Co-Nobel Laureate scientist Dr Sergio C. Trindade tells Pipeline the future of global refining, downstream impact of the Deepwater Horizon tragedy and why demand management is critical in achieving a sustainable energy mix.
1-Post-downturn: what are the current challenges in global refining? Has the golden age of refining ended? If so, what’s next?
The present challenges are lower crude quality, higher environmental pressures, climate change and the competition/co-existence with biofuels.
In the US, the oil refining business is stagnant, immobilised by environmental obstacles, the NIMBY (not in my backyard) effect, and declining margins for refined products.
However, refining is moving toward a golden age in other parts of the world, such as India, China, Brazil and the Middle East. The largest refinery in the world today is in India, not Texas!
2-Refining overcapacity - how long will it last? Will the market ease in the long-run? Will refining survive?
Refining will definitely survive! The question is who will be refining in the future. And what margins will be realised.
Overcapacity is likely to be around for the foreseeable future. But, some restructuring of the oil industry due to overcapacity is to be expected. The most vulnerable refineries will be those whose location is far from demand or are inadequate to process newer crudes and meet stiffer regulations. The shift in refinery location will reflect the growth of the emerging economies.
The limited expansion in the mature OECD countries will probably be more than compensated by refining in emerging markets, especially in oil exporting countries and larger consuming countries such as Brazil, China and India.
3-What about the shortage of feedstocks, particularly natural gas, is it still an issue given a glut of supply worldwide? Aside from gasoline, what are the most in demand refined products?
Natural gas will make strong inroads as a key source of hydrocarbons in a few decades. Natural gas resources are more widespread than oil. Natural gas liquids will add to the pool of liquid hydrocarbons. But natural gas is a different animal from oil altogether. With respect to crude, recoverable amounts, quality and the ghost of the Gulf spill are important issues, in spite of offshore and onshore prospects.
Except for North America, diesel is the refined product most consumed in the world, which increases the Nelson Complexity Index of refineries.
4-Currently, how would you compare economic trends in the western (US, Europe) and eastern (Middle East, Asia) refining markets?
Over the past two decades, growth in the world economy has been coming from the East. In the future, first Latin America and later Africa will join Asia as higher growth areas. The OECD countries will also grow, but at a much slower pace. Oil consumption per unit of GDP has been decreasing over the past few decades. In this context, refining is likely to remain stable or even decreasing in the OECD and expanding in the emerging markets.
5-In the mean time, do you think Asia is going to be a key market for profitable refiners? Is it wise to curb downstream investments in developed economies (US and Europe)?
As refining gets squeezed in the US and Europe, Asia has already emerged as a strong market. Profitability of refining depends on many factors, beginning with access to crude and its cost.
A key factor in profitability is the interference of governments on the price of refined products through subsidies and other measures. There have been initiatives in China, India, Indonesia and Malaysia to curb subsidies, always a tricky move due to the ensuing political reactions.
Over time, it is likely that these emerging markets will gradually allow the prices of refined products to reflect their economic value, which might improve the profitability of refining. With respect to the OECD markets, it is almost impossible to build a new refinery in the US and to some extent the same applies to Europe.
Downstream investments in developed economies will increasingly shift the focus to new more sustainable feedstocks for producing liquid hydrocarbons. Driven by environmental and economic pressures, companies such as Finland’s Neste Oil are using their refineries to produce fuels from alternative sources. It is simply a matter of oil companies finding ways to provide liquid hydrocarbons with less use of petroleum as a feedstock.
6- What will happen to future expansion – Is there a need to shift or upgrade refining capacity to heavier fuels?
For some time now, the Nelson Complexity Index has been increasing. Newer refineries are prone to be very complex, due to oil quality, which requires more advanced refining to meet environmental regulations.
Today’s market demands middle distillates, which requires refiners to increase the complexity of their operations. The blending of ethanol in gasoline requires, especially in the warmer months, the removal of light components, such as butanes and pentanes, from the blending stock prior to formulation.
Refineries must also upgrade their processes to accommodate the increased use of lower quality crude oil as a feedstock, further increasing their costs. As costs of refined petroleum increase, the door for renewables opens a bit more.
7- Given the increasing HSE laws, what about clean-burning fuels and renewables (biofuels)? How are operators globally reacting to this change? What do you think is the future?
