Oil is Nothing Without Infrastructure
created: 13 Feb 2012 14:54
tags: iraq pipeline usa
As the world awaits the impact of the embargo on Iran, one of the suppliers that we are relying on over the longer term to make up the difference is Iraq. The country faces a mass of problems, technical and political in order to step into the breach. Wildly optimistic forecasts have been made about future production, but its not just upstream that needs serious investment, but so do the logistics infrastructure needed to get rising volumes to customers.
So the news that Foster Wheeler has completed an export facility with capacity of 1.8 million barrels per day is an important one, it will make the realisation of production increases easier. There is more to come:
A further increase of another 1.8 MMBPD in Iraq’s export capacity is intended to be delivered on completion of phase 2 of the expansion.
Meanwhile thousands of miles away, another growing region is suffering from the same problem.
Want to lay your hands on some oil at just $US70 a barrel? Turns out you can. Question is what you will do with it once you own it. Such cheap oil also raises a worrying prospect: North America's vaunted progress toward less reliance on energy imports may well get bogged down for want of a pipeline.
The problems faced in the Bakken, illustrate nicely the need for the Keystone XL pipeline. Because as oil production patterns change, the infrastructure needs to change too. Because Oil is Nothing Without Infrastructure
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Why are Refineries Closing Down
created: 24 Jan 2012 14:32
tags:
The sudden spate of refinery closures have a number of people wondering why it is happening. A few years back, commentators were blaming high oil prices on the lack of refining capacity, and yet today, refineries are dropping like flies. What happened?
The first thing to understand is that all refineries are not created equally. There are huge differences between
- The ability to add value, something that depends in large part on Nelson Complexity
- The cost of operations, including energy efficiency
- Access to and ability to process low cost raw materials, like extra heavy crudes
- The market conditions in the local or regional area
If a refinery scores high on all of these factors, it is likely to make money even in the bad times, scores low on all of them, and its probably going to shut down.
A complex refinery has the ability to upgrade low value products into higher value ones, thanks to cracking units. As Residual Fuel Oil sells for less than the price of crude, producing it drags down a refiner's margin. Highly complex refineries such as the Jamnagar Refinery I & Jamnagar Refinery II twins in India, can produce a much more valuable mix of products than could the Port Clarence Teeside Refinery one of the early victims of the current sector downturn.
Fredericia Refinery in Denmark is not a very complex one, but it is one of the worlds most energy efficient. This is extremely important when you consider how much energy a typically refinery needs. In fact, Valero, the owner of the Aruba Refinery, which was mothballed a couple of years back, decided that solving the high cost of energy was a major priority, so they announced an LNG import terminal project to replace expensive oil with cheap gas.
The importance of raw materials is hard to overstate. As an example take a look at the Wood River Refinery Project. The Conocophillips / Cenovus JV refinery has been upgraded at a cost of $3.6 Billion, partly to enable the processing of heavier crude. Crude mix has been one of the key reasons for the closure of Pennsylvania's 3 large refineries.
As an illustration, I analysed the EIA data for crude purchases by the Marcus Hook Refinery for October 2011. Imports came from Ivory Coast, Nigeria & Azerbaijan, all countries with light crude oil. The average API was 37.1. By comparison, the average US refinery was processing 30.6 API crude. Remember the lower the number, the heavier and more difficult to process, but significantly cheaper.
In terms of markets, the world can be split into two, growing markets in the developing world, and stagnant or even shrinking ones in the developed countries.
According to the International Energy Agency, demand for refined products in Europe, fell by 1 million barrels per day between 2008 and 2011. Now the current economic problems may have exacerbated this but when you look at the details, it is heating oil & fuel oil that have fallen, as natural gas steals market share. Using oil products for heating makes no sense when natural gas is so abundant and cheap. This is one reason why refineries are being upgraded to produce far more transportation fuels.
In the USA, it is actually falling gasoline demand that has helped shrink demand for oil products
according to the EIA, as high prices led to reduced mileage and more efficient vehicles.
So if we look at the refineries closing or under threat, they have a number of things in common, expensive crude, a lack of upgrading capabilities and they are located in markets with poor growth prospects. Unfortunately there are still a lot more like them, so this is unlikely to be the last word.
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LNG Export Applications in the USA
created: 23 Jan 2012 09:22
tags:
For some reason, the idea of the USA exporting natural gas has become controversial. There are those who claim that US citizens and companies have a God given right to cheap energy, and exporting gas will damage that.
Ed Markey, a congressman from Massachusetts, is against any LNG exports. In a letter to Energy Secretary Stephen Chu, He worries that:
exporting America's natural gas would raise energy costs for American consumers, reduce the global competitiveness of U.S. businesses, make us more dependent on foreign sources of energy, and slow our transition away from dirtier fuels.
To add fuel to the fire, the EIA has released a report that concludes that LNG exports will lead to higher prices for US consumers:
Under the Reference case, domestic wellhead prices rise by about 57 percent between 2010 and 2035.
Meanwhile the Department of energy is considering applications from 7 projects having given full approval to one to export to non FTA countries
The projects are as follows
- Sabine Pass LNG Terminal
- Freeport LNG Terminal
- Trunkline Lake Charles Lng Terminal
- Carib Energy
- Dominion Cove Point LNG Terminal
- Jordan Cove LNG Terminal
- Cameron LNG Terminal
- Calhoun Lng Terminal
So should US consumers get worried about these developments?
A few points to ponder
- Can you imagine the reaction if the Auto industry were told not to export so that Americans can get cheaper cars
- Is Rep Markey really someone with credibility here?
- He doesn't seem very keen on Fracking, the very process that led to cheap natural gas
- He wasn't too keen on importing LNG either
- The 57% is a little misleading, as even the base case has considerable inflation
- On average, from 2015 to 2035, natural gas bills paid by end-use consumers in the residential, commercial, and industrial sectors combined increase 3 to 9 percent over a comparable baseline case with no exports
- , it should be noted that natural gas prices in all of the cases are far lower than the price of crude oil when considered on an energy-equivalent basis
Even with significant exports, the USA will still have some of the cheapest natural gas prices in the world, the the rush to invest in industries utilising it is going to continue. With 18% more natural gas production, the industries supplying upstream will have nearly a fifth more orders. Moreover, the increased production of natural gas liquids, is actually what is spurring investment in petrochemicals, an industry that is often used a reason not to export natural gas. Perhaps most important of all these natural gas liquids are a substitute for imported crude oil, and will help to keep prices of gasoline down
