Controlling the Design Spiral

HYDROCARBONENGINEERING

January 2014

January2014

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Controlling the Design Spiral

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contents

January 2014 Volume 19 Number 01 ISSN 1468-9340

(03) Comment

(30) Keep it lean

(05) World News

Contract awards, project updates, industry latest, news digest, diary dates, mergers and acquisitions

Simon Bennett, AVEVA, UK, explains how new technology advances are enabling lean construction processes in plant projects

(12) Facing headwinds Luisa Sykes, Euro Petroleum Consultants, discusses the outlook for the oil and gas sector in Europe

30 (35) Fully qualified Sari Aronen, Metso, Finland, discusses the importance of reliable valves in renewable fuel production

12

(41) Additional treatment

(20) Flood warning Matthew Kuhl, Mark Routt and Scott Sayles, KBC Advanced Technologies, USA, look at the US shale supply flood, focusing on processing developments and issues

(26) Dieselising Europe: Part 2 Dirk Frame, T.A. Cook Consultants, Germany, discusses the key problems that affect diesel producers and the importance of correct maintenance

Berthold Otzisk and Silke Rüdel, Kurita Europe, Germany, discuss the chemical treatment programs that can be applied to water and wastewater processes in order to remove oil, solids and other troublesome substances

(45) Knowledge nexus Kevin Milici, GE Water & Process Technologies, USA, looks at the evolution of water management

(51)

review

Catalyst

Hydrocarbon Engineering provides an overview of some of the most advanced catalyst technologies available within the hydrocarbon processing industry today

(72) 15 questions with.... Ruth Poultney, Fuels Development Technologist, BP, talks women in engineering, career development, her first pet and favourite band

This month's

front cover Join the conversation

AVEVA™ is a leader in engineering design and information management solutions for the plant, power and marine industries. For more than 45 years it has delivered business critical software solutions to owner/operators, engineering contractors and shipbuilders around the world. AVEVA employs over 1400 people and has a global sales and support network of 49 offices in more than 30 countries.

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We keep a close eye on your plant efficiency. The trouble-free operation of your plant is the precondition for maximum economic efficiency. Kurita’s patented ACF technology inhibits the formation of chloride and ammonium salts, thereby preventing fouling and corrosion. This is only one example of how Kurita protects your production unit against unscheduled shutdowns, extends its runtime and lowers process costs – while at the same time increasing plant and operational safety. Particularly for refineries and petrochemical plants, Kurita offers innovative and sustainable process technologies as well as a broad portfolio of products for water management. From consultation through to implementation and maintenance, we support you with a comprehensive range of services. As you can see, we keep a close eye on the effcient operation of your plant. Process technologies for refineries and petrochemical plants Water treatment technologies for cooling water, boiler water, waste water and reverse osmosis

Kurita Europe GmbH . Industriering 43 . 41751 Viersen . Germany Phone:+49 2162 9580110 . www.kurita.de

comment Claira Lloyd Editor

W

hen thinking about 2013, the death of Nelson Mandela, the US government shutdown and the birth of the Royal baby (hard to avoid if in the UK) spring immediately to mind. Yet, when thinking about the world of oil and gas I think shale and the turbulent situation that has been faced by the European refining industry. The European refining industry is being heavily impacted by the shale revolution as the US now has an abundance of cheap fossil fuels and the infrastructure to utilise it, which is leaving Europe to play catch up. And let’s face it the wealth of shale gas is America’s biggest asset at the moment as gas is inevitably going to be cheaper than oil, boosting its downstream industry to incredible heights. The level of liquids demand growth in Europe is also a problem as it is flagging, as developed markets are no longer commanding such high levels and the emerging markets, which still crave liquid fuels, are procuring it from cheap sources such as the US. The overcapacity of European gasoline production is another area that is not helping the European situation, and this is likely to worsen over the next five years unless changes are made. European refineries need to adapt to increase the production of middle distillates, which are currently being demanded at high volumes all over the continent, as well as in areas overseas. Sadly, Europe is not only competing with the US. Russia and the Middle East are also two strong players in the global refining industry that are giving Europe cause for concern. The level of subsidisation in the Russian refining industry allows

for expansion and revamps to boost the country’s distillate production and therefore allow it access to the global market, which is craving these fuels. The subsidisation in the country also ensures that the domestic refining industry does not suffer even if demand drops off, something the European refining industry does not benefit from. When it comes to the Middle East, the explosion of complex refineries is the biggest threat. These facilities, such as Jubail, have high levels of efficiency and complexity that dwarf European counterparts. While one cannot deny that the shale revolution is one event negatively impacting Europe, it is having many positive impacts that will no doubt continue into this year, and cannot be ignored. The US has now cemented its energy security of supply, something that economies across the world strive for on a daily basis. Also, the country is sharing the benefits with others (so to speak) as due to tight oil, Latin America and West Africa have gained a secure supply of gasoline to feed ever increasing demand at a relatively cheap price. So, yes, unless changes are made to reduce the complexity of European refineries, it is possible that there will be tough times ahead this year in the region, however, there is hope elsewhere as fossil fuel supply continues to be secure and prices continue to be favourable and competitive to many. Happy New Year from all of us on the Hydrocarbon Engineering team.

