The Politics and Economics of International Energy (Spring E657) Lecture 3 Playing with the Molecules Prof. Giacomo Luciani

Outline  Refining and cracking  The various qualities of oil  Refinery capacity and location  “Petroleum Products” that do not come from petroleum: Gas to Liquids Coal to Liquids Bio-Fuels: Ethanol & ETBE, Bio-Diesel

Refining and cracking

Petroleum refining  Crude oil must be refined before it can be optimally used  Crude oil from the field is a mix of hydrocarbons of different molecular length (all hydrocarbons contain carbon and hydrogen, but in different compositions)  Refining is the process through which the various components of crude oil are separated

Different Hydrocarbons  CH 4 = Methane  C 2 H 6 = Ethane  C 3 H 8 = Propane  C 4 H 10 = Butane  C 5 H 12 = Pentane  Etc.  Gasoline = a mix of C 5 to C 12  Diesel = various higher fractions

What is a refinery? A refinery is a plant where crude oil is boiled and distilled to separate the individual components Atmospheric distillation is the essential process from which refining starts. It is normally followed by further stages: Vacuum distillation, Cracking: thermal or catalytical, etc. The objective is to increase the output of light products, which are more valuable and reduce residuals, which constitute a problem

2. Refining Process

8 Petroleum Refining Process Content of a Typical Barrel of Crude Oil Gasoline 25% Kerosine 12% Distillate Fuels 25% Residual Oil 39% From Distillation Only Gasoline 58% Kerosine 8% Distillate Fuels 24% Residual Oil 10% From Modern Refining Process

9 Petroleum Refining Process Simple Distillation Process – straight run Fractionating Tower Gasoline 30  C  C Crude Oil Heater Naphtha 105  C  C Jet Fuel 160  C  C Gas Oil 230  C  C Residual Fuel Oil +425  C Butane & Lighter 30  C Crude Oil Charge Tank

10 Petroleum Refining Process Thermal Cracking Process Fractionating Tower Gasoline Reaction Chamber Flash Chamber Crude Oil Heater Middle Distillate Residual Fuel Oil Crude Oil Charge Tank

11 Petroleum Refining Process Refinery Flow Diagram

Cracking  Cracking takes large hydrocarbons and breaks them into smaller ones  There are two main types of cracking: Thermal Catalytic

Thermal cracking  You heat large hydrocarbons at high temperatures (sometimes high pressures as well) until they break apart. steam - high temperature steam (1500 degrees Fahrenheit / 816 degrees Celsius) is used to break ethane, butane and naptha into ethylene and benzene, which are used to manufacture chemicals. visbreaking - residual from the distillation tower is heated (900 degrees Fahrenheit / 482 degrees Celsius), cooled with gas oil and rapidly burned (flashed) in a distillation tower. This process reduces the viscosity of heavy weight oils and produces tar. coking - residual from the distillation tower is heated to temperatures above 900 degrees Fahrenheit / 482 degrees Celsius until it cracks into heavy oil, gasoline and naphtha. When the process is done, a heavy, almost pure carbon residue is left (coke); the coke is cleaned from the cokers and sold.

Catalytic cracking  Uses a catalyst to speed up the cracking reaction. Catalysts include zeolite, aluminum hydrosilicate, bauxite and silica- alumina. fluid catalytic cracking - a hot, fluid catalyst (1000 degrees Fahrenheit / 538 degrees Celsius) cracks heavy gas oil into diesel oils and gasoline. hydrocracking - similar to fluid catalytic cracking, but uses a different catalyst, lower temperatures, higher pressure, and hydrogen gas. It takes heavy oil and cracks it into gasoline and kerosene (jet fuel).

Refinery capacity  When the capacity of a refinery is quoted, reference is normally to atmospheric distillation  However, conversion capacity is increasingly important to deal with heavier and sourer crude oils and meet mandated product specifications  Refineries are increasingly complex and expensive

Different qualities of oil

Different crude oil qualities  Crude oil comes in very different qualities  The two key measures are: Gravity Sulphur content  Gravity reflects the composition of the crude: proportion of light vs. heavier fractions  A crude with: little sulphur is called sweet sulphur in excess of 1% is called sour  Other metals and impurities are also a problem

World Crude Production by Quality Thousand Barrels/Day

Refinery capacity and location

Refinery location alternatives  Refineries can be located: Close to the source of the crude oil  (example: Abadan in Iran) Close to markets In strategic points along transport routes  (examples: Singapore, Aden, Augusta, the Caribbean)  For the last 50 years, refineries in proximity of markets have prevailed

The crisis of refining  A refinery requires considerable time to be built; heavy up-front investment;  Economies of scale are very important  A high rate of capacity utilisation is key to a refinery profitability  In the 60’s oil companies built very large refineries in the expectation of demand growth  When oil prices rose in the ’70s, and demand declined, excess refinery capacity ensued

The painful road to downsizing  For 30 years, companies have been struggling with poor refinery returns and excess capacity  It is difficult to close a refinery – you can sell it but the buyer will still run it  Little price differential for different qualities of crude – abundant supply of light, sweet crude  Tighter product specifications imposing investment with essentially zero return

HESS ENERGY TRADING COMPANY, LLC The tightening sulfur specs stipulate global investments Major policy changes

Insufficient capacity  For decades, all major oil companies have been busy reducing their refining capacity  The upstream has received the bulk of the investment and generated the bulk of the profits  Considerable regulatory/environmental hurdles for establishing a new refinery  Hence: no new refineries built

