What is Refining?
We’re going to talk about the US refiners and the major categories of the refining process. Then we’ll discuss the qualities that determinate crude oil value. We can then go through a demo at that point.
How can we refine or alter the operation refinery? Not only how but why? What are they trying to do?
When you drive along past 249 you think they’re just sitting there or running in steady state but there’s quite a bit of flexibility.
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What drives refining economics?
A little bit on the 321 crack spread that you talked about.
Then how environment rules impact operations. Again, we have some key sources of industry information.
We got the crude either through a pipeline or rail car or a marine terminal to the refinery gate.
What are we going to do with it?
First, let’s talk about who the big players are. Here’s how the USA’s refinery rank as of January 1st, 2016.
This was from the EIA website.
Valero was the top with 13 refineries. Capacity here is barrels per calendar day and they have a little over 2 million barrels a day.
ExxonMobil number 2 is 6 at 1.8 mm bpd.
Marathon Philips Motiva. I’m doing a consulting project with Motiva right now. Motiva is currently owned 50% by Royal Dutch Shell and 50% by Saudi Aramco and they’re about to split the sheets on that to move it off as independent operation.
Here’s Chevron, Tesoro, PDVSA which has a part ownership in a refinery in the Gulf Coast PBF Energy BP.
You noticed the 146,000, 147,000 barrel day refinery of Total is not a very big refinery.
I think the average size in the US is running 175,000-180,000 barrels a day. The bigger the more efficient. You’re going after bigger and bigger refineries.
One of the Motiva refineries is now the biggest in the country at over 600,000 barrels a day after a major expansion.
The US refining capacity is about 13 million barrels a day, 139 plants.
The world refinery positions are a little bit different.
Exxon is the top in the world with about 5.5 million barrels a day Royal Shell. Number 2, Sinopec is in China. BP, Saudi Aramco, Valero, Petroleos de Venezuela, PDVSA, CNPC.
The important thing is to notice how many of the national oil companies are really, really big players in refining.
The reason they do that is they like to have security of supply in their country.
Over the years, when the industry started out, a lot of the product that was moved into these countries was imports, the way you have secured supplies to build your own refinery in your country.
The pot has shifted in China, Saudi Arabia, Venezuela, et cetera.
Saudi Arabia also exports a lot of product from their refineries. In addition to the discussion that we had earlier on the way crude oil moves, products move the same way.
They’re a global commodity and we’ll learn a little more of that when we talk about supply and trading in a subsequent module.
Crude oil cannot be used as it occurs.
This is a barrel of crude oil and this is the US demand profile. When you add up everybody’s use of petroleum in the country, 10% of it is LPG like the bottles you use in your grill or they use it for heating in parts of the country where they can’t get heating oil or natural gas.
About 44% is gasoline. 27% is middle distillates. That’s the term for jet fuel, diesel fuel and heating oil.
Finally, about 19% is heavy fuel oil.
These numbers are probably 10 years old. We have less and less fuel oil demand in the US and more and more light product demand. This is the term light products that you heard about earlier.
The crude oils don’t look like this.
Here’s two examples.
Here is Arab Lite which is a crude, comes in from Saudi Arabia and this is after its run through the first step in the process, distillation. Still has 42% fuel oil. We only need 19%. 26% lite middle distillates around pretty good, 27%.
Only 18% gasoline and only 4% LPG.
A heavy crude, one from Mexico, Mexico Mayan has tons of fuel oil, very little middle distillates, very little gasoline and only 4% LPG.
Basically, what we’re trying to do is get the crude we run to match the products we need. That’s what goes on in a refinery.
Bruce: why don’t you go into your example at this point?
Marty: did a good job of showing. I hope you can see the distillation tower at a refinery. You can imagine and the film you just saw chemist in a laboratory, 3rd party laboratory. They have glassware which is set up on a bench scale to emulate the refinery part of the process.
It’s called the crude assay.
This shows a tower with a little more detail kind of products that come off. Let’s take for example my little demo. I took West Texas Intermediate.
It’s the one on the news.
You always see when they flash up WTI for a Brent crude in the North Sea. Those are two large benchmark fields and crude types that most people are familiar with.
