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HYDROCARBONENGINEERING

October 2016

October 2016

INNOVATION IN THE PIPELINE

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CONTENTS October 2016 Volume 21 Number 10

03 Comment 05 World News 12 Follow my lead

63 Saving the day

Xiaoping Tian, Linde, UK, Paolo Kirchpfening, Linde, Germany, and Marco Marquez, Linde, North America, examine the important role of oxygen and hydrogen in delivering flexibility to the refining industry, as quality of crude continues to vary.

Of all the OPEC countries, Saudi Arabia stands out as a leader in many respects. Nancy Yamaguchi, Contributing Editor, explores the ways in which the Kingdom currently leads the global oil and gas industry, and how it may lead in a life after oil as well.

69 Infiltrate the suppliers

22 Brilliant biogas

As oil prices remain low and company profits are squeezed, Chris Ruane, Air Products, UK, examines how the sector is looking to its gas suppliers to help ease the pressure.

Denis Clodic, Cryo Pur, France, discusses the evolution of biogas, and why biomethane is a viable and sustainable global energy solution for waste valorisation.

75 Cause and effect

30 A win for flow control

Kenneth Kildong Hwang and Suckhee (Steve) Kim, SK E&C, USA, present a study exploring how the removal of a vent gas incinerator can affect an LNG plant's capacity.

Paul Root, Goodwin International Ltd, UK, outlines a new design concept for axial isolation and control valves to improve flow management in oil and gas applications.

80 Virtual reality

37 Reviewing the situation

Luis Gabellieri, SENER, Spain, examines how the installation of a virtual gas pipeline improved a variety of processes at the Río Grande LNG plant in Bolivia.

Marc Massó and Miquel A. Alós, Inprocess Technology and Consulting Group, Spain, describe the steps that should be taken during a flare network capacity assessment, using both a conventional approach or dynamic simulation.

87 Systemic stronghold

Mike Baldi, Honeywell Process Solutions, USA, highlights why a sophisticated and holistic industrial process control system is an integral part of modern downstream facilities.

43 Withstanding the wind

Joseph D. Smith, Missouri University of Science and Technology, USA, Robert Jackson, Vikram Sreedharan and Ahti Suo-Anttila, Elevated Analytics, LLC, USA, and Doug Allen and Scot Smith, Zeeco, Inc., USA, discuss the safe operation of adjacent multi‑point ground flares, focusing on predicted and measured flame radiation in cross flow wind conditions.

92 Playing defence

Ken Keiser, Parsons, USA, discusses the importance of a well structured cyber security plan in downstream chemical plants, in order to maintain high security defences against virtual attacks, both now and in the future.

50 From discovery to distribution

97 Managing misconceptions

Eric Phillips and Paul Barboni, Agilent Technologies, Inc., USA, and Coen Duvekot and Remko Van Loon, Agilent Technologies, Inc., the Netherlands, look at the critical role of analysers in maximising the value of the natural gas production process, from exploration to distribution.

Pavan Chilukuri and Gary Bowerbank, Shell Global Solutions, the Netherlands, and Arnav Bhattacharya, Shell Global Solutions, India, demonstrate the true value of hybrid solvents through a lifecycle costs analysis.

55 Break the chain

103 Swift removal

59 Viscosity in motion

109 Sulphur Show Preview

Gökhan Ömer Alptekin, SulfaTrap LLC, USA, discusses a new sorbent-based sulfur removal process for liquefied petroleum gas, natural gas liquids and light naphtha.

Stuart Rye, Mettler Toledo Gas Analytics, Switzerland, examines the successful integration and effectiveness of tunable diode lasers in fluidised catalytic cracking units.

Hydrocarbon Engineering previews a number of the companies that will be exhibiting downstream oil and gas sulfur innovations and technologies at the Sulphur 2016 International Conference & Exhibition in London.

Gerd Büttner, Bartec Benke GmbH, Germany, explores the measurement of kinematic viscosity when processing petrochemical products in a downstream facility.