HESS ENERGY TRADING COMPANY, LLC The spare capacity is unlikely in the near term Private companies are reluctant to use excess returns on investments The memories of over-capacity also loom large for governments in producing countries In US concerns are also connected to a lack of prospects that are politically acceptable Refining investments are taking place, but will only affect the market in size towards the end of the decade US refinery investments are limited by the lack of upgrading potential without new distillation capacity A new refinery in the US is likely to at least take 7 years to build

HESS ENERGY TRADING COMPANY, LLC Distillation growth will at best take place towards the end of the decade

HESS ENERGY TRADING COMPANY, LLC And when it does it is mainly outside the OECD

Oil exporting countries  Integrating downstream in the value chain was a main objective of the oil producing countries in the 1950s and 60s  Major investment in refineries in the 1970s  Followed by a long parenthesis: oil production was down, the market demanded crude, margins were slim

A new wave of investment  In the new market conditions, the situation has changed radically  Oil production is up, most of the incremental production will be heavy and sour  Refining capacity in the importing countries is tight  Hence: a wave of new refinery projects in the Gulf  But: the economic crisis is leading to postponements and cancellations

Main Gulf Grassroots Refinery Projects  Saudi Arabia: four 400,00b/d refineries: Saudi Aramco in Ras Tanura W. Total in Jubail W. ConocoPhillips in Yanbu’ W. ? In Jizan  Kuwait: new 600,000 b/d refinery in Al Zour  Abu Dhabi: new 500,000 b/d refinery in Fujairah w. ConocoPhillips  Oman: new 116,000 b/d refinery in Sohar

Old refinery revamping / Petrochemical Orientation  In addition, major revamping of older refineries is underway to improve product slate (e.g. in Rabigh, Yanbu’, Ras Tanura)  Revamping and new refineries are mostly based on FCCs to maximize petrochemical feedstock  This opens a new page in the Gulf petrochemical industry

Project Capital Requirement Escalation – the case of PetroRabigh

North American Polyolefins Net Trade

Geopolitical Impact of Producers’ Downstream Integration  What will be the geopolitical impact?  Greater diversification of markets and prices  Greater diversification of logistics  Greater dependence from foreign sources but spread over multiple products  Supply in case of emergency?

“Petroleum Products” that do not come from petroleum

Petroleum products  We are accustomed to referring to gasoline, diesel, kerosene etc. as “petroleum products”  In fact, we shall increasingly rely on these same products derived from sources different than crude oil  You can play with hydrocarbon molecules in many ways…

GTL – Gas to Liquids  Liquid fuels can be produced out of gas through a reaction called Fisher- Tropsch  Methanol  MTBE – a gasoline additive  Diesel  GTLs are premium fuels for blending  Major projects underway, especially in Qatar (but Exxon opted out!)

The Fischer-Tropsch process The Fischer-Tropsch process is a catalyzed chemical reaction in which carbon dioxide, carbon monoxide and methane are converted into liquid hydrocarbons of various forms. Typical catalysts used are based on iron and cobalt. The principal purpose of this process is to produce a synthetic petroleum substitute.

The Fischer-Tropsch process  The mixture of carbon monoxide and hydrogen is called synthesis gas or syngas. The resulting hydrocarbon products are refined to produce the desired synthetic fuel.  The carbon dioxide and carbon monoxide is generated by partial oxidation of coal and wood-based fuels. The utility of the process is primarily in its role in producing fluid hydrocarbons or hydrogen from a solid feedstock, such as coal or solid carbon-containing wastes of various types. Non-oxidative pyrolysis of the solid material produces syngas which can be used directly as a fuel without being taken through Fischer-Tropsch transformations. If liquid petroleum-like fuel, lubricant, or wax is required, the Fischer-Tropsch process can be applied. Finally, if hydrogen production is to be maximized, the water gas shift reaction can be performed, generating only carbon dioxide and hydrogen and leaving no hydrocarbons in the product stream. Fortunately shifts from liquid to gaseous fuels are relatively easy to make.

Potential is enormous, maybe over 30bscfd could be monetised through GTL 2020 Methanol DME Fischer Tropsch Products Fuel additives Fuel cells Olefins Proplylene Diesel Jet fuel Naphtha Lubes Fuel for Power LPG substitute > 500,000 bbl/day (13 world-scale methanol plants) > 200,000 bbl/day (4.5 world-scale DME plants) 3,000,000 bbl/day (20% of incremental product demand by 2015) Natural Gas Refinery ~2bscfd Product Volume by 2020* Gas Requirement* ~1.5bscfd ~28bscfd * ADL and BP Estimations

The Shell MDS Technology In essence, the Shell MDS technology is a three-stage process. In the first stage synthesis gas is obtained by partial oxidation of natural gas with pure oxygen in the Shell Gasification Process (SGP) In the second stage, Heavy Paraffin Synthesis (HPS), the synthesis gas is converted into liquid hydrocarbons. In the third and final stage, the waxy syncrude is fractionated into high-quality products, a part of which is converted into middle distillates by means of the Heavy Paraffin Conversion (HPC).

Converting remote natural gas to environment-friendly liquid fuels

Coal to liquids  Liquids can also be produced from coal  Coal, exposed to the atmosphere, produces gas (grisou, methane)  Coal gasification is a well established, time-honoured process  The Fischer-Tropsch technology was originally developed to produce liquids from coal

Bio - Fuels  Finally, fuels may also be produced from vegetable sources  Ethanol (alcohol) is the product of fermentation of vegetable matter  From Ethanol to ETBE – parallel to MTBE  Diesel oil can be produced from seeds – prime candidate is rapeseed  It is just a matter of costs…

Conclusion  Fuels specifications are becoming increasingly stringent – the chemistry is more important  Liquid hydrocarbons (crude oils) are the main, but not exclusive raw material to produce liquid fuels  As we move away from abundant oil, the transformation phase becomes more important  Growing role of the oil exporting countries