West Texas Intermediate, this is what’s called a whole crude sample, runs from 37 to 42 API typically. If you have a number of 37, that’s a little heavier than a number of 42 advance in your API gravity. Do you want to pass this around and kind of be a little feel for what WTI sort of looks like.
There’s another barrel called West Texas Sour that has higher sulfur over half percent.
You could simply, you’re looking at gravity, all thick or thin, dense and sulfur.
That is in part how crude is bought, sold and it has a cursor, a determination on the value.
I took another crude that’s very extreme. This is a waxy crude. It’s 28 gravity. It doesn’t even pour. It’s set up. That came from the Uinta Basin which is up in the Utah. I think there are some in the Bakken. It’s a black wax. Sometimes it comes in yellow wax.
Male: I think so. Here’s a western Canadian select which goes from 19 to 22. Now, back at some point, there are roughly 80 different Canadian types of crude some are bitumens, some are SAGD, some are synthetic. Some come from the field.
At any case, the Canadians had a lot of trouble marketing their crude because they came in a such a wide variety so they came up with a blend of about 7 different crudes that come to one big turmoil at Edmonton and then they market it.
Western Canadian Select. It’s manufactured. It’s blended if you will to compete with the Mexican Maya.
Crude is typically put in large areas gathering sites and where there’s a large enough volume, you get scale and you start getting pricing mechanisms where there’s a trading hub, much like Cushing.
Now, there’s not an actual definition. Condensate, if you talk to a different organization, they’ll give you different definition but to keep it simple.
Generally when you start getting about 50 degree gravity, you’re in a condensate.
Here’s one. Look at the color. See how light it is. There’s another condensate. I’m not going to say this came from the Eagle Ford which that play runs from 19 gravity all the way to 70 gravity, so wide variety of crudes down in that play in that region. Here’s another condensate.
Generally speaking, condensates, because they are so lite, are good feed stocks to go into petrochemical facilities.
You can see they’re closer to that gasoline make.
Again, I’m just speaking a real simple terms here. If you can see and I’m going to have to tip this and if you look around, this is 9 different fractions that came from the whole crude.
It was put in a laboratory. You see in the hand out that I sent around. You can go from an initial. It is 650 degrees under atmosphere. That’s one technique. ASDN 2892 that you can cut these crudes.
Then do you want to change the molecule too much, you go from 650 to 1050 in a laboratory. That’s under another, let’s call high-vac distillation and get the heavy end.
There’s a lot of acronyms that people use. If you can look here, let’s see. This clearly is the waxy crude. Different people use different terms. Well, we started with the gas fraction. We can go to a light naphtha then naphtha. You get into jet fuel. Now, we’re under the 450 to 500 degrees.
There’s a carbon range associated with that or we could talk 3C. We get to diesel. We’re generating 550 to 650.
You saw the slide where they were boiling the material then you get to 650 plus. That’s the real heavy. Look at this. See how waxy? That’s just the waxy crude.
Before that, the diesel was more like this, very amber, very lite. Now, you start getting into light vacuum gas oil 650, 850. It’s this black nasty stuff.
Then we started getting out to the high-vac gasoils, a little more waxy looking.
Ultimately, to the real heavy, a thousand plus.
Again, we can’t get too much more in the lab. We heat the material. We change the molecule. We change the results. That’s as far as they could push in a distillation part of lab.
Now, you’re basically in the product that would make asphalt. It would make roofers flux.
Now, if we went to a WTI barrel, and we started with initial, we put cotton because that’s gas just to simulate, gas fraction. If you went to a light naphtha, this is the WTI and you see the volume, this is the waxy crude. See the difference and make?
That’s what you’re trying to do is ultimately look at what product make do you get out of the barrel, what fraction, what yield.
In the laboratory, you can very easily take each fraction that will start with 2 5 gallons typically to do this make and it could take cetane and run. Take diesel and cetane index. You could go to the gasoline fractions. This is in light gasoline fractions. You could do the octanes which you see on the pump. 87, 89, 93. You can do a research and motor to Octane GUI by 2 to get an average. You could run any number of properties all who samples.
Oil producers will do it if they’re smart. Joe mentioned pioneer. There’s a lady that markets their crude production. She handle work for Arco.
She’s a really smart lady that markets their production. She understands this and she probably gets a little better value for her crude when she’s selling it. You take another producer and, no offense, you may not be quite as savvy and they are concerned with their world production, not necessarily the marketing.
