The challenges of crude blending - Part 1

Declining crude prices encourage more spot purchases that save costs, but mixing different grades can create headaches for refiners.

Hydrocarbon Publishing Company

Viewed : 14638

Article Summary

Lingering low prices since the market rout began in mid-2014 have motivated many refiners around the world to buy more price-advantaged heavy and lighter grades on the spot market and try to blend them together in order to create so-called lookalike crudes similar to what they have been processing. Despite economic incentives, these crudes often exhibit ‘dumbbell’ properties — a higher proportion of light ends like gasoline and lower-value heavy products like fuel oil and asphalt with a lesser fraction of valuable middle distillates, as well as other undesirable qualities for current refinery configurations. For many refiners, the concerns go beyond crude-refinery mismatch to make products in demand. Equipment failures, unit shutdowns, and even safety problems have been reported, resulting in lost profit opportunities. Anticipating and preventing this mismatch as well as solving the potential problems of the crude cocktails involve a thorough understanding of the crude properties that contribute to these setbacks. Our discussion of crude selection and blending criteria appears in two parts. This first article covers the criteria that are relatively straightforward to characterise: API gravity, paraffin content, total acid number, and contaminants.

The recent trend of increased blending of a variety of crudes appears to have staying power, at least for the foreseeable future, as many watchers anticipate a ‘long U-shape’ recovery. According to Nobuo Tanaka, former executive director of the International Energy Agency (IEA) in October 2015, oil prices will not return to the $100/bbl range until US shale production starts to dry up around 2020-2025. In the long term, he explained, crude demand from Asia and Africa could be expected to push prices back up, but not on US shale drillers’ watch. Shale production is a built-in stabiliser, he said, and will gradually slow down after 2020 or 2025, so again there is a chance of higher prices coming after that. His view is shared by others including analyst Jeff Currie, head of commodities research with Goldman Sachs, who has reiterated that crude prices could still fall as low as $20/bbl, although he rates the likelihood of that at ‘below 50%’ and said that prices will likely stay below $50/bbl for the duration of 2016. These predictions do get support from the overall market fundamentals as demand growth is rather lacklustre because of the still weakened economies of China, Europe, Japan, and most emerging markets. Furthermore, the long-
anticipated interest rate hike by the US Federal Reserve Bank has driven US dollar-denominated crude prices down.

Hard to pass up a bargain

Since mid-2014, global crude prices have been halved. With the spread between Brent and WTI crude narrowing as crude prices have fallen, there has been less economic incentive for refiners on both the US East and West Coasts to bring in railed volumes of Bakken crude from the mid-continent. Freight rates to rail Bakken crude have made the tight oil more expensive relative to overseas barrels imported via tankers. According to energy market data and intelligence firm Genscape, East Coast refiners were expected to import 10.0 million bbl of West African crude in October 2015, up from 6.0 million bbl in September and 9.6 million bbl in August. Over the first seven months of 2015, East Coast refiners imported 3.0-8.0 million bbl of West African crude per month. According to data from Platts, 13 crude tankers carrying 1.83 million bbl had arrived or were due to arrive from West Africa on the US Gulf Coast in October, up from just four vessels (556 000 bbl) in September.

With global markets brimming with crude oil that is both cheap and plentiful, refiners — especially in Asia — are making a higher priority of getting the best profit margins they can obtain, and worrying less about security of supply. For many refiners, that means purchasing less crude under long-term contracts and more on the spot market, a switch that allows them more flexibility when it comes to making the most of bargains that come up. For instance, South Korean refiner SK Innovation said it will buy up to about 
6 million bbl of UK Forties crude on a spot basis in 2015. Likewise, JX Nippon Oil & Energy said that the Japanese firm might double its spot buying from about 15% to 30% of all crude purchases. Meanwhile, Indian refiners were on a ‘perceptible shift’ toward spot markets, estimating that while spot purchases once made up only about 10% of purchases by the country’s crude processors, that figure might rise to about 25%.

Variety of crudes and configuration mismatch
Much has been made of a so-called ‘mismatch’ between US production of light sweet crude oil and refiners that are geared toward processing large volumes of heavy oil that must be imported. Many US refiners along the Gulf Coast have had to make modifications to their plants in order to better take advantage of domestic crude’s low price. The mismatch has caused hardship for Latin American oil companies who really have to struggle as the heavy crude they produce requires much more expensive, sophisticated technology to refine. So refiners in Colombia, Ecuador and Mexico are looking to import various types of light crudes, and sell overseas the heavy material that they have struggled to process at their own relatively simple refineries.

Colombia’s state-owned Ecopetrol purchased September-loading crude for its Cartagena refinery in 2015, its first imports of crude, probably Nigerian Bonny Light and Russian Varenday, since at least January 2013. While some sources suggested that Ecopetrol might be following the example of Venezuela’s PdVSA — which uses imported light crude to dilute heavy grades for export — others said that the imports were more likely to stay in Colombia. A month later, Ecuador’s state-run energy firm Petroecuador said that it was looking for a supplier to sign a tender to provide 82000 b/d of medium sweet crude (most likely Angolan or Nigerian crude) to the South American nation over a year. Meanwhile, Mexico’s Pemex is continuing to work toward importing light US crude under a swap arrangement that sources say has already been approved by the US government. Pemex has said that it plans to process the crude at its own refineries, freeing up more of its heavy oil for export.  
According to Dario Scaffardi, general manager of Italian refiner Saras, refiners in Europe need to step up their trading game in order to remain competitive, and the traders and plant engineers need to be on the same page. He explained that refinery traders must not simply seek the cheapest crude available. They must also be thoroughly acquainted with their plant’s processing capabilities and the product mix that it can be expected to make from each prospective feedstock. Saras itself, he said, has been working hard to match the right crude with both its refinery configuration and the market conditions of the moment, processing 30-35 different grades in 2015, double the number of crudes the plant handled in 2014.

Heightened blending activities worldwide
Low crude prices and refiners’ drive to take advantage of inexpensive cargoes have made blending a bonanza. In the US, Jefferson Energy Companies has announced plans to open a heated 100 000 bbl tank at its crude-by-rail terminal in Beaumont, Texas, to blend undiluted heavy Canadian crude with super-light condensate or tight oil to the individual specification of a refinery in order to help that refinery maximise yields or maximise a specific product such as diesel or gasoline. The company’s stated aim is to ensure delivery of compatible and consistent crude oil to the refinery, for further blending or direct processing. In Louisiana, Hazelwood has considered plans to construct a $400 million blending terminal that will combine surface storage with underground salt cavern storage and an in-line blending system to allow simultaneous blending of up to 10 different 
types of crude to provide a ‘boutique’ crude blend for a given customer based on current market conditions and refinery constraints. Construction is set to begin early 2016, with completion scheduled for early 2018.

Add your rating:

Current Rating: 4

Your rate: