Operational efficiency assessment of oil refineries using data envelopment analysis and Tobit model: evidence from India

Abstract

Purpose In India, the operational performance of the refinery is influenced by many factors. It is important to identify those key drivers which can assist the refineries to uphold and succeed in day-to-day production activities. Therefore, the purpose of this study is to evaluate the operational efficiency of seven Indian oil refineries during the period 2010 to 2018. Design/methodology/approach In this work, a two-stage empirical analysis is proposed. In the first stage, the data envelopment analysis (DEA) – variable return to scale model is used to evaluate the operational efficiency of the Indian oil refineries. The ordinary least square (OLS), random effect generalized least square (GLS) and Tobit model are used in the second stage to identify the key determinants of efficiency and to explain the variation in refinery efficiency. Findings The first-stage DEA results showed that the Numaligarh Refinery Limited and Chennai Petroleum Corporation Limited are found to be more efficient than the rest of the sampled refineries and attained their efficiency scores of 0.993 and 0.981, respectively, during the study period. The second-stage regression analysis suggested three explanatory variables: refinery structure, utilization rate and distillate yield, which are found to be significant in explaining variations in refinery efficiency. Practical implications This study provides valuable information that would help policymakers to formulate policies toward improving the efficiency of underperforming Indian refineries, which reduces the excessive use of resources and gives a competitive advantage. Originality/value This study proposes the first-ever application of the profit frontier DEA model for assessing the operational efficiency of oil refineries and explains the variation in refinery’s efficiency using OLS, GLS as well as the Tobit model.