They simply sell it to a gatherer and trucker at whatever. The trucking company says, we’ll pay for it. They may even short change a little bit.
These assays are very simply is why they’re used for producers. In the mid stream, you can see all these properties.
If you were a pipeline, you might be concerned with the flow and viscosity. If you’re a refiner, it’s obvious. They uses some great [inaudible 00:18:23]. You can get into other testing environment but this is the full scale what they call comprehensive transportation asset. [Lube oil 00:18:31], you could see the [lube oil 00:18:33] make and then you could in turn start running your ash content, your [inaudible 00:18:38]. You’re looking for viscosities.
You could actually send that fraction after the production lab or research lab and then we put them in a physical automobiles, motorcycles and they do [crosstalk 00:18:53] performance of the lube oil, so you then finish running the car engine for several weeks. It takes the engine, you fair it down and you look and see that the lube oil have any [wear 00:19:07] characteristics on the components with the pistons, crash out at X hours and that’s more performance based but with this kind of [crosstalk 00:19:16] a little more value based.
This helps going to spreadsheet. It goes back to like a total. By the way, that total does a lot of these overseas. Sometimes it’s internal. Sometimes you send it to external. You go to [Haverly 00:19:33] and [pervonator 00:19:32]. It’s in a lot of those high end consultants. They’ll do the economics for you because again, Marty mentioned we have so many different refinery configurations, different kind of crudes and have different product slates and different product contracts.
If you were in east Texas or the [Orio 00:19:54] refinery or [Delick 00:19:56], you might sell all the jet fuel to the local Air Force. That might be more important to you if you were Total under heavy, the lube oil make, and you might be looking for [inaudible 00:20:09]. You might be looking for select optimization crudes that yield at [inaudible 00:20:15] because that’s where your economics [inaudible 00:20:17]. Okay. Any questions? Thank you. All right.
Bruce mentioned a couple of key components of crude oil. API Gravity and sulfur.
Let me go into that a little bit more detail.
This left scale is the API gravity. The higher the number, the lighter the crude as you saw in the example.
35 API gravity is up here in the upper left hand corner. Here’s WTI, West Texas Intermediate. The lighter the crude, generally the higher the value, generally speaking.
The other scale at the bottom from zero up to 3.5 is the sulfur level.
A little bit of sulfur they called a sweet crude. High sulfur is called a sour crude and believe it or not, it comes from the fact that when crude was first discovered, they had crude tasters. If it tasted sour, it became a sour crude. Wine tasting would be a much better deal than crude tasting.
You’ll hear the term sweet and sour.
This upper left hand corner is the high valued crudes because there’s a lot of light product and low sulfur. I don’t have to take the sulfur out as much. There is less sulfur to take out.
One of the big things you’re doing in the refining business is removing the impurities especially sulfur. This term is called lite sweet, a light sweet crude. Most of the shale crudes in the US are light sweet crudes, so good for making gasoline and low refinery operating cost.
This corner over here, here is Mexican Maya. Here is Venezuelan. Here is Arab heavy. These are the heavy sour crudes.
These are lower value generally speaking.
Before we had the shale plays, we were running out light sweet crudes, so a lot of refineries in the world and especially in the gulf coast were designed to run heavy sour crudes.
The Canadian oil sands crude is a heavy sour crude.
You heard the story on the Keystone pipeline and the Enbridge pipeline to bring that heavy sour Canadian crude to these refineries in the gulf coast that could run heavy sour crudes.
Then now that we have the light sweet crudes refineries are changing their configuration because it takes a different set of processes to handle those types of crudes.
The three crudes that are in circles are called marker crudes.
These are crudes that are used to price other crudes. WTI you hear on TV all the time. WTI closing price 45-32.
The other crude that came out of the North Sea is called Brent. You’ll hear the Brent price is this. The differential between Brent and WTI which we won’t go into is another thing that commercial people watch very carefully.
The Ural crude from Russia is used as the pricing mechanism into Europe for Russian crudes.
These other crudes are measured versus the marker crudes.
You’ll hear the Arab lite price versus North Sea Brent, or you’ll hear the Alaskan crude price versus WTI. They don’t have pricing out there for all.
You’ll see the pricing that is relative to the marker crudes. That’s the main thing that I wanted to talk about on that one.
API and sulfur, I call those the indexes.
Then the yield percentage is really what can happen in the refinery. The yield value is another thing that goes into the value of the crude.
We’re going to cover distillation a little bit and this was covered in the video so I’m not going to spend a whole lot of time on it.
Crude oil boils at these different temperatures, each type of crude has a unique distillation curve.
A curve in the movie, this basically enhances it to show just kind of what comes off. At 100 degrees Fahrenheit on this scale, here’s my butane and lighter. This is commutative percent which is this line along here.
Then my gasoline, naphtha’s, middle distillates, gas oils and the asphalt and residue. It’s in the crude but the plant has to get that out of the crude and these were distillation fractions.
The refinery has multiple ways of converting crude oil into what we need for refinement products.
I’m going to talk about four very high level processes:
Separation, conversion, treatment and blending
Each one of these processes is managed using temperature, furnaces, the pressure that you put on the system, a catalyst. A catalyst is something that helps a reaction without taking place in the reaction.
For example, the catalytic converter in your car is right near the muffle and it converts exhaust gases into gases that are environmentally friendly.
The other we have are additives, chemicals and materials that you can add to enhance the properties of a product. Those are the four types of chemical processes that you can do in a refinery.
The first step in the process is separation.
You’ll hear the term CDU which is a crude distillation unit that was the example that was shown in the video. Out of that, it’s done at atmospheric pressure which is regular sea level pressure.
The bottoms are moved into what is called a VDU, a vacuum distillation unit. You basically put a vacuum on the heavy material so you can continue to boil it.
This is the same principle if you do hiking in the mountains. Why it takes so long to boil an egg? You got less pressure. You have to continue to add heat to boil your egg when you’re under a little bit of a vacuum.
You can then get more material out of the heavy oil at your atmospheric bottoms.
You’re basically trying to get rid of all that stuff on the right end side of his demonstration. We’re headed the products over here.
There’s some real value in the material coming out of the bottom.
We can make lube oils and we make asphalt out of what’s going on in the bottom of the barrel.
There is separation.
The next step is conversion. There is three different types.
We can combine molecules and the two processes are alkalization and polymerization and I’m not going to go into these in much detail but I have an example that we can talk about.
We can rearrange some molecules using cat reforming or isomerization or we can crack the molecules using cat cracking, hydro cracking, thermo cracking or coking.
Okay. I have a mechanical engineer’s explanation of a chemical engineering process. When you look at the gas pump and you see 87, 93, 98, what is that? The octane, right? Octo is the latent word for 8.
Think in terms of 8 carbon atoms. Remember in the video, you have carbon atoms. All the way up to carbon of CH4, one carbon for hydrogen all the way up to carbon 35, 53.
We want 8.
In alkalization and polymerization, we’re going to take the ones that are less than 8. We’re going to make 8’s out of them. In rearranging, certain types of molecules have better octane than others. Chain molecules are better than linear molecules to produce octane.
Cat reforming and isomerization help us make chains.
Cracking, we’re going to take some of those 35s and break them into 8s or other products.
Very, very simple explanation using octane is an example.
However, it is so much more complicated than we can go into and there’s examples on the wall if you want to take a look at it when we take a break for lunch.
For now, you’re trying to achieve a certain level of product and product quality with each of these conversion processes.
Then we have to treat it.
We have to remove the sulfur and remove the other impurities.
We remove the sulfur with hydrogen. You take the sulfur and you combine it with hydrogen and you form a very unfriendly gas called hydrogen sulfide which is poisonous but you take that hydrogen sulfide through another plant.
You separate out the hydrogen and you remove the sulfur and you put the hydrogen back through the plant.
The other thing about a refinery is you’re constantly recycling material and support materials throughout the refinery to take every high valued item like your hydrogen and use it wherever you need it throughout the rest of the plant.
You can also do a chemical treating, various types of chemicals to remove other impurities that are in the strains.
Last but not least, you blend.
Remember that Leffler said that crude is made up of … It’s not one thing, it’s a whole mixture of various molecules.
Your gasoline pool, you diesel pool and your fuel oil pool is also a blend of various product streams that are inside the refinery.
A gasoline could have 30 different components out of the refinery.