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COMMENT ROSALIE STARLING EDITOR

E

nergy security has long been a hot topic for European leaders and politicians. The shortfall between production and consumption in the EU has led to increasing dependency on energy imports from non‑member countries – more than half of the EU‑28’s energy comes from countries outside the EU, and this proportion has been generally rising over recent decades, according to statistical

information organisation Eurostat. While European gas production is dwindling, the situation is markedly different over in America. This state of affairs resonated with chemical giant INEOS, which, in response, hatched a pioneering plan to bring US ethane gas to Europe: a virtual pipeline across the Atlantic, giving the continent the chance to benefit from US shale economics, which did so much to revitalise the country’s manufacturing industry. The company has since secured 15 year contracts for purchase, distribution and shipping. At the heart of the plan, which has seen more than US$2 billion worth of investment, lie the Dragon ships – a fleet of eight highly advanced, sustainable vessels, and the largest, most flexible multi-gas carriers ever built. 2016 has without doubt been a milestone year for INEOS’ grand scheme. In early March the 180 m INEOS Intrepid (part of the Dragon fleet) left the Marcus Hook deepwater terminal near Philadelphia bound for Rafnes in Norway, carrying 27 500 m3 of US shale gas ethane. On 23 March, INEOS confirmed the vessel’s arrival at the Rafnes petrochemical plant. Jim Ratcliffe, INEOS’ Chairman and Founder, stated: “This is a strategically important day for INEOS and Europe. We know that shale gas economics revitalised US manufacturing, and for the first time ever Europe can access this essential energy and raw material source too.” The project includes a connection to the 300 mile Mariner East pipeline from the Marcellus shale in Western Pennsylvania to the Marcus Hook terminal, with new export facilities and storage tanks. To receive the gas, INEOS has built the largest two ethane gas storage tanks in Europe at Rafnes and Grangemouth in Scotland. The company will use the ethane in its two gas crackers at the Rafnes and Grangemouth facilities, both as a fuel and as a feedstock. Fast forward to September, and INEOS, along with Enterprise Products Partners, made another big announcement. The first cargo of ethane to be exported from Enterprise’s Morgan’s Point terminal in Texas was loaded, and the INEOS Intrepid set sail on 1 September en route to the Rafnes facility. The Morgan’s Point ethane export facility, which is the largest of its kind in the world, can load at a rate of 10 000 bbls/hr, provides INEOS with another supply route from the US, and will help to secure the growing international demand for supplies of US ethane from shale, improving diversification and offering a competitive raw material for the global petrochemical industry. Supply for the terminal is sourced from Enterprise’s natural gas liquids fractionation and storage complex in Mont Belvieu, Texas, and transported through a new 18 mile, 24 in. diameter pipeline that was completed in February 2016. The Mont Belvieu complex is also connected to the Marcellus and Utica shale regions through the ATEX pipeline. On 22 September, the US Energy Information Administration (EIA) confirmed that the US Gulf Coast ethane shipment had arrived in Europe. Back to the present, and another major milestone is imminent. At the time of writing, the INEOS Insight is four days away from its scheduled arrival at Grangemouth on 27 September, carrying 27 500 m3 of ethane from US shale fields. This, also, is a first for the UK and signals the beginning of a new era for the domestic industry, marked by more competitive fuel costs. The gas will replace dwindling North Sea supplies, secure essential raw material for Grangemouth and support thousands of manufacturing jobs in Scotland and the UK. This has certainly been a success story so far, and the future of the project looks bright. INEOS could well have found a way to provide Europe's manufacturing industry with a much needed boost, bringing jobs and added security along with it. Long may it continue!

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WORLD NEWS USA | Sulfuric acid alkylation technology

C

B&I, a provider of technology and infrastructure for the energy industry, has been awarded a contract by a major North American refiner for the technology license and engineering design of a new alkylation process unit to be located on the US Gulf Coast. The unit will use CB&I's advanced CDAlky® sulfuric acid alkylation technology to produce 23 000 bpd of alkylate based on 100% C5 olefin

feedstock, and marks CB&I's first US license for the technology. CDAlky is an environmentally friendly alternative process to obtain high octane, premium gasoline with less environmental impact, while also reducing overall maintenance and chemical cost for refineries. CDAlky technology has been commercially proven in international markets since 2013.

UAE | EPC service contract

E

mirates National Oil Company (ENOC) is set to expand its ENOC Processing Company (EPCL) Jebel Ali facility by 50% in a project that comprises three separate packages at an estimated value of over US$1 billion. The expected date for commercial production is 4Q19. The main package will add a new condensate processing train to the existing facility, expanding its capacity to 210 000 bpd, up from its existing current 140 000 bpd. Additional processing units will also be added, including a new liquefied petroleum gas (LPG)/naphtha hydrotreater, an isomerisation unit, kerosene hydrotreater, and a diesel hydrotreater. These units will ensure that the

USA |

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refinery’s fuel products, which include gasoline, jet fuel and diesel, are capable of meeting expanding domestic fuel demand, and will also be used for export purposes. Technip will provide engineering, procurement and construction (EPC) services for the design and construction of the processing unit. The group’s operating centre in Rome will manage the project. The front end engineering design (FEED) was carried out by KBR, while the licensor technology has been provided by UOP, Axens and KT. The subsequent two packages of the project will include the construction of storage tanks and a 31 000 ft2 warehouse.

