What Is the Nelson Complexity Index?

The Nelson Complexity Index (NCI) is a measure of the sophistication of an oil refinery, where more complex refineries are able to produce lighter, more heavily refined and valuable products from a barrel of oil.

Refineries that are higher on the Nelson Complexity Index are valued higher relative to their peers because of their ability to handle lower quality crude oil or produce more value-added products. Due to their greater complexity, high NCI refineries are more costly to build and operate.

Key Takeaways

  • The Nelson Complexity Index (NCI) takes account of what types of petroleum products an oil refinery can produce.
  • Measured on a scale from 1 to 20, the higher the value on the NCI, the more sophisticated and complex products the refinery can produce.
  • Higher-valued refineries on the NCI tend to be more costly to build and operate, but also produce more profitable outputs.

Nelson Complexity Index Explained

The Nelson Complexity Index was developed in 1960 by Wilbur Nelson. Since the details of how a refinery operates are difficult to comprehend without specialized industry knowledge, the Nelson Complexity Index provides an easy metric for quantifying and ranking the complexity and sophistication of different refineries.

According to the Oil and Gas Journal, Nelson actually developed the complexity index to quantify the relative cost of components that make up a refinery. It is a pure cost index that provides a relative measure of the construction costs of a particular refinery based on its crude and upgrading capacity. The NCI compares the costs of various upgrading units to the cost of a pure crude distillation unit. Computation of the index is an attempt to quantify the relative cost of a refinery based on the added cost of various upgrading units and the relative upgrading capacity.

The NCI is measured on a scale from 1 to 20, where low numbers represent refineries that are simple in nature and produce low-quality fuel, such as jet fuel and heating oil, and high numbers represent more complex and expensive refineries that produce high-quality light fuels, such as gasoline and kerosene.

Which Refineries Will Thrive?

Bain & Company, a management consulting firm, has developed a proprietary model that shows which oil refineries around the world are likely to prosper and which are likely to fail based on their refining capacity and Nelson Complexity Index rating. The interactive graphic shows by geographic region where these refineries are located. Based on the Nelson Index, on average, U.S. refineries are the most complex in the world. However, there is an increasing number of highly complex refineries located in other countries.

Refining plays a vital role in maintaining the country’s fuel supplies. In Europe, for example, many refineries have closed because they are too expensive to upgrade and are unable to produce the quality fuel modern consumers demand. In the OPEC countries, on the other hand, a significant number of new investments are set to occur between 2016 and 2021, with almost eight million barrels per day of potential new refining projects.

OPEC Refining Investement Projects to 2021
Source: OPEC.