What is the Nelson index?
The Nelson Index is a benchmark used to assign values to oil refineries based on their level of complexity. The higher a refinery score on the Nelson Index, the more complex it is. More complex refineries are able to handle and produce a wider range of products and therefore have greater economic value. This index is used to break down refinery information into simple terms that are easy to understand. No special knowledge of the oil and gas industry is required to contextualize a score.
Also known as the Nelson Complexity Index, this metric was developed in the 1960s by Wilbur Nelson. Nelson presented his ideas in a trade journal, and the Nelson Index remains the most widely used in the oil and gas industry. Score disclosures for various refineries can be found in trade publications as well as reports on specific oil companies in financial magazines, as this information may be relevant to the interests of investors weighing decisions about where they want to put their money.
To determine the Nelson Index for an individual refinery, each piece of equipment in the refinery is given a score and the scores are added together. The more equipment a refinery has, the more versatile and flexible it is. Refineries with low scores can only handle oil within a limited range of grades, for example, while a refinery with a high Nelson Index can handle low-quality oil as well as higher-valued crudes. This allows you to take advantage of the cheapest oil on the market, rather than forcing refinery managers to buy expensive, high-quality oil for all production needs.
In addition to handling a variety of crude oil types, a refinery with a high Nelson rate can also produce more oil and gas products. This expands the manufacturing potential. Refineries can adjust production to meet market needs, take advantage of high prices for certain products, and reduce production of products that currently do not sell well on the open market. This increases profit potential and allows refineries to remain in continuous production.
Advanced refiners tend to have a Nelson index of around nine. As of 2010, the highest scoring refinery was the Jamnagar refinery in India, with a score of 14. This massive refinery complex is capable of producing a wide range of oil and gas products. It can process 661,000 barrels of oil per day.