The way that this is managed is through a series of sophisticated computer programs called linear programming to make sure that the gasoline that’s produced in the refinery is on the specification that you need for products.
If you get to go to a refinery, here is an idea of a plant layout in some of the terms you’re going to hear.
Here is the crude ship or the pipeline receiving the crude into what I called a crude oil tank farm, yes, and that is the term.
The crude oil tanks are often floating roof tanks so the big ones as you drive down along the ship channel, there is a big ones you see.
You hear the term on-sites.
This is where the process units are and this is where the conversion and the separation, the crude distillation unit, the atmospheric distillation unit, the crackers, et cetera are all in there.
There is a control house that manages all these operations then there’s a term called off-sites. This is where the boilers are, the cooling water towers, the utilities and power. There’s also warehouse and shop for the maintenance people to do repairs on the equipment.
You’ll go in if you visit to the administration building. You can always recognize the administration building because it has two things out in front of it. One is the flag of the nation that you’re in. The other is the safety sign that talks about lost time action and safety is the number one objective of every refinery and manager throughout the world.
I’ve done projects in India and South America and Europe and it’s always this safety sign and the national flag. For some reason, there must be a standard lay out sign or whatever.
This is where your finance people are, your processing people, your engineers, your technical people. The operators are usually in the control house closer to the on site units.
Finally, this is the blending, storage and shipping.
Remember the gasoline could have 30 components. Diesel probably has 15 or 20 to move material to the product tank farm and load it out either by rail or by marine or you’ll hear the term loading rack. This is where the trucks that we see moving around town come in and load their product at the refinery.
That’s what all I have on facilities.
The economics of a refinery are extremely difficult to determine because you have numerous crudes available to you.
You have numerous operating processes that you can do and you can make numerous products.
One index is called the 321 crack spread.
This talks about how much money can I make at my refinery and that term is called a margin because I’m buying the crude and I’m selling the products.
It’s simplified. I’m going to buy 3 barrels of crude oil and I’m going to turn it into one barrel of diesel and 2 barrels of gasoline.
You take the price of the crude oil into the refinery. The prices today of diesel and gasoline at the refinery today and that’s your index of the margin potential in the refinery.
Remember it’s a margin business.
The bigger the drums on the right, the smaller the drums on the left the better.
This is a positive crack spread margin measured in dollars per barrel.
It’s available everyday. Bloomberg and Reuters put it out as a price index and it varies over time.
This is from BP. It goes from 2005 to 2016.
The yellow is the crack spread on a refinery in the US gulf coast. The blue is a crack spread on northwest Europe. The light yellow is a Singapore crack spread. The point is the refinery margin was as high as 25 dollars a barrel in 2007, 25 dollars a barrel, 200,000 barrels a day.
Tons and tons and tons of money. The glory days of refining.
Now, we’re at this point, it looks like we were down around 10 or 15 and it’s been lower than the last 6 months.
The oil price drop that they were able to bring in cheaper crudes. They got to boost the margin but over time, as things balance out, the margin is settling back down and it’s still positive and it’s settling back down.
It went over 20 and then now it’s probably in the low teens still making money and that’s why you see that spike there in the far right and then now it’s come down.
I had a good friend, 30 years with Shell. He said refineries only make money when gasoline is tight. Right now, gasoline is really surplus.
If you hear the oil curve, it went back to 98 when oil was 10 dollars a barrel. You would see almost a zero margin here on the gulf coast who are actually negative. If you’re losing money which it had kept running until it came back positive.
For years, the refiners were losing money and that’s why they didn’t invest. A lot of the, no early retirements, didn’t hire any people. This is the year that I think that we’re going to be in for a while.
Question:
Male: Now, does that gasoline price … Is that like a rack price or retail price when you figure out the crack spread?
Marty Stetzer: Wholesale net [pack 00:39:16] price.
Male: Wholesale, okay.
Marty Stetzer: That’s a very good point. When you think of … I’m the refinery. Joe has a crude ship in Saudi Arabia. I got to get him to my right hip. Freight, duty, transportation, duty pay landed cost at refinery.
Mary is a service station in Baltimore. We got to back out the truck. We got to back out their pipeline. We got to back out everything to get the ex-refinery gate wholesale price. Not the retail price you see at the pump.
