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Jul-2008

Analysing economic viability of opportunity crudes

Challenges to refinery heavy oil upgrades are discussed. Demand for heavy and high-TAN crudes continues to rise as light sweet crude reserves decline. These upgrades will remain lucrative for refiners, provided they develop strategies for mitigating higher carbon emissions

Adrienne M Blume and Thomas Y Yeung
Hydrocarbon Publishing Company
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Article Summary
The declining global supply of high-quality crudes and the rising demand for light products from China, India and the US have propelled oil prices to lofty levels. At the same time, the worldwide consumption of 
motor gasoline, diesel and jet fuel has been growing by more than 2% per year. This supply/demand imbalance 
could be a permanent feature in the foreseeable future unless a weakening US and global economy manifests into a worldwide recession. The high price of crude has prompted many refiners around the world to look for relatively inexpensive, but low-quality, opportunity crudes.

Opportunity crudes, as defined in this article, may have various combinations of high acidity (with total acid number [TAN] exceeding 0.5 or 1.0 mg KOH/g, depending on the definition used); high sulphur content (>0.7–1.0%), nitrogen and aromatics; low API gravity 
(<26–28°); elevated levels of vacuum bottoms and high viscosity. There are basically five types of crude available to refiners, as shown in Table 1.

However, in light of the current economic slowdown in the US — which, if it spreads to the rest of the world, could cap international oil prices — the long-term economic viability of processing opportunity crudes is of crucial importance. Refiners need to know if the light/heavy spread will remain wide enough to justify the expansions and modifications needed to process heavy, sour and high-TAN crudes, and heavy crude producers need to know that demand for their feedstock will persist well into the future, as they are making large investment decisions for projects with projected lives of 20–50 years or more. Other questions centre around the long-term availability of opportunity crudes and the competition refiners may encounter for access to these crudes, especially in light of the rising nationalisation of oil assets by national oil firms. These concerns will be addressed, and analysis of the long-term economic viability of opportunity crudes processing will be provided.

Availability of conventional and unconventional oil
Although analysts often disagree about the amount of recoverable oil left in the world, the availability of opportunity crudes appears to be quite solid, at least over the medium term. Both non-OPEC and OPEC crude supplies have grown increasingly heavy and sour over the past decade, and the availability of light sweet crude — optimal for producing gasoline and other light products — is decreasing. However, opportunity crudes remain ripe for the plundering. The incoming refining head of US-based ExxonMobil, Sherman Glass, recently estimated, “The world has about three times as much oil to meet future needs [as] has been used to date.” Also, senior vice president of ExxonMobil Chemical Co Jim Harris believes projected growth in global energy demand of 1.3% per year can be easily met, as only one trillion of the world’s four trillion reserves of conventional and unconventional oil have been used.

Meanwhile, consultancy Wood Mackenzie believes unconventional hydrocarbons, which the consultancy defines as heavy oil, tight gas, shale oil and coal bed methane, may supply more than 20% of the world’s demand by 2025, and potentially have a reserve volume of about 3.6 trillion BOE. According to the latest geological surveys, oil sands, or bitumen, which account for up to 66% of the world’s total oil reserves, are currently found in 70 countries, although about 75% of the reserves are located in just two nations — Canada and Venezuela. Canada’s Athabasca region boasts at least 1.7 trillion bbl of oil sands reserves, while Venezuela’s Orinoco heavy oil belt holds around 1.8 trillion bbl.

While Canada’s political stability and close proximity to the US provide US refiners with some level of energy security, Venezuela’s opposition to US politics and its efforts to diversify its supply partners away from the US make the country’s heavy oil reserves an unreliable source of feedstock for US refiners. However, Venezuela’s heavy crude deposits could benefit refiners in the Latin American and Asian countries that Venezuela is courting as potential supply partners. This example reflects the growing complexity of energy partnerships around the world, especially in light of the feedstock and fuel diversifications that are taking place with greater use of lower-quality crudes and growing investment in biofuels and other alternative energies.

Resource nationalism and energy security
The role reversal between international oil companies (IOCs) and national oil companies (NOCs) over the past few decades has forced US petroleum firms to find new ways to remain major industry players, according to discussion forum RMI Oilfield. In the 1960s, IOCs had full access to 85% of global petroleum resources, while the Soviet Union had 14% and NOCs only held 1%. However, since then, nationalisation drives have shifted the balance of power to NOCs, which control 77% of reserves today.

Although IOCs have been forced to give up control of large volumes of reserves, they have been holding strong positions because of the superior technology and services they possess, of which NOCs have a need. However, international service providers (ISPs), which offer technological expertise to NOCs without controlling production, have increased competition with IOCs. “IOCs still have unique combination[s] of technology, financial backing, market access and operational expertise...[but] ISP technology is expected to take the lead in the next few decades,” RMI stated. This scenario will, in turn, lead IOCs to consider new tracts of investment for the future. Currently, IOCs are turning to natural gas in an effort to maintain their profits and asset portfolios. Recent deals include Italian ENI’s takeover of Dominion’s NG assets in the Gulf of Mexico, US ConocoPhillips’ 2006 acquisition of Burlington Resources, and US Chevron’s 2005 purchase 
of Unocal.

In light of this growing resource nationalism, there is expected to be some competition for opportunity crudes, but not all refiners will choose or be able to afford to make the necessary upgrades to process these dirtier, lower-quality crudes. Many will remain reliant on lighter, higher-quality crudes, whether because they choose to stick to their current refinery configurations or because their budgets are not large enough to accommodate heavy oil upgrades. Some refiners, such as Frontier Oil and Valero Energy in the US, who already possess the ability to refine heavy crudes, will continue to take advantage of the healthy light/heavy spread. However, the production of opportunity crudes is likely to outpace heavy oil expansions at refineries, at least over the medium term, as high construction costs and other factors make these types of project increasingly expensive and difficult to carry out.
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