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Where does the oil refining industry can go?
10

Where does the oil refining industry can go?

Where does the oil refining industry can go?

(OP)
In Europe, refining margins are very small and in some cases negative. In principle this situation should-be attributed to:

An overproduction of oil products,

A slowdown in the economy with low market demand,

Technological advances in the automotive industry,

Appearance of electric motors,

Greater environmental awareness.

Unfair environmental requirements competition between EEC, USA, Eastern countries, Africa, Asian and Australia.

In this context where does the oil refining industry can go?

Luis

RE: Where does the oil refining industry can go?

I always thought the refining business was cost-plus (people will pretty much buy whatever you produce, without much competition ... around here pretty much all pumps have the same price, it fluctates some but rarely will one brand be out of step with the others).

now maybe refined oil products can be imported for a lower price than those refined there. maybe Europe is trying to outsource it's refinery business ?

another day in paradise, or is paradise one day closer ?

RE: Where does the oil refining industry can go?

" around here pretty much all pumps have the same price" I haven't seen that. I see different prices on different sides of town. Personally I think they are trying to price gouge.

I guess if countries want to get rid of the refining business, they can at the cost of higher prices to import. And that's the falacy of enviromental regulations. There will always be some country somewhere that will be willing to make a butt load of tax revenue by taking in businesses that other countries don't want.

Countries need to wise up that some things aren't going to go away very soon, and accept that taxes may not be the solution to all there problems, or throwing money at problems also won't fix things. You need a working plan and people who can make it work (not political hacks).

RE: Where does the oil refining industry can go?

around here there may be (at most) a cent (per lt) difference between different brands and they'll all rachet down a tenth or two for a few days, then "boing" back up again ... free market? yeah, right! no price fixing 'round here (the govt says so !)

another day in paradise, or is paradise one day closer ?

RE: Where does the oil refining industry can go?

There are numerous factors involved in profitability of refining
Supply and demand
Cost of Crude
European Tax structure
Maintenance costs
Labor rates and productivity
Energy costs to produce the refined product
Tranportation costs, etc.
Currnt Economic conditions (Recession or very low growth)

US refineries have also experienced periods of low profitability due to many of the above issues.

RE: Where does the oil refining industry can go?

3
The majority of today's refineries were built by the "Majors" (in fact the original definition of "Major Oil & Gas Company" was "A company vertically integrated from exploration activities through marketing to final consumers". Originally that value chain was measured between lifting costs (plus overhead including exploration costs) and nozzle price at the petrol station. At any given time some segments would be very profitable and others would lose money, but the end-to-end margin was all that mattered (up until the mid 1970's). When I started in 1980, crude prices were VERY low, oil production was barely profitable, but since refinery feed stocks were so cheap and refined products relatively expensive, the refineries made boat loads of money. Today the opposite is true and wellhead prices are really high while refined products are actually VERY cheap (don't start with the idea that the pre-tax pump prices are high, in constant dollars they are lower than any time since WWII).

With the rise of the MBA in the late 1970's this model was thrown out the window. By 1985 the upstream operations side of the Major that I worked for would happily take a lower price to keep from selling to our sister downstream company (the paperwork that the sister company required of us was too onerous to continue, especially when they didn't require the same documentation from 3rd parties). We would sell to jobbers at a discount and the jobbers would sell to our sister company.

Today the vertical integration is mostly gone. Every business segment must succeed or fail on its own. At today's high crude prices the OP is quite correct that refining margins are really skinny. Add to that the fact that well over half of the world's refining capacity is more than 80 years old. They are getting tired, but the margins do not exist to build new multi-billion dollar plants. Silly government policies (like the U.S. export ban and the U.K. Frac'ing ban) are keeping crude prices very high. Other government policies (like the very high usage-tax rates in most of the world and the threat of price control) are keeping end-use prices very low. Not a lot of room in there for new capital investment. So the OP's list is mostly not the driving force:
  • An overproduction of oil products, Crude oil prices don't seem to indicate that this is true
  • A slowdown in the economy with low market demand, Rate of increase in market demand has slowed in the last few years, but world demand is still increasing
  • Technological advances in the automotive industry, A bigger factor in the U.S. than in most of the world. The U.S. road use taxes are so much lower than Europe or Japan that we don't have nearly as much price sensitivity as I've seen elsewhere. If you are driving your vehicle 40,000 km/year technology is a much bigger deal than if you are driving it 15,000 km or less
  • Appearance of electric motors, A sideshow at best, not a factor in refinery profitability
  • Greater environmental awareness. Environmental regulations are raising costs in refineries, which cuts into thin margins, it is certainly a major factor in the cost of new plants (getting a permit through the environmental regulators takes decades)
  • Unfair environmental requirements competition between EEC, USA, Eastern countries, Africa, Asian and Australia. My practice is global and I have clients on every continent with a large city and I don't see much difference in environmental regulations from one place to the next. The Interwebz is everywhere. A country seen as "lagging" the world's environmental regulations tends to find the strictest rules and modify them for the current thinking which leapfrogs from the "bottom" of the pack to the "top" of the pack in one legislative session.
My estimate of the driving force is regulations that put barriers in the path of supply and demand. Crude price should be around $60 USD/bbl and pre-tax pump price should be around $8 USD/gallon (€1.69/L). Neither is going to happen so we will Limp along until you see a major refinery go bankrupt, or blow up and not be fixed (I think that if anyone proposes shutting down a major refinery the government will nationalize it and run it until it burns to the ground).