Male: That’s got another mark.
Marty Stetzer: That’s right. A 321 crack spread is across the refinery.
Male: Got you.
Refining has always had regulation.
In the ’70s and ’80s, it was the clean air legislation with huge focus on the plants. Then the ’90s to the 2000, the clean air legislation focused on the products.
We started putting better gas caps, less volatiles in the gasoline, lesses butane in the gasoline. All these products have to be manufactured in the refinery.
As I’ve mentioned today’s challenge is carbon emissions at the plant which is where the refineries are being concerned.
The other focus on the products is we continue to remove sulfur out of diesel. There is a product called ultra low sulfur diesel which is moving the sulfur to around 10 to 20 PBM on down from over a 100.
From under 100 to 10, yeah.
Male: Something like that. They went down from 30 to 50 down like a 10.
Marty Stetzer: It’s carbon in the product and carbon, anything emissions at the plant. Just saying I noticed in the news. There is the EPA is now targeting aircraft for carbon emissions and sulfur emissions from jet fuel. Jet fuel is an extremely small volume in the total picture but it’s an easily recognized spot to do the next one.
Male: If I am not incorrect the last I read, I think jet fuel lay have a waver and they’re like 200 to 300 BPM.
Marty Stetzer: Right.
Male: They’re up much higher.
Marty Stetzer: Jet fuel software is much higher.
Process Safety
Male: If I might add one other thing. In the ’90s, we got the process safety management that rolled out PSM than the 1904 and so we saw an extra emphasis on all the hazardous operation analysis that process safety that came in the early ’90s as well.
That’s feeding into your comment earlier about the safety flag out front and why it’s so important.
Summary
Crude oil is an inconsistent mixture of molecules.
The 25 largest refineries have 50% of the capacity.
Crude oil must be treated to produce salable product.
We talked about separation conversation treatment and blending.
Refinery margins are volatile and vary by geograph.
Refiners continue to be under increasing regulation.
That’s all I have on refining. Any questions? Any comments? Anything to add? Yes, Joe.
I would add one thing. If you look at the landscape of the oil business and refining from the late ’60s till now, last 40 to 50 years. Back in the 1970, the what we call the Seven Sisters. Exxon, Mobil, Texaco, Gulf Oil, Total, ENI had 70% of the world’s reserves. Now, they have about 10 with access to another 10.
This is the shift to who’s running, who owns the crude.
North America, you’ve see the refining footprint change. The big guys still occupy big positions but the largest refiner in the US is Valero which came from …
They have no crude.
Now, of course, you’ve also seen the refining companies do split, so Phillips 66 is now separate from ConocoPhillips.
BP, you’ve seen them push away from refining.
You also see that refiners in the US have 10, not the only gasoline stations anymore. It’s all gone.
10 years ago, Shell had 900 stations. Now, they’re all franchised.
You see the shift away. They’re basically out of the retail business most of them completely.
They’re basically in the wholesale business and they let the independence and there was a lot of big independence actually.
They own hundreds of stations, Quick Drip and all these names. You see, when you drive down the road here that speed little, I forget, race track and these guys. They have big franchises that buy lots of gasoline.
You’ve seen the ownership of this whole thing changes. It’s quite interesting.
There’s still big integrated people that own and the big guys still own a lot but they tend to own their stations in foreign countries.
Total owns its stations in Europe for example but there aren’t Total stations here in the US but they may be franchised or maybe they’re gone now. I’m not sure if you have them anymore.
Their used to be some.
It’s just an interesting trend on the ownership of all this is shifting around at the end of it.
Male: I think a lot of that horizontal and vertical, divestiture we called it in the ’70s and bring it forward like Joe’s saying. The oil business is very risk averse. There’s reasons behind some of these …
For example, BP’s jumped out of a lot of the refining sector because it adds some catastrophic news. Offshore, they had some. If you look at everything and they’re striking from the service sector, a lot of the key drivers and investors look for are they go back to industry events and regulations. Sometimes they’re usually linked again.
There’s a reason you might not want to own a service station today because you might have tanks that leak. You pulled steal out of the ground. You replace with fiber glass. Well guess what? Some of the gasoline additives may affect the seams in which those fiberglass tanks were put together, for example. I mean we could go on and on. [crosstalk 00:46:24].
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