There is definitely public pressure for cleaner fuels, as reflected in the evolving legislation and regulation in the US, especially in California, and all over the world. And more recently, concerns about the net impacts on greenhouse gas emissions of burning fuels have elicited initiatives, especially in Europe, to promote higher efficiency and the use of biofuels.
Refineries’ crude slates will evolve and require changes in refining schemes, accordingly. With respect to transportation, more efficient engines, more use of diesel fuel, biodiesel-diesel blends, ethanol-gasoline blends, hybrid drives, all-electric drives, and in the future fuel cells, are all coming to play a role in responding to public demands. Overall, the future promises a larger role for biofuels, natural gas and electricity from renewable sources.
Refiners are reacting by starting to incorporate biofuels into blending, distribution and refining. As I mentioned earlier, Neste Oil, for instance, is producing hydrocarbons from carbohydrates. Smaller, more agile oil players will be the first to bring biofuels into their operations on a large scale.
8-In the US, what are the possible ramifications of the Deepwater Horizon disaster to the refining sector? Can you explain more on the demand management and efficiency?
The Deepwater Horizon disaster relates to availability of crude oil not to refined products. Most of the crude imported into the US comes from Canada and Mexico.
The disaster means that the US would have to either produce oil elsewhere or import a bit more to mitigate the short term loss. The US consumes some 20 million barrels of crude oil per day, of which gasoline represents at least 50%. More than 60% of the oil is imported.
Thus, if gasoline consumption would be half of what it is currently, the US could save some 5 million barrels per day!
Now, this is a feasible target, if one considers a scenario where currently available hybrid and E85 vehicles, would predominate in the national fleet, combined with more efficient engines, such as diesel engines.
The efficiency of diesel (and gasoline) could be further leveraged by the use of fuel enhancements such as DiesoLiFTTM10 (or GasoLiFTTM10), produced by International Fuel Technology, Inc. to achieve a 3–6 percent improvement in fuel economy.
The free-wheeling mindset that assumes oil resources are infinitely available also needs to change to allow higher efficiency and demand management to prevail.
However high Americans believe gas prices are, in the US they are among the lowest in the world. Higher prices that reflect opportunity costs of oil products ought to change, not curb, mobility behavior and to promote fuel efficiency technologies such as those of IFT.
Demand management will be critical in achieving a sustainable energy mix. The demand side is also the easiest and most readily available path to immediately expanding capacity without requiring the production of more oil.
Part of demand management has to do with technology, such as International Fuel Technology’s fuel-saving DiesoLiFTTM10 product, and part has to do with psychology. Poor driving habits alone waste millions of gallons of gasoline every year.
9-With the new cleaner, safer specifications in place, what is your advice to refineries to remain profitable and keep the products available? Downstream strategies to consider?
Refined products prices should reflect their opportunity costs. Thus, a higher Nelson Complexity Index needs to be rewarded with higher prices. Refineries ought to obtain higher prices for products refined in more complex ways to meet cleaner fuel specifications out of lower quality crudes.
On the other hand, if governments subsidise prices at the consumer level, there will be limited incentive to manage demand and to be more efficient. This situation would put pressure on supplies.
Policy-wise, prices should reflect the economic value from crude to refined products to consumers. One possible downstream strategy to consider is to bring bio feed stocks into the refinery, such as feeding vegetable oils for hydro-treatment to increase the diesel fuel yield.
10-Can you cite upcoming sustainable refining technologies in development to look forward to?
When talking about “sustainability” it is important to remember that sustainability has three dimensions: economic, environmental and social. When dealing with a finite resource such as oil, the application of this concept is tricky.
In my view, the sustainability of oil refining has to do with the ability of oil companies to remain solvent and to generate enough financial resources to move on to the next step in providing the energy services (mobility, lighting, heat/cooling, rotary motion) that will always be demanded. In other words, sustainable refining means to use oil to make enough money to get off oil.
The reason oil companies produce gasoline is not for gasoline’s sake, but to help move cars. If cars can move with an alternative fuel source, such as biofuel, it is possible for oil companies to provide that as well. While there is likely to always be a bio-fossil fuel interaction for the foreseeable future, I can see a time when “Big Oil” exists without producing any oil at all.
Dr. Sergio Trindade, IFT's Director of Science & Technology, is a globally recognised consultant and expert in sustainable energy and alcohol fuels. He served five years as the Assistant Secretary General of the United Nations for Science and Technology and continues to provide consulting for the UN system, including the World Bank, and many other organisations regarding energy and environmental issues.
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