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

So we should expect a refinery explosion some time soon?

I think refinerys will morf into more profitable ventures, like plastic production, or something else before that happens (or maybe they aren't run very well).
Several years ago I saw a large number of coal cars at a refinery, and wondered why. It seems that coal is one of the building blocks of plastics.

And there are much more in the way of products that can be produced, example asphault. So maybe auto gas is just a side line for other more profitable products.

RE: Where does the oil refining industry can go?

cranky108,
An explosion in a refinery is guaranteed.

Was it coal you saw or coke being shipped from the refinery?

RE: Where does the oil refining industry can go?

I'm pretty surprised any day that doesn't have one. Hundreds of miles of pipe, thousands of valves, pressure vessels operating for decade on decade above 90% of temperature and/or pressure limit. Continuous pressure to cut costs. I was in once in Indonesia that was 75 years old and most of the pumps (steam driven) were original equipment. I was pretty happy that I didn't soil myself before the tour was over.

Refineries are amazingly complex operations that scratch every erg of value out of every molecule that comes in. The person who replaced me when I retired came from a refinery that had her and 7 other engineers responsible for a single vessel. It is a big deal vessel, but that still seemed excessive to me.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

Interesting statement about government (the US?) nationalizing refineries rather than allow them to close. That is obviously not the case in Australia, as refinery capacity here is being steadily reduced. By mid 2015, Australia will only be refining about a third of its requirements of gasoline and diesel. That seems to me to be a national security issue, particularly because of our isolation, but our government is more concerned about other things.

RE: Where does the oil refining industry can go?

The WWII refineries were HUGE. Each of them represents a non-trivial portion of a country's total refining capacity. Closing one of them is a significant supply disruption that would ripple through an economy. There are hundreds of "small" (none of these facilities is really small, but you know what I mean) refineries that can come and go without huge disruptions and they do. It's the big ones (like BP's Texas City Refinery that should have closed after the last annual disaster, but pressure from the state and federal level convinced them to keep it open) that won't be allowed to close. Fewer than 100 of these massive facilities in the world.

It absolutely is a national security issue, but the governments are in a tough position. On the one hand they must have someone to blame their (the government's) screw ups on, and Oil & Gas is easy. On the other hand, they've been so successful in making these guys the villain of the piece (both in legislation and the captive press) that they can't appear to grant any special dispensations. So they fine BP for the last Texas City annual explosion and make speeches about forcing the industry to comply with regulations, and while meeting with BP executives on the golf course to work out how to keep the facility open. BP's old CEO (Sir John Lord Browne of Maddingly) was a world master at this game, never been anyone significantly better. His successors are hacks at it, consequently BP is in the news far more than the company or the world's governments would like. I'm not sure how this is going to play out, but I am confident that the real resolutions will not make the Evening News.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

Refiner margins are definitely skinny- they make their money by doing huge volume, trading off the sunk value of 40+ yr old infrastructure. New capital investment? Meh. Only if regulations require it.

That infrastructure is very old- nothing new has been built in a long, long time here in the US and Canada. I too am surprised that we don't see more catastrophic failures.

Many locales would be happy to have others do the refining for them, so they get the benefit of the fuels without a good chunk of the environmental impact of refining them- until there's a big shock in the world that makes them concerned about price spikes due to supply disruptions.

Smaller refineries, including many here, don't have the scale to make investments in new technology worthwhile. So when new sulphur limits in a couple products kick in, the refineries are sold and packed off to a part of the world where that doesn't matter so much.

Shale gas has been the big game changer here in North America. The effects are still rippling through the O&G and chemicals system. Many thought new chemicals investments in North America had gone the way of the dodo, but shale gas changed all that.

RE: Where does the oil refining industry can go?