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w rld news CB&I |

THREE CONTRACTS WON

C

B&I has been awarded a contract valued at approximately US$ 1 billion by Ingleside Ethylene LLC, a joint venture between Occidental Chemical Corporation (OxyChem), a subsidiary of Occidental Petroleum Corporation, and Mexichem, S.A.B. de. C.V. for the engineering, procurement and construction of an ethane cracker and associated utilities and offsites to be located at OxyChem's complex in Ingleside, Texas. The cracker will have the capacity to produce approximately 1.2 billion lbs/y of ethylene. Feedstock for the cracker is anticipated to be ethane derived from domestic shale gas. As previously announced, CB&I provided the technology license and basic engineering for the ethylene technology, five SRT® (short residence time) cracking heaters and the front end engineering design (FEED) services. CB&I has also been awarded a contract by JSC Gazprom Neft for FEED services for a new oil refining complex at Gazprom Neft's refinery in Omsk, Western Siberia, Russia. The existing

Algeria |

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refinery is currently the largest operating refinery in Russia. CB&I's project scope includes FEED development for multiple new process units, including a 2 million tpy hydrocracker unit licensed by Chevron Lummus Global, as well as hydrogen, sulfur and other associated units. CB&I delivered a similar hydrocracker complex earlier this year for Gazprom Next in Pancevo, Serbia. Finally, CB&I, in a joint venture with Zachry Industrial, Inc. has been awarded two contracts, each valued at approximately US$ 2.5 billion by FLNG Liquefaction, LLC and FLNG Liquefaction 2, LLC in order to construct the first two trains of the Freeport liquefaction project. The project scope includes engineering, procurement and construction for the conversion of an existing regasification terminal in Freeport, Texas to an LNG liquefaction terminal. The two train LNG liquefaction facility will have a total capacity in excess of 8.9 million tpy of LNG. The initiatial contract discussions for this project began in 2012.

READY FOR STARTUP

onatrach, ranked by Forbes as the world's 12th largest oil company, is nearing completion of a new paraxylene crystallisation plant at its integrated refinery/petrochemical site in Skikda, Algeria. Start up was scheduled for December of 2013. The plant's core units will utilise CrystPXSM and GT-IsomPXSM, both licensed from GTC Technology. CrystPX recovers paraxylene from reformate feedstock while GT-IsomPX, using ISOXYL® catalysts from Clariant, isomerises C8 aromatics into additional paraxylene. This license also includes

naphtha hydrotreating and reforming, aromatics extraction and other aromatics operations. Samsung Engineering Co., Ltd., provided EPC services for the new facilities. The paraxylene plant was originally part of Sonatrach's petrochemical subsiduary, Naftec, which Sonatrach absorbed in 2009. The new units continue Sonatrach's long term expansion plans for additional refining and petrochemical capacity at its facilities in Algeria to meet with growing local demand for oil products.

ENERGY EFFICIENCY ORDER USA |

A

lfa Laval has won an order to supply Alfa Laval OLMI heat exchangers to a petrochemical plant in the US. The order, booked in the process industry segment has a value of approximately SEK 60 million. Deliveries are scheduled for 2014 and 2015. The Alfa Laval OLMI heat exchangers will be used to incease the yield and recover energy in the production of ethylene, an important ingredient for the manufacturing of industrial chemicals and plastics products. The order is an example of the reindustrialisation occuring due to the shale gas revolution in the US. The shale revolution is thought to be the major driver behind expansion in the US petrochemical sector. The unlocking of the previously inaccessible reserves has driven down prices of the essential inputs to petrochemical manufacturing.

PLANT EXPANSION Venezuela |

M

anoir Industries was awarded catalyst tubes, outlet manifolds and transfer line assembled by Technip Claremont for the expansion and upgrade of PDVSA Puerto La Cruz refinery, Venezuela. The furnace components are based on Manoir's proprietary Manaurite® high alloy technology. They are manufactured in its leading production centres in France an the UK under its 'One Manoir International' production methodology which guarantees coherent manufacturing and quality control processes across all plants in France, UK, India and China.

HYDROCARBON

ENGINEERING

5

January 2014

w rld news INBRIEF USA |

SULFUR RECOVERY UNITS

USA

P

South Africa

Denmark |

FourQuest Energy has acquired the assets of Odyssey Technologies Inc., a custom chemical solution company based in Houston, Texas. OTI has been one of the process industry's leading suppliers of speciality chemicals. With the acquisition, FourQuest Energy is now in the position to deliver one of the most powerful and complete portfolios of services in the energy industry.

MAN Diesel & Turbo South Africa (Pty.) Ltd., local subsidiary of the engineering enterprise MAN Diesel & Turbo SE (Augsburg, Germany), has entered into an agreement to acquire 100% of the share in the family owned ELCA Engineering (Pty.) Ltd. near Johannesburg. Closing of the transaction is subject to approval of the South African Competition Commission. The parties agreed not to disclose any financial details of the transaction.

USA

AMETEK, Inc. has acquired Powervar, a provider of power management systems and uninterruptible power supply systems for approximately US$ 128 million. Headquartered in Waukegan, Illinois, the privately held company has annual sales of approximately US$ 70 million.

Australia

The sale of Caltex Australia's Sydney based import bitumen business to Puma, Energy, a subsidiary of Trafigura Beheer BV has now been completed. The details of the sale remain commercial in confidence. Caltex no longer deems bitumen to be a core business, hence the sale.

January 2014

6

HYDROCARBON

ENGINEERING

rincipal Technology Inc., a provider of total system solutions for natural gas, refining, chemical, process and manufacturing facilities, is supplying the small capacity sulfur recovery units (SRU) and tail gas treating unit (TGTU) for Dakota Prairie Refining, LLC refinery in southwestern North Dakota. Designed to address the specific needs of small capacity refineries, Principal Technology's SRUs are based on a modular platform design that reduces

CELLULOSIC BIOETHANOL

R

oyal DSM has announced that together with DONG Energy it has demonstrated the combined fermentation of C6 and C5 sugars from wheat straw on an industrial scale. The combined fermentation results in a 40% increase in ethanol yield/t of straw, which can result in significant cost cuts in the production of bioethanol from cellulosic feedstock.

Kuwait |

H

installation time and enables the units to meet the tight construction deadlines imposed to complete the refinery by the end of 2014. The US$ 300 million refinery will process 20 000 bpd of oil and produce 7000 bpd of diesel fuel, specifically to meet the needs of North Dakota. The remaining petroleum will be shipped to other refineries for further processing. The technology was chosen as the facility is at a small scale.

The demonstration took place in DONG Energy's Inbicon demonstration plant in Kalundborg, Denmark, the longest running demonstration facility for cellulosic bioethanol production in the world. The faciltiy was reconstructed in 2013 in order to be able to conduct mixed fermentation of C6 and C5 sugars.

PROCESS AUTOMATION SYSTEMS

oneywell has been selected by Kuwait National Petroleum Company (KNPC) to provide the integrated control and safety system (ICSS) for its new 615 000 bpd Al Zour refinery complex to be built in southern Kuwait. Honeywell will also provide the front end engineering deisgn for the system. This will be Kuwait's fourth refinery and the largest refinery in the entire Middle East. The total capacity of Kuwait's three current refineries is 930 000 bpd. The new refinery is targeted for startup in 2018. Honeywell has provided industry technologies to KNPC's refineries for approximately 30 years through its Process Solutions business (HPS) and

has long sustained a presence in Kuwait. As the main automation contractor for the new Al Zour refinery, Honeywell will supply Experion® PKS as the main control system for the refinery complex, as well as integrate all process automation systems throughout the site. Additionally, having HPS perform front end engineering and design of the system will help drive consistent designs from other contractors throughout the entire project and help speed its completion. The new refinery complex will help to meet domestic demand and export of ultra low sulfur products each as fuel oil, diesel and kerosene, as well as petrochemical feedstocks.

w rld news INBRIEF

Worldwide

BASF and the Petroleum Institute of Abu Dhabi intend to develop new processes for removing aggressive sulfur compounds from acid gases in a research collboration. The two parties have already signed an agreement.

USA

Athalon Solutions has announced the purchase of a 36 acre chemical plant in Bayport, Texas from Clear Lake Chemicals. The company has significantly added to its existing manufacturing base in Louisiana with this purchase.

Turkey

Intertek has opened a new petroleum testing laboratory in Kirikkale, Turkey, close to the capital city Ankara. The laboratory supports both local and regional customers with fuel quality testing for diesel and gasoline, and is adding a full range of tests to analyse LPG.

Russia

BASF and Gazprom have signed a final agreement to swap assets of equivalent value. Through the swap, the BASF subsidiary Wintershall will further expand its production of oil and gas and exit the gas trading and storage business. The completion of the transaction is expected to take place mid 2014 and will be economically effictive retroactively to April 1st 2013. Sales and earnings of BASF's Natural Gas Trading business will continue to be reported in the oil and gas segment until completion. The transaction was approved by the European Commission at the beginning of December 2013.

January 2014

8

HYDROCARBON

ENGINEERING

Belgium |

INCREASING EFFICIENCY

I

NEOS Oxide, part of the INEOS Group of companies and a leading producer of ethylene oxide and ethylene oxide derivaties, propylene oxide and propylene oxide derivatives, plus a range of solvents and chemical specialties, has purchased CADWorx® Plant Professional and CADWorx P&ID Professional to increase plant efficiency for its site in Belgium. With strategic locations in both Europe and the US, INEOS focuses on

Canada |

LICENSE AGREEMENT

B

ASF and Pacific NorthWest LNG have concluded a license agreement on the use of BASF's OASE® technology for the removal of carbon dioxide and sulfur containing components from natural gas for all trains of Pacific NorthWest LNG's proposed LNG facility in the district of Port Edward, near Prince Rupert, British Columbia, Canada. The facility anticipates shipping first gas to customers by the end of 2018. The use of BASF's OASE technology for gas treating is essential for the production of LNG. OASE technology removes contaminants contained in the gas to

Oman |

A

continually improving cost structures, technologies and safety, health and environment initiatives while combining plant scalability and reliability. After a benchmark analysis, the CADWorx Plant Design Suite was adopted to standardise and automate work processes, minimise the amount of transportation errors and enable integration between CADWorx Plant Professional and CADWorx P&ID Professional.

enable its liquefaction at temperatures of approximately -160 ˚C. The technology has a proven track record in LNG facilities around the world and its robustness and flexibility to meet stringent removal requirements is well recognised in the industry. Front end engineering and design (FEED) for the LNG faciltiy is currently ongoing with three international engineering contractors. The FEED is expected to be complete and in time for a financial investment decision by the end of 2014.

INDUSTRIAL GASES VENTURE

ir Products and Takamul Investment Company, a subsidiary of the Oman Oil Company, have signed a joint venture agreement to establish an integrated industrial gases venture, which will become a one stop provider for a full range of industrial gases such as hydrogen, nitrogen and oxygen for all customers in the Special Economic Zone at Duqm (SEZAD), Oman. The joint venture will support the economic development of the SEZAD and enhance its competitiveness to attract further industrial investments. It will also aim to deliver the highest

operational excellence by leveraging Air Products' world class capabilities in large industrial gas plant design, pipeline infrastructure development and operational know how, as well as Takamul's strong multi utilitiy infrastructure position in Duqm, via its Centralised Utility Company. Strategically located along the Gulf of Oman, Duqm has been targeted for development as a major maritime gateway for trade in crude oil from the Gulf, and as an important industrial and commerical hub. Duem will be the largest SEZ in the Middle East.

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w rld news igest d s w ne

| DIARYDATES

18 - 19 February METECH 2014 Madinat Jumeirah Dubai, UAE Tel: +44 (0) 20 7357 8394 Email: [email protected]

23 - 26 February Laurence Reid Gas Conditioning Conference University of Oklahoma Norman, Oklahoma, USA Tel: +1 4-5 325 3891 Email: [email protected]

18 - 20 March StocExpo 2014 Ahoy Rotterdam Rotterdam, The Netherlands Tel: +44 (0)20 8843 8820 Email: [email protected]

23 - 25 March AFPM Annual Meeting Hyatt Regency Orlando Florida, USA Email: meetings @afpm.org

24 - 27 March Gastech Conference & Exhibition KINTEX Korea Tel: + 44 (0) 203 615 2847 Email: [email protected]

31 March - 2 April Global Refining Summit 2014 Hesperia Tower Barcelona, Spain Tel: +44 (0)20 7202 7690 Email: [email protected]

January 2014 10

HYDROCARBON

ENGINEERING

Worldwide |

CYBER PROTECTION

P

rotecting smart grids from cyber attack is a popular conversation in information security circles. But the threats are far worse than generally believed. Lila Kee, chief product officer at GlobalSign, has commented; 'Of all CNI sectors, the energy industry is the recipient of a disproportional number of cyber related attacks, as hackers prey on systems in desperate need of modernisation and if penetrated could lead to devastating consequences. Smart grid equipment and software manufacturers, as well as operators are urged to step up efforts to upgrade

USA |

O

technology, especially around the area of replacing weak passwords with stronger authentication measures. As in any cyber security planning, IT and security professionals should incorporate the level of security necessary for the associated risk of a breach, in the case of smart grids, potentially catastrophic. As participants in North American Energy Standard's Board (NAESB), GlobalSign encourages energy participants to incorporate cyber security standards developed by NAESB and NERC, that if adopted will lead to a safer smart grid ecosystem.'

WHAT AMERICA IS THIINKING

verwhelming numbers of US voters of all political persuasions agree that increased development of the nation's energy infrastructure is in the country's best interests according to a poll conducted for the American Petroleum Institute (API) by Harris Interactive. API Downstream Operations Senior Manager, Refining and Oilsands, Cindy Schild commented on the results of the poll. 'The American people understand the value of investing in our energy transportation network in order to get energy to consumers efficiently, and to businesses that are thriving and creating jobs due to the abundance of affordable oil and natural gas. 93% of respondents agree that increased development of energy infrastructure

would help create jobs, while 89% agree infrastructure investment would strengthen America's energy security. One obvious infrastructure project with significant economic and energy security benefits is the Keystone XL pipeline, and voters remain supportive of moving forward with the project. 72% agree it is in the US's national interest to approve the Keystone XL Pipeline so that it can transport North American oil to US refineries, while 63% would like to see America import more of the oil it needs from Canada, rather than other foreign countries.' The telephone poll of more than 1000 registered voters also found that 88% said that increased development of energy infrastructure is good for American consumers.

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Facing

headwinds

January 2014 12 HYDROCARBON ENGINEERING

Luisa Sykes, Euro Petroleum Consultants, discusses the outlook for the oil and gas sector in Europe.

E

uropean oil and gas demand was still affected by the economic downturn during 2013. Is 2014 going to be the turning point towards a more positive outlook for oil and gas demand or just a mirror of 2013? Estimates from the International Energy Agency (IEA) appear to indicate the recovery in oil and gas demand is going to be slow and initially restricted to a small number of European countries. According to the IEA, European oil demand is estimated to decline by 0.7% in 2014 relative to 2013 numbers. This is an improvement compared to the expected drop of 1.4% in 2013. Gas consumption is estimated to decline by 3% in 2014, the same rate of decline expected for 2013, following drops of 3.5% in 2012 and 11% in 2011. Despite the fall in oil and gas demand, European imports of gas and middle distillate products increased during 2013. This was caused by falls in European gas production and the shutdown of European refineries during 2012 and 2013. Europe is still the world's largest energy importer, importing approximately 55% of its overall energy needs, the imports represent approximately 84% of oil consumption and 64% of natural gas consumption. In contrast with the US, which is fast becoming self sufficient in energy, Europe is becoming increasingly more dependent on imports of oil and gas. Consequently, concerns are being raised over energy costs and security of supply. Both the oil and the gas industry are navigating a sea of change that will affect the future outlook of both industries. European refiners have been experiencing a sharp decline in domestic oil demand and tougher competition abroad. While the gas industry is under pressure to change its business model and adapt to

HYDROCARBON 13

ENGINEERING

January 2014

more flexible business practices. Gas markets are likely to be affected by price volatility as conflicting interests from LNG, renewables and carbon markets interplay. In contrast with the US, natural gas consumption in Europe has been declining in the last three years and market share has been lost to both coal and renewable energy.

Coal versus gas The IEA revised down its forecast for European gas consumption for the period between 2013 and 2018. According to the IEA, gas consumption will increase by only 12 billion m 3 from 513 billion m 3 in 2012 to 525 billion m 3 in 2018. The new forecast places future European gas consumption below pre recession levels. The revision was based on lower estimates for European GDP growth and more conservative estimates for gas consumption in the power generation sector. According to the IEA, the high price of gas relative to coal and the low price of carbon will negatively affect gas consumption in the period between 2013 and 2018. The IEA is forecasting a further drop in European gas consumption in the next two years because of the unfavourable relationship between gas, coal and carbon price before consumption starts to recover after 2015. As coal produces more carbon per unit of heat than natural gas, coal is more affected by the carbon price. This explains why under the current scenario of low price for carbon, European power generation suppliers are opting for coal rather than gas whenever possible. Data by the IEA shows that carbon price of € 45/t of CO 2 equivalent would be required to motivate the switch from a coal fired plant to a gas fired plant. At present European Trading Scheme (ETS) allowances are traded at approximately € 4/t of CO 2 equivalent. Many European electric power producers with the flexibility to use coal fired generators switched to coal to take advantage of lower coal prices relative to gas. The US has become the main supplier of coal to Europe as low US gas prices turned coal less competitive in the US market and made exports of coal to Europe more attractive. However, the preference for coal could be short lived as many European countries will be decommissioning older, less efficient coal plants in the next five years and the European environmental agenda takes precedent over profitability considerations. In 2013 coal consumption dropped 6% mainly because of the decommissioning of several coal fired power plants in Europe. Some of these plants were decommissioned on environmental grounds rather than profitability assessments. The environmental agenda will benefit renewable energy that will become the fastest growing energy for European power generation in the future. It will also benefit gas exporters in the long term and limit the scope for expansion of coal fired plants bypassing price and profitability considerations.

