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What is the Nelson Index?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 04 December 2016
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The Nelson Index is a frame of reference used to assign values to oil refineries on the basis of their level of complexity. The higher a refinery's score on the Nelson Index, the more complex it is. More complex refineries are capable of handling and producing a wider array of products and thus have more economic value. This index is used to break down information about refineries in simple terms easy for people to understand. No special knowledge of the oil and gas industry is needed to contextualize a score.

Also known as the Nelson Complexity Index, this metric was developed in 1960 by Wilbur Nelson. Nelson introduced his ideas in a trade journal, and the Nelson Index continues to be most widely used in the oil and gas industry. Disclosures of scores for various refineries can be found in trade publications, as well as in writeups on specific oil companies in financial magazines, as this information can be relevant to the interests of investors weighing decisions about where they want to put their money.

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To determine the Nelson Index for an individual refinery, each piece of equipment in the refinery is assigned 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 may only be able to handle oil within a limited range of grades, for example, while a refinery with a high Nelson Index can handle low quality crude in addition to more highly prized crude products. This allows it to take advantage of the cheapest crude on the market, rather than forcing refinery managers to purchase expensive high quality crude for all production needs.

In addition to handling a range of crude grades, a refinery with a high Nelson Index can also produce more oil and gas products. This expands the manufacturing potential. Refineries can adjust production to meet the needs of the market, take advantage of high prices for particular products, and ramp down production of products that are not currently selling well on the open market. This increases the potential for profits and allows refineries to stay in continuous production..

Advanced refineries 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 an extensive array of oil and gas products. It can process 661,000 barrels of oil a day.

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Mammmood
Post 3

@miriam98 - I think that even among people who favor coal and natural gas for energy production, you’ll find many who endorse green energy as well.

That includes me as well. I disagree with the notion that green energy is taking longer because of lack of effort; in fact, there has been a lot of political will and effort spent on green energy.

The problem is that green energy doesn’t completely meet our needs like oil does. The Nelson Index, as an example, points to a refinery’s ability to produce a wide range of petroleum based products, not just gas.

We forget how many products in our everyday lives are petroleum based, plastics being one of them. Transitioning to green energy would not change our demand for these products, and I suspect any green alternatives would be a bit more expensive, at least at the outset, just like Ethanol was.

miriam98
Post 2

@everetra - Clean energy is the wave of the future in my opinion.

While the Nelson Index may be a fair way to give a report card to existing refineries, it doesn’t tell us how much pollution those refineries are putting into air or whether they are damaging the environment in any way.

That’s why I don’t favor anymore work being done with oil production, whether you’re talking about improving current productive capacity or building new refineries or digging in other locations or whatever.

Critics like to charge that clean energy takes too long before it becomes profitable. I say that it’s because we haven’t been exploring it with the same intensity as we have with capitalizing on current oil production.

everetra
Post 1

I think that in the ongoing debate over oil and green energy, people sometimes think that creating more oil refineries is the answer to our problems.

While I support the notion of exploring our oil and natural gas reserves, I don’t think building more refineries is the answer. I think the answer is increasing the productive capacity of the refineries that we already have.

I believe this article makes clear that not all refineries are created equal. Ideally, we should have a refinery that produces as much oil and gas as possible while expending the least amount of energy, and respecting the environment.

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