Shale oil is the whole driving force behind Keystone XL. Mix 40 API shale with 15 API oil sands oil and you have a reasonable approximation of WTI that the gulf coast refineries are designed for without huge capital investment. Politicians and enviro-wackos just don't get this. Without Keystone XL and without export being legal then we have to build a few trillion dollars worth of new refining capacity in someone's back yard. With Keystone XL, I think that it will be possible to make do with the old kit.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

Outsiders view here: I read about how US is exporting refined gasoline to the point where its actually moving the needle on total national manufacturing output. This seems to the view of The Economist and similar business outlets, and it sounds great. But what you guys seem to be saying is they are just cranking more through WWII refineries to the point that they are about to burst. Is it driven by cheap gas powering the refineries, or by the export restriction on US oil?

RE: Where does the oil refining industry can go?

Refineries are amazingly complex entities. They are designed for a reasonably narrow range of crude input. In a pre-1975 world, producers of Baaken Shale Oil would have looked the world over for a refinery with excess capacity that was designed for crude like they have. It might be a perfect fit for an underutilized facility on East Kalimantan, Indonesia. Rational producers would load it on boats and process it there, and let the refined products serve Asian markets. At the same time Brazilian crude might be a good fit for spare capacity in Texas City (or California, etc). That kind of global juggling act works. It works very well even in the cases where Alaska crude needed to go to Japan for refining and the gasoline and diesel needed to be shipped back to the states for retail sales. You are optimizing the most expensive asset (which is definitely not transportation).

In steps politicians to "protect" consumers by putting huge roadblocks in the way of this global chess game. U.S. crude must be refined in the U.S. (but by god you can't build that stinky refinery in my Congressional district) and refined products must be consumed in the U.S. The result is refineries operating outside of their design conditions (at the cost of efficiency and quality of refined product). Until/unless the short-sighted government idiots step out of the way the best we are going to be able to do is blend and limp. And blow up the occasional 40, 50, or 60 year old facility.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

zdas: agreed that the export restrictions on oil are hypocritical and irrational in a post Cold War world, but why are the margins on refining so slim? Is it because we prevent export of refined gasoline but allow import?

RE: Where does the oil refining industry can go?

(OP)
Because governments don’t want to lower their taxes, the refinery margins are low, and fuel oil prices keep going on high, in the pump stations. The governments never lose money with the oil industry, if the crude oil price increases the governments increase the price per liter, but they maintain the same taxes, so that they never lose money.

RE: Where does the oil refining industry can go?

I wish I could buy into the government conspiracy thing, but the refineries sit between two commodities whose prices float independently. It is the only segment of any industry that I can find that has that horrible reality.

Crude prices float on fear and superstition from day traders (bomb an oil pipeline in Columbia and the crude price jumps $5/bbl, start a war in Iraq and the price jumps $20/bbl, Chavez dies in Venezuela and world crude prices drop $10/bbl). Supply and demand don't really have that big an impact on crude (some, of course, but not dominant).

On the other side, commodity petrol and diesel prices have a damped relationship to demand (the dampening effect is the very high road-use taxes around the world). In anticipation of summer holiday weekend, the prices increase in the face of increasing demand. Normal times, if people perceive prices are too high then they individually cut back on driving a bit and put downward pressure on prices.

Today crude is at historic high prices while motor fuel is at 1970's prices (when crude was selling for $12/bbl [$72/bbl in 2014 prices].

This morning some pundit predicted that shale oil supply was going to put downward pressure on crude prices. He may be right. It has occasionally happened that actual supply and demand factors have influenced prices more than day traders, but it has been a while. I'll believe it when I see it. In the 1950's when the bulk of the world's motor fuel came from vertically integrated majors, you could almost call the whole value chain supply-and-demand driven, but today with every segment under individual profitability pressure the refineries stand out as having really skinny margins (while the margins from the wellhead to the gas pump in total are acceptable, not as good as Micro$oft, but acceptable).

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

zdas: so if its about the temporary price delta between fuel and crude, will refineries be profitable again if crude gets cheaper? If so, I will buy some refinery stock immediately. The obvious alternate explanation is that there is simply too much refinery capacity out there.

btw: thanks for your excellent insight into oil and gas economics and history. I really feel a bit wiser having read your posts.

RE: Where does the oil refining industry can go?

What do you guys think about the Canadian Energy East pipeline to the Atlantic? I guess the Canadians have lost patience with Keystone XL.

RE: Where does the oil refining industry can go?

Speaking of the Keystone XL pipeline, it might just be history, and not because of anything that will happen here in the States, but rather something that the Canadians are considering (I read it this morning on my iPhone while I was waiting for a flight from Rochester, NY to Baltimore):

http://www.bloomberg.com/news/2014-10-08/keystone-...

John R. Baker, P.E.
Product 'Evangelist'
Product Engineering Software
Siemens PLM Software Inc.
Industry Sector
Cypress, CA
Siemens PLM:
UG/NX Museum:

To an Engineer, the glass is twice as big as it needs to be.

RE: Where does the oil refining industry can go?