Russia's expanding gas market share Russian physical gas deliveries into Europe increased by 10% in the first six months of 2013. This increase in Russian January 2014 14 HYDROCARBON ENGINEERING

gas imports was driven by lower supplies from Norway and North Africa and lower LNG imports. LNG imports into Europe have been falling in the last two years and estimates from Societe Generale suggest a 24% decline in LNG demand for 2013. This follows a drop of 31% in 2012 relative to 2011. The decline in demand for LNG in Europe was motivated by weak gas consumption and high LNG prices. LNG producers and traders have been focusing on the growing Asia LNG markets and some LNG cargoes designated for Europe have been reloaded and redirected to Asia. This trade is emerging as an important additional supply source for Asia and has the unintended consequence of benefiting Russian gas exports. The European economic downturn has had a negative impact on gas consumption for power generation in the majority of European countries and particularly in the Southern European countries. The combined gas consumption for power generation in Italy, Spain, UK, France and Belgium declined by 21% in the second quarter of 2013 relative to the same period in 2012. High price of gas, low ETS prices and high growth of renewables replacing gas for electricity generation were some of the contributory factors explaining the low intake of gas in the power sector. In spite of the recent steep decline in LNG imports into Europe, these trade flows are not doomed. The UK, which has been experiencing a decline in gas production from the North Sea and requires higher levels of gas imports, has recently completed two deals with US suppliers for the import of LNG into the UK. A slump in US natural gas prices, caused by increased shale gas production has created an opportunity for US gas suppliers to sell LNG into Europe and Asia. US benchmark natural gas prices have remained below US$ 4/million BTUs since October 2011, compared to the current benchmark price of approximately US$ 10/million BTU in the UK. On the other hand, LNG prices in Japan during 2013 were on average 55 - 70% above the UK National Balancing Point (NBP) and German border prices and four and a half times higher than US Henry Hub prices. These price differentials make LNG exports into Europe and Asia very attractive for US Exporters. The IEA forecasts considerable tightness in LNG markets for 2014 with some incremental LNG demand from Asia surpassing the additional LNG capacity expected to come on line in 2014. The supply and demand balance may change from 2015 depending on Australia LNG projects currently pending approval.

Oil indexation versus hub price indexation A great proportion of natural gas price in Europe is still based on oil prices. It is not possible to get an accurate view on oil indexation versus hub indexation levels. The majority of the supply contracts are structural long term contracts with confidentiality clauses. The European Commission estimates that approximately 50% of European natural gas supply is indexed to oil. Moreover, approximately 80% of Russian natural gas supplies to OECD Europe are linked to oil.

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CADWorx 2014 Plant Professional ®

Bringing you the power of information HOW TO GET THE MOST FROM OPTICAL GAS IMAGING Over the last few years, one of the most significant advances in infrared thermographic cameras has been the introduction of OGI. These cameras use spectral wavelength filtering and streling cooler cold filtering technology, but how do you utilise them to the max? For further information go to www.energyglobal.com

ILLEGAL REFINING IN NIGERIA: 2013 FIGURES It has been reported that during 2013, the Nigerian Navy destroyed 1556 illegal oil refineries and arrested 1646 suspects related to illegal refining activity. 103 barges, 69 606 auxiliary equipment and 1443 large wooden boats were also seized by the naval forces. In relation to these arrests, it has been reported that piracy and sea robbery in surrounding areas has dropped. For further information go to www.energyglobal.com

US GASOLINE PRICES It was predicted by the US AAA that 94.5 million Americans would travel at least 50 miles from home during the holiday season, which breaks the 2012 record of 94 million. This is the fifth consecutive year of travel increases in the US over the holiday season. The period was defined by the AAA as 21st December - 1st January. For further information go to www.energyglobal.com

UP TO 30% FASTER MODELING Intergraph® CADWorx 2014 is the latest release of the popular AutoCAD®-based, intelligent 3D plant design and P&ID solution. The new routing tools, piping specification system, and selfaware components help increase flexibility and reduce delivery times thanks to faster modeling and design modifications. Enhanced:

GLOBAL SHIFT TO SHALE - PART TWO Recently, the EIA examined 137 shale basins around the world and concluded that there were almost 8000 trillion ft3 of technically recoverable natural gas in regions outside North America. For further information go to www.energyglobal.com

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The increasing level of hub indexation in European gas supply contracts has been one of the main trends marking the evolution of the gas market over the past few years. Hub indexation has been gathering momentum as North West European hub prices have traded below oil indexed contract levels for the last five years. This has been a key factor in the development of hub liquidity and transparency and opened a gap between high cost long term contracts and short term contract prices. Gazprom and North Africa producers have been keen defenders of oil price indexation. However, there are signs that even Gazprom is beginning to make concessions. The marketing and trading arm of Gazprom in Germany has signed a 3 year deal with Centrica for the supply of 2.4 billion m3 gas to the UK priced at the NBP hub. Statoil has been more willing to accept increasing levels of hub indexation and has recognised that the majority of the company’s gas supply contracts will be hub indexed in the future. Recently, the company has signed a 10 year 45 billion ft3 supply deal with BASF linked to the German hubs. It remains to be seen if the Centrica deal is a turning point for Gazprom towards accepting hub indexation as the standard for gas pricing in the future. It is nevertheless a recognition of the way the gas market is developing and the difficulty in finding buyers for oil indexed gas deals, for example in the UK, where hub indexation has become more widespread. The progress towards hub indexed gas prices is inevitable. However, oil indexed gas prices are still going to linger for a long time thanks to the long term contracts that underpin most of the European pipeline imports.

European oil demand in 2014 European oil markets are slowly coming out of the doldrums and in 2014 some European countries are expected to experience increases in oil demand triggered by more dynamic economic growth. The IMF European GDP forecast of 1% for 2014 cannot be considered impressive but it is still an improvement from the 0.6% GDP decline expected for 2013. The signs of recovery in oil demand during 2013 were mixed with Germany and UK showing encouraging increases in diesel demand but Spain and Italy still exhibiting sharp declines in motor fuel demand by 4% and 8% respectively in the first six months of 2013. France recorded a combined decline of diesel and gasoline demand of 1.8% in the first half of 2013 according to the industry group Union Francaise of the Industries Petrolieres (UFIP). The outlook for European oil demand is expected to be weak in the next two years with the UK Petroleum Industry Association (UKPIA) forecasting oil demand growth of 0.1%/y until 2015. Oil demand growth is expected to increase slightly after 2015, according to the UKPIA, particularly in the southern European countries that enjoy greater prospects of economic growth. The positive signs of economic recovery in the Euro Zone are improving the outlook for the European refining industry, but there are very serious risks looming over the future prospects of the industry. Compliance with environmental regulation, lack of investment, mismatch January 2014 16 HYDROCARBON ENGINEERING

Figure 1. OECD Europe gasoline exports, gasoil imports.

between product supply and market requirements are just some of the problems facing the industry. These issues are not easily resolved but lack of a strategic framework for the industry in Europe and lack of political engagement to resolve some of these problems leave the industry vulnerable and at risk of becoming another casualty of modern times. While other refining centres prosper, European refining is perishing. US refiners are on a mission to expand their product exports to all corners of the world. The Russian refinery industry is embarking on a massive modernisation program which will turn Russian refiners into more competitive players in global refining markets. Middle East and Asia hold state of the art refineries and petrochemical complexes and are able to compete on the basis of economies of scale and lower production costs. In contrast with such positive developments from refining centres around the world, European refining is being left behind struggling to compete with more innovative and more profitable refining centres elsewhere.

Increased dependency on oil imports The structural imbalance between gasoline churning European refineries and market requirements for increasing volumes of diesel places the European industry at a great disadvantage. The economic downturn, high crude oil prices and vehicles efficiencies reduced oil demand and forced refiners to cut runs imposing additional downward pressure on refinery margins. As a result, 16 European refineries had to shut down since 2008. Data from BP shows France suffered the steepest refining capacity loss, 25%, while Germany, UK and Italy lost 11%, 11% and 8% respectively between 2008 and 2012. Many refineries are still under threat of closure. Cepsa’s 88 000 bpd refinery in Tenerife has been idle for the last four months and Hellenic Petroleum’s Thessaloniki refinery in northern Greece is also idle, both refineries are at risk of permanent closure. MOL’s Mantova refinery in Italy is scheduled to close down at the start of 2014. Diesel demand has been growing strongly in the last 10 years. The switch from gasoline to diesel has been driven by a combination of taxation favouring diesel and efficiencies in diesel engine. In contrast to diesel robust growth, gasoline’s demand in Europe has been declining at a rate of 3%/y for more than a decade. In Central and East

Europe, gasoline has been growing but in countries such as Poland, Turkey and Ukraine the switch from gasoline to diesel has been taking place for the last few years. The overall net effect is an increasing gasoline surplus that will continue to be exported to the US and West Africa. The imbalance between refinery production and market requirements resulted in a growing deficit of diesel/gasoil and a surplus of gasoline. Total gasoil/diesel imports grew from 49 million tpy in 2008 to over 53 million t in 2012 (Figure 1), with the impact of the recession on demand being generally offset by temporary or permanent refinery closures. Gasoline exports exceeded 48 million t from 2008, although there was a small decline over the period as a result of refinery closures and reduction in refinery utilisation rates.

