-value "light products" (i.e., gasoline, diesel, and jet fuel) that it makes. However, refineries also, unavoidably, produce some lower-value products (such as fuel oil) in the process. Some refineries also generate incremental value from producing some small-volume specialty products.
To increase their margins, many refineries have invested in conversion units to increase their ability to run cheaper, low-quality crudes and/or to increase their yield of high value products. However, this comes at a high capital cost.
How a refinery works
There are four main steps in the oil refining process.
- The most basic and common step is distillation, where crude oil is separated into its component parts or distillation cuts. This is typically done in a two-stage process: atmospheric distillation then vacuum distillation
- Next, these distillation cuts are further processed through conversion units to transform them into a more profitable mix of products. A typical refinery has 5-10 different conversion units, such as an FCC or coker. These allow the refinery to produce a mix of petroleum products that is more valuable than the mix that occurs naturally in crude oil. Many of the outputs from one conversion unit are also then fed into another conversion unit
- Next, refiners employ treating units such as hydrotreaters to improve stream qualities and to remove contaminants
- Finally, refiners blend different streams to create batches of finished refined products meeting the exact quality specifications that the market wants
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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.