"Refinery stock" is kind of a hard beast to find. The majors still have refining branches, but as crude prices go down the producer margins go down. There are some refiner/marketers out there (I'm not going to mention names since if I do someone will buy that stock and when it goes down because of the next war they'll be mad at me), but mostly they seem dominated by their marketing end (which makes more money from selling cigarettes and candy bars than from selling motor fuel). I can't think of any company that is just a refiner, but there probably are some. They might do really well in the next 6-18 months. Or they may not because of uncertainty in supply-mix and market accessibility (Keystone XL and export restrictions).

I don't think that the pipeline to the Atlantic has much chance to actually get built (much like the Alaska Gas pipeline). Pipeline economics tend to be around 4% ROI and 30 year treasury bond prices are around 3% which doesn't provide enough delta to account for the risk. Keystone is kind of a special case because it is being funded as a reservoir-management tool by producers instead of a marketing tool for speculators (as I understand it, once the oil gets to the Atlantic coast it hits a spot market instead of a long-term contract).

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

My guess is that if the oil pipeline folks think Obama is a tree hugging obstructionist, they have not met a French Canadian.

RE: Where does the oil refining industry can go?

Hahaha... Love your (very astute) comment glass... We can be a "touch" difficult.

I think, however, that you are in fact referring to the extra-unique group of distinct Canadians, the Québécois. They are not uniquely francophone, though most certainly are, and they are nearly universally hard left. At least left from an average Canadian standpoint, and certainly HARD left from a US standpoint. Many would have a hard time making Obama look like Mussolini, but they are probably the most typically European group in North America. Do you think any of these pipelines would get built through the Netherlands?

RE: Where does the oil refining industry can go?

CEL: Yes exactly, the Quebecois. Not a chance.

I do of course love the French Canadians. My favorite glass fabricator of the moment is of that place, and he is in fact very easy to work with. I am just glad I don't have to build an oil pipeline through his backyard.

RE: Where does the oil refining industry can go?

CELinOttawa: politics in Quebec are a little more complicated than that. Urban Francophone Quebecois definitely tend to be lefties- but the rural ones aren't quite so leftie, though they are often separatists. The xenophobic thing (banning religious symbols etc.) came from somewhere, and you can bet it wasn't from the urban leftie Quebcois...Remember that the Bloc Quebecois came from the conservatives in the province, not the Liberals- and the NDP have never had any traction there, until the last election where Quebec sent a raft of NDP university students to parliament as a protest vote.

Agree that there's a strong current of BANANAism (build absolutely nothing anywhere near anything) pretty much everywhere in Canada except Alberta and maybe Saskatchewan- there's a fracking ban in New Brunswick and one considered in Newfoundland too as examples. But the people you need to concern yourself with in building a pipeline east, or west, aren't so much the Quebcois- it's the First Nations, where the issues are much more complex than just environmentalism.

Note that the Line 9 pipeline flow reversal (the one that runs through Toronto all the way to Montreal, has been approved. This particular recent "environmental action" hobby-horse, was originally intended for crude and originally flowed west to east, then was reversed, and now will be reversed again. Anyone concerned about pipeline safety has to understand the statistics versus rail transport.

http://www.enbridge.com/ECRAI/Line9BReversalProjec...

RE: Where does the oil refining industry can go?

In my little NYC bubble you can't even renovate your bathroom without your upstairs and downstairs neighbors wigging out, so building an pipeline across a whole country is unthinkable. I have no idea how the interstate highway system got built.

RE: Where does the oil refining industry can go?

Zdas04--David could you elaborate on how the mixing of Baaken and Athabasca crudes makes a raw product similar to WTI crude for the refineries? My simple understanding of refineries is that they have distillation columns, cracking vessels and reformer vessels. So, if you hit the refinery with a diet of heavy crude instead of WTI, there will be a mismatch of utilization of distillation columns, crackers and reformers. But if you introduce the Baaken product into the mix, the refinery equipment usage becomes more similar to what it would be with WTI? Keep your answer simple, as I am a metallurgical engineer, not a ChemE or petroleum engineer.

RE: Where does the oil refining industry can go?

I get out of my depth pretty quickly here as well.

As it was explained to me, the equipment in the refinery splits the inlet stream into various components and then puts some of it back together. Each vessel is looking for a pretty specific mix of stuff to split (or combine). When the wrong crude comes in, some of the processes are over loaded (resulting in reduced purity on the outlet) and others don't have enough flow to sustain the process (which can result in overheating or runaway reactions). Consequently if you are looking for something like a 30 API crude at the inlet, then you can blend the very light shale oil with the very heavy oil-sands oil until you have a mix similar to what the plant is designed for.

If any plant guys read this, please correct any misconceptions above, I'd like to know if it was explained to me correctly.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

France is altogether just as Xenophobic, and the Netherlands as well as most of the Scandinavian countries are well on their way there too...