Threats and challenges facing the oil sector The weakness of the European refining sector is being exacerbated by the drastic reduction of gasoline exports to the US markets. A combination of lower US consumption and domestic production replacing imports has significantly reduced gasoline import requirements by the US. Refiners in Europe are struggling to find new markets to replace the volumes of gasoline previously sent to the US and face tough competition from other refining centres for markets in West Africa and in the Mediterranean region. US refiners benefit from discounts on domestic crude and can afford to send products to far off markets. During 2013, US refiners have been sending significant volumes of gasoline to North and West Africa markets, traditionally consumers of European gasoline. West Africa and North Africa reportedly increased gasoline imports from the US in the first half of 2013 by more than 50%. US refiners have been able to gain market share in Africa and also capture gasoline market share at home thanks to improved domestic logistics. The 5500 miles colonial pipeline from Texas to New York Harbour has recently increased capacity by 160 000 bpd reducing gasoline imports requirements from Europe. US gasoline and diesel exports to Africa are expected to continue well into 2014 and beyond, seriously undermining European competitive position within these markets. The growing European diesel deficit has also created export opportunities for other world refining centres. US refiners have been sending increasing volumes of diesel to Europe. Diesel shipments from the US exceeded 2 million t in September 2013, the highest volume on record. Additional supply requirements into Europe are met by imports from Asia and Russia. The Jubail refinery in Saudi Arabia is ready to start exporting diesel to Europe at the time when Asia oil demand appears to be weakening. Indian refiners such as Reliance are also keen to send diesel and jet fuel to Europe. Exports from Russia into Europe have increased to 650 000 bpd in 2013 and further increases are expected in 2014 as more Russian refineries complete their upgrades. The upgrade of Russian refineries is also imposing a serious challenge for the European refining industry. January 2014 18 HYDROCARBON ENGINEERING

European refiners have for many years relied on supply of untreated Russian gasoil for further processing. The cheap low quality material enables refiners in Europe to increase their middle distillate yields and improve their margins. The prospect of diminishing supplies of gasoil will add extra pressure on the profitability of European refining operations.

No rosy prospects for the oil industry in 2014 The continuing switch from gasoline to diesel in Europe has boosted diesel growth rates in the past 10 years. However, diesel growth rates in Europe are forecast to be much reduced in the future compared to past performance due to improved engine efficiencies and market saturation. Spain and France, for example, are approaching diesel market share of 80% of total cars on the road. Therefore, in the future the European diesel market needs to rely on real economic growth rather than fuel substitution to sustain a good level of diesel demand growth. The prospects for European fuel demand in 2014 are going to be mixed, Germany and the UK are already showing good recovery in diesel demand and both countries are expected to achieve diesel demand growth of approximately 2% in 2014 relative to 2013. On the other hand, Italy, Spain, Portugal and Greece have been the worst affected by the economic downturn and oil demand in those countries are still expected to decline in 2014. Many refineries in Europe will have to make substantial investments and switch upgrading capacity from catalytic cracking to hydrocracking and coking to boost middle distillate production or face the alternative option of closing down. These investment decisions are impaired by current low level refinery profitability which makes the investment case look unattractive.

Conclusion European oil and gas industries are undergoing many changes and facing many challenges. The nature of these challenges can potentially change the outlook for both the oil and the gas sectors in Europe. Energy dependency and security of supply are underlying ‘themes’ linking the two industries. European authorities and European consumers are increasingly concerned with oil and gas supply reliability and affordable prices. Despite all these fears, the dependency on oil and gas imports is estimated to increase in 2014 and beyond. The expansion of European gas hubs is regarded as a positive development by European consumers and will help to keep gas prices under control. Under intense pressure from consumer countries and facing competitive challenges from other sources of energy, the gas industry is being forced to renegotiate long term contracts and accept more flexible price mechanisms. In the oil sector, European refinery closures will have very negative implications from the point of view of both energy security and prices. Europe will become more dependent on product imports and more vulnerable to supply disruptions and higher costs as long haul transport costs and storage have to be added to the price of imported products.

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