I believe my statement stands well in this case. It is more true than most generalities to call Quebecers hard leftist for north america, and for any rural QC farmer you can find five way harder right wing nuts in the rural areas outside of Quebec.

RE: Where does the oil refining industry can go?

What about Delta airlines having bought that refinery in Philadelphia a couple of years back? In a lot of ways, airlines are just a pass through organization for jet fuel from a refinery to passengers. They seemed to think that they were paying hundreds of millions of dollars a year in markups to the refinery. Running a refinery can't be that much different from running an airline, can it?

CEL: I don't think of the Quebecois as especially left or right, I think of them as spirited an independent. They love nothing more than to raise a middle finger to those in power, whoever that may be. It is why they choose to speak French in spite of the outlandish inefficiency involved.

RE: Where does the oil refining industry can go?

(OP)
Oil refineries constructed before the oil crises in the beginning of years 70, were base in 3 cases of crude feeds such as; Arabian light, Arabian medium and Arabian heavy. Today, refineries constructed at that time, they process all the stuff, the so called "opportunity" crudes bought at low prices. Crude is blended in a way, to obtain what the markets demand, and the refinery equipment is being progressively up-dated, and, corrosion inhibitors are added to fight the corrosion originated by those "opportunity" crudes.

RE: Where does the oil refining industry can go?

If David is out of his depth, then I'm drowning- but here are my impressions: it would take quite a lot of Bakken crude to make Athabasca bitumen good enough, but I guess if they pick Bakken crude up en route that would be a bonus. They currently use distillate to make the bitumen pumpable, so you have trainloads of distillate going north and trainloads of diluted bitumen going south. They need to send it to the Texas refiners which have sufficient coker capacity to handle it. Building and operating upgraders in Alberta is too expensive and not getting any cheaper, and there are mountains of petcoke there already. Lots of people have been studying alternatives to cokers since the 1930s, but the one thing the coker has on every other heavy oil/resid utilization technology is flexibility/robustness. It's a garburator- it grinds up pretty much anything you feed to it, with no catalysts to poison etc.

RE: Where does the oil refining industry can go?

Why do they not build a refinery in North Dakota where all the oil is? Its not too far from the Canadian tar sands. Surely there has been some advance in refining technology since WWII.

Another interesting tidbit from Wikipedia about Bakken shale:
"Absent the infrastructure to produce and export natural gas, it is merely burned on the spot; a 2013 study estimated the cost at $100 million per month."

RE: Where does the oil refining industry can go?

The current state is that it takes 10+ years to get a permit for a new refinery, another 3 years for engineering and procurement, and 5 years for construction. Call it 20 years. At $100 million/month of flared gas that is a lot of money. Some of the ideas that people have talked to me about for solving the vented/flared gas problem:
  • On-site small scale gas to liquids (viable at $3/gallon for diesel, but permits for GTL are tough, the enviro-wackos claim that GTL releases too much CO, so rather than simply setting max CO number and letting us develop a way to meet it, the EPA just slow plays GTL permits)
  • Build a mega power plant in the middle of the field. Great idea, but the electric infrastructure to get mega-power to the grid doesn't exist and permits are a problem.
  • Generate wellsite power with local gensets. Wellsite power requirements are too small to use it all and most wells don't have grid connections to export the excess.
  • Build a pipeline for the gas. Compressor station and pipeline permits are not trivial to obtain, but are underway and a couple of pipelines are under construction, this will certainly be the first piece of the solution that is deployed
  • Reinjection of the gas back into the formation. Interference between injected gas and reservoir fluids is so great that this would cut base production to near zero.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

Permits are always going to be a challenge, but compared to building a pipeline right through Quebec or the whole of the US, North Dakota would be a relatively welcoming jurisdiction for a refinery. My understanding is that ND is pretty much a subsidiary of the shale oil industry at this point. Transporting the oil by train is not ideal from an derailment point of view (sorry Warren Buffet).

Small scale GTL sounds like the right answer. Can you not burn the CO? Shame the EPA is not helpful (what about all those pointless CO2 emissions from the burnoff?) Mega scale pipeline and power line projects are always going to be rough politically.

A whacky idea would be to build an aluminum smelter in the field. Aluminum is basically solidified electricity, so if you had free electricity you just shovel in a bunch of bauxite and out comes aluminum billet.

I suspect part of the gas burnoff problem is just the low gas price right now.

RE: Where does the oil refining industry can go?

Small scale GTL is too capital intensive to make money, especially if the high value, zero sulphur product it generates is simply blended back into dirty crude to take it to market- and especially if there's no path to market for the significant quantity of LPG it also generates. Just how small "small scale" is, is a matter of debate, but it's certainly in the thousands of barrels per day. Individual wellhead flaring doesn't generate such large amounts of gas, and if you're going to spend the money to collect it from multiple wells in pipelines the most sensible thing to do then is to market it.

A flaring ban could make smaller scale GTL an attractive alternative, but the locations which are truly stranded AND on land are comparatively few. There's always an alternative.

Places like Qatar where large-scale GTL facilities have been built, are also building aluminum smelters...

RE: Where does the oil refining industry can go?

Interesting about Qatar with the GTL and aluminum.

I guess building a relatively local pipeline network in the Bakken oilfield is relatively easy politically. Large scale GTL plants are gigantic. They are building one in my home country of Australia and its costing ~$20BB or some silly number like that. Its like the worlds biggest fridge.

RE: Where does the oil refining industry can go?

I was talking to a company about a recent patent on GTL that takes in 1.5 MMSCF/day and produces about 100 gallons of diesel and LPG components. Skid mounted, toss it in the dirt, drop a genset, set a tank, run a couple of hundred feet of pipe and a few wires and you are online. At first quarter 2014 average price the payout was less than a year, but it required someone to look at it about every 12 hours (i.e., more manpower intensive than is normal for wellsite equipment). Even with that kind of manpower requirement it might work. Interesting technology and really nice skid. Their target was to blend the zero sulfur diesel with low sulfur diesel to try to get to the CA standards, not blend it with the crude.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. —Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

I work in a refinery built to process heavy canadian crude. We have made modifications to process bitumen and synthetic crude. ND crude passes right by us. It is much too light and too expensive for us to process profitably. Running crude that the refinery is not built for does not produce inferior products or unsafe reactions. It simply results in poor asset utilization. It we ran Bakken, our distilate units would fill up and our GOHT's, cokers and hydrogen plants would be under utilized.

The biggest barriers to running alternate crudes are metallurgy and asset utilization. Our refinery is making near record profits and is expanding with $1B per year in capital projects. We have a sister refinery in Texas. If Keystone makes it down there, they could not run the crude we run. They are swimming in light sweet Texas crude. The cost to metal-up for tar sands bitumen would be a deal-breaker. And diverting our heavy sour feed to the gulf would drive up our raw materials costs and errode our profitability. We make more money if Keystone is not built.

Our company owns refineries, but no drilling and exploration and no retail. We may be unique in this regard.

Johnny Pellin

RE: Where does the oil refining industry can go?

Quote (glass99)


Why do they not build a refinery in North Dakota where all the oil is? Its not too far from the Canadian tar sands.

At least with respect to the oil that would have been delivered via the Keystone XL pipeline, it's being directed to a series of refineries in Texas which are located in a sort of free-trade zone which will allow the oil companies to sell the refined fuels to overseas customers and avoid paying ANY US taxes because technically the oil will have NEVER been in the United States. It enters the pipeline in Canada and is delivered to a refinery where little or none of the refined products are going to be sold on the US domestic market. Therefore this argument that it will help lower the price at the pump for us consumers is not going to happen. In fact, it could raise the price since the Keystone XL could result in LESS Canadian oil going to refineries which are supplying the domestic markets. After all, where is the Canadian oil going now? Once the pipeline is finished they could pump literally 100% of the oil to Texas where it could ALL be shipped overseas, to Asia or Europe.

http://thinkprogress.org/climate/2011/12/20/393247...

John R. Baker, P.E.
Product 'Evangelist'
Product Engineering Software
Siemens PLM Software Inc.
Industry Sector
Cypress, CA
Siemens PLM:
UG/NX Museum:

To an Engineer, the glass is twice as big as it needs to be.

RE: Where does the oil refining industry can go?

JJPellin - thanks for the great insiders view. Sounds like you guys are doing just fine - what's this business about refineries having tight to negative margins? Or are you guys doing something different?

RE: Where does the oil refining industry can go?

Our company is closely held (not publicly traded stock). Our owners have invested for the long term. We had relatively little competition for our crude until the last decade or so. There are no major refineries nearby. We have spent billions upgrading, expanding and improving. Original carbon steel piping in our crude units has been replaced with solid Inco. We can process the nastiest crude on the planet.

Johnny Pellin

RE: Where does the oil refining industry can go?

JJPellin: The problem with being publicly traded is that a bunch of passive investors become your boss. I am a great believer in the Mittelstand and its US equivalent.

RE: Where does the oil refining industry can go?

JohnRBaker--the destination of products refined from Athabasca tar sands oil, delivered to the U.S gulf coast, i.e. being exported, has not exactly been kept secret. I have read about this for the last several years. It is also not a secret that European refineries have been shipping gasoline to the U.S. for several years. I would also say that your fears of XL pipeline crude being hogged by the gulf coast refineries is unfounded. BeePees big refinery in Whiting, Indiana was upgraded a few years ago for the specific purpose of being able to handle the tar sands oil. I am sure they will continue to get their share of this crude.

RE: Where does the oil refining industry can go?

Quote (swall)


I would also say that your fears of XL pipeline crude being hogged by the gulf coast refineries is unfounded. BeePees big refinery in Whiting, Indiana was upgraded a few years ago for the specific purpose of being able to handle the tar sands oil. I am sure they will continue to get their share of this crude.

That's because that's as far as the current pipeline runs from the Canadian tar sands operations. However, there is the possibility that if the Keystone XL pipeline is completed that these mid-west refineries could be left holding the bag as there would be more profit to be made by refining the oil in Texas and shipping the refined products overseas, both in the price that they could get for finished goods and the ability to avoid paying US taxes.

And as for these facts not being a secret, that the whole issue, the proponents of the Keystone XL has always made that claim that the pipeline will help reduce America's dependence on foreign oil (as if Canada was part of the US, eh) and reduce the price at the pump due to increased production of gasoline here in the US. This has always been pablum for the masses since this project is after all being paid for by people who are looking to maximize their ROI and if that means earmarking most if not all of the oil going into the pipeline for overseas customers, that's exactly what they're going to do. They have absolutely nothing to gain by continuing to sell their oil to purely US domestic refiners who supply finished products to local markets, at less than the world market price simply because they currently have NO way of delivering their oil to an international market.

http://www.nber.org/digest/oct12/w18127.html

http://business.financialpost.com/2013/02/07/growi...

http://business.financialpost.com/2012/02/07/glut-...

John R. Baker, P.E.
Product 'Evangelist'
Product Engineering Software
Siemens PLM Software Inc.
Industry Sector
Cypress, CA
Siemens PLM:
UG/NX Museum:

To an Engineer, the glass is twice as big as it needs to be.

RE: Where does the oil refining industry can go?

3
David: the devil's in the details. If it sounds too good to be true... Doing GTL profitably at lower than 1000 bbl/d is going to be very, very tough, irrespective of patents. Not impossible- but I'd say very, very tough absent a flaring ban. A GTL plant isn't a "toss it in the dirt" kind of unit- there are too many steps, too many unit ops to go wrong.

Here's my chance to promote Bill Banholzer's paper again: it's a brilliant paper, one of the best I've read in many years. It has an uninspiring title, but is very good reading and not just for chemical engineers. In Banholzer's parlance, "Scale always wins...". GTL isn't like microcomputers. How I wish it weren't true! But regrettably, it is.

http://www.dow.com/innovation/pdf/Banholzer_AIChE_...

RE: Where does the oil refining industry can go?

moltenmetal: Good article. There are clearly a lot of advantages with scale, but there are a lot of advantages with small scale too. Are there economies of scale in shale oil and gas? Unlike offshore oil platforms, wells are basically small individual operations which have been made possible by technical innovation. If refineries could be made small scale close to the well, you would avoid all the human hassle of building pipelines.

In my construction industry world, hassle with human beings is massively expensive, and the bigger the project, the more hassle you get. In the middle of a boom market like right now, a huge condo development in Brooklyn called B2 is imploding under the weight of political pressure and some technical problems. Scale does give you production efficiencies, but the main reason you would go for scale is to simply take advantage of a larger opportunity and carve off a bigger piece for yourself.

And don't get me started on scale in professional services...

RE: Where does the oil refining industry can go?

The reason you go for scale is to ensure payback on capital invested. If the costs of capital are too high to recoup in a reasonable period of time, the investment doesn't happen- or more properly shouldn't happen. Scale reduces capital intensity, lowering $ of capital per unit produced. Lots of dumb investments are made because people haven't read Banholzer's paper and hence haven't done the very basic technoeconomic analysis required to determine whether the claims of the inventors can actually be achieved within the limits of thermodynamics, conservation of mass, conservation of energy etc. There are whole areas of technology development which are literally castles built in the sky, i.e. without adequate foundations...

There's always an alternative, and some alternatives don't involve building pipelines either.

Could small scale GTL become economically feasible? At double today's oil prices, perhaps it could- assuming gas prices don't also rise. Who knows: the guys David is talking to may have the elusive magic bullet, but I'm skeptical.

The biggest problem is that the product is too cheap, especially in historical terms. That the feedstock is essentially free helps a lot, but the product is still too cheap to provide rapid payback on capital invested. Another problem is more of a future risk- that the process only makes sense if you can dump the product CO2 to the atmosphere for free. You get at least a mole of CO2 for every mole of -CH2- you make, and that represents a huge source energy waste relative to direct uses of the gas. Fortunately the latter disadvantage also kills flaring, which is a pure waste which we'd all be better off finding some way to avoid. The pure waste of it is providing the motivation to find something- anything- that makes money off this gas.

RE: Where does the oil refining industry can go?

moltenmetal: totally agree that techno-economic and techno-political analysis is the answer to most problems in this world. I'm sure you are right about GTL scale, though I am still a scale skeptic in general.

Interesting that GTL releases so much CO2. Is it not possible to simply compress the gas into big cylinders at the well head? I know this may wrankle with the political sensitivities of some folks here, but it seems like flaring should be illegal. It would seem like a cheap way to reduce total carbon emissions. Much better ROI than subsidizing solar for example.

RE: Where does the oil refining industry can go?

(OP)
GTL

“The technology is not new. People have been making liquid fuel for many years from gas, most principally natural gas, which actually started in World War II, by the Germans. Our particular technology is a CO2-based gas-to-liquids technology. While most GTL technologies produce and emit CO2, we actually use the CO2 as a feedstock.”

“One of the reasons you don't see the big oil companies bragging about their GTL efforts is because it's not particularly sexy in terms of the environment. You produce a lot of CO2. But from a national security standpoint? It's spot on.”

See the site below

www.smartplanet.com/.../carbon-sciences-ceo-byron-...

RE: Where does the oil refining industry can go?

Sorry, but the link you posted is dead. However, so-called "dry reforming" (where CO2 is used in a pseudo closed loop instead of adding water to run the water-gas shift reaction) isn't new either. Using CO2 as a "feedstock" to the reforming process, using some of the hydrogen produced from the fuel to run the reverse water-gas shift reaction to essentially generate water in situ, has a significant energetic cost, which is additive to the already very significant energetic cost of F-T. Breaking a feedstock all the way down to CO and H2, then hydrogenating the CO to -CH2- and water (that's basically what F-T amounts to), is very energy intensive as you can imagine.

RE: Where does the oil refining industry can go?

(OP)
What percentage of taxes, take your governments, for every liter of petrol or diesel?

Crude oil at the moment is at prices of four years ago...

RE: Where does the oil refining industry can go?

In the US, gasoline taxes are supposed to cover the cost of the highways the cars run on, but have not been adjusted for inflation since the 90's because of political resistance. As a direct result, the transportation highway trust fund is broke, and roads are paid for out of general revenue. I hate tax as much as the next red blooded American, but roads are not free.

RE: Where does the oil refining industry can go?

Collapses are... And then they blame the engineers! *sigh*

RE: Where does the oil refining industry can go?

Everyone should start driving faster.

RE: Where does the oil refining industry can go?

Playswow,
It is rarely a good idea to open up a conversation that has been dormant for 6 months to make a quip. In this case I went back and read the end of it and found that it continued while I was without internet in October/November and I missed the end of the conversation.

Moltenmetal posted a link to me that I never saw until this afternoon. I've been reading the Banholzer paper this afternoon and it is fantastic. He puts a number of very difficult concepts into terms that are completely accessible to any engineer and very accessible to anyone willing to open their minds a touch.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

MoltenMetal,
The well-scale GTL liquids skid does not violate any of the concepts in Banholzer's paper. The reason that it seems like it is you are comparing a commodity with value (natural gas) to another commodity with value (syngas and follow-on products) and the economics favor scale. In the case I was talking about (the Baaken) not only is the feedstock worthless (zero value), but everyone from the county commissioners to the EPA are clamoring for fines to be assessed on flared gas. So if I'm taking a product that has a significant negative value and converting it into a product with a significant positive value then the economics change dramatically. Once someone builds gas pipe to that field then the economics get considerably skinnier quickly.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist

RE: Where does the oil refining industry can go?

In India,we have to import most of the crude. But we have some refineries of latest vintage(largest one with 650 kilobarrels/day output-66MT/annum)which can use the worst crude that no one else likes to refine and export the entire output for use in US or Europe as they cannot sell locally to match the government subsidised petrol price.

RE: Where does the oil refining industry can go?

David, what you're saying is that we agree- small scale GTL will make sense WHEN the regions stop talking about fines for flared gas and actually either heavily fine or outright BAN it. Then you're competing small scale GTL "destruction" of the gas against compression/reinjection (which the reservoir folks apparently don't like much) and pipelines. Tough to compete with a fire, though- it takes care of the negative value for very little capital or operating cost!

Until the heavy negative cost or ban is in place, there's insufficient driving force to pay back the capital and operating of something which is still fairly complex even at the small scale.

We deal with "waste conversion" projects all the time. As soon as your waste becomes someone else's feedstock, the economics change- again- with the negative value either going away entirely or being reduced quite a bit. If you're making money off my waste, generally I notice and want a slice. The oil producers wouldn't suffer from this if they ran the small scale GTL units themselves.

RE: Where does the oil refining industry can go?

PS: the Banholzer paper is the best one I've read in YEARS- glad you found it worthwhile David!

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