Malaysia | New

industrial air facility

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inde Malaysia Sdn Bhd, a subsidiary of The Linde Group, has established a joint venture company with Petronas Gas Berhad (PGB) to build an industrial air gas facility that will produce gaseous oxygen and nitrogen to supply Petronas’ world scale refinery and petrochemicals integrated complex (RAPID), within the Pengerang integrated petroleum complex (PIPC). Linde and Petronas’ joint venture company, Pengerang Gas Solution Sdn Bhd (PGS), has also secured long term agreements for the supply of oxygen and nitrogen to the world scale refinery and petrochemical complex, which includes an ethylene oxide/ethylene glycol plant. PGS will build two large air separation units and associated gas facilities resulting in a total investment of €150 million. Linde’s Engineering Division, which will design and construct PGS’ air separation units (ASUs), also concluded the engineering, procurement, construction and commissioning (EPCC) contract with PGS. Linde’s technology in air separation design offers high energy efficiency and operational reliability. The ASUs will be operated by Linde Malaysia and are expected to start operations in 2018.

GTL plant completion

onstruction of ENVIA Energy’s gas to liquids (GTL) plant in Oklahoma City is now complete. Onsite loading of catalyst into the Fischer-Tropsch reactors has been completed by Velocys with support from its partner, Mourik. Pre-commissioning work, including hydrotesting of the lines and vessels, and a rigorous inspection process, is substantially complete. The team has made extensive and detailed preparations; operating manuals and procedures have been completed and robust commissioning and startup

plans are in place. The commissioning plan will ensure that each process system in sequence is working robustly, safely, and within specification. Early commissioning steps have begun. In February 2016, Velocys made available to ENVIA a senior loan of US$9 million, secured on the project. Additional equity ownership units and voting rights were granted to the company as part of the terms of the loan agreement and Velocys sought and gained greater operational management involvement in the project.

Velocys has been supporting the EPC contractor, Ventech, in leading and executing the planning for the commissioning, startup and operation. Additionally, under the secondment agreement with ENVIA, Velocys’ team of GTL operations managers, operators and engineers have been on site since their deployment began in July, providing essential support until the permanent operations team is phased in over a planned period. Drawdown on the loan to ENVIA will begin in 4Q16, with the final drawdown expected in 1Q17. HYDROCARBON

ENGINEERING

5

October 2016

WORLD NEWS IN BRIEF kuwait

GP Strategies Corporation has entered into a multi-year agreement with Kuwait National Petroleum Company (KNPC) for training, documentation and competency development services to support KNPC's Clean Fuels Project. The value of this five year agreement is approximately US$$36 million. KNPC's Clean Fuels Project is a large, strategic capital improvement project intended to upgrade existing refinery infrastructure.

usa

Cheniere Energy Partners has announced that substantial completion of Train 2 of the Sabine Pass liquefaction project in Cameron Parish, Louisiana, was achieved on 15 September 2016. Commissioning has been completed and Cheniere Partners' EPC partner Bechtel Oil, Gas and Chemicals, Inc. is turning over control of Train 2 to Cheniere. This will be carried out in coordination with a previously announced planned outage to improve performance of the flare systems at the project, as well as to perform scheduled maintenance to Train 1 and other facilities.

canada

AltaGas Ltd has opened an integrated midstream complex located in northeast British Columbia approximately 100 km north of Fort St John and 20 km southeast of AltaGas' Blair Creek facility. The facility includes a 198 million ft3/d shallow‑cut natural gas processing facility, natural gas gathering and liquids egress lines and a truck terminal. Commercial operation commenced on 10 July 2016.

denmark

Shell has reached an agreement with Dansk Olieselskab ApS for the sale of A/S Dansk Shell in Denmark, which consists of the 70 000 bpd Fredericia refinery and local trading and supply activities, for approximately US$80 million including working capital. The transaction includes long term agreements for the supply of crude oil and feedstocks to the refinery, including gas to liquids (GTL), and for the offtake of some products from the refinery.

October 2016

6

HYDROCARBON

ENGINEERING

Indonesia |

Natural gas liquefaction project

G

E Oil & Gas has been awarded a contract to supply gas turbine driven compressors for a third natural gas liquefaction train for the Tangguh expansion, having provided the original equipment for Trains 1 and 2 when the plant was first established. The order for the third train equipment has been placed with GE Oil & Gas' local business partner in Indonesia, PT IMECO Inter Sarana. The Tangguh facility in the Papua Barat Province is being expanded to increase LNG production by a further 3.8 million tpy, bringing plant capacity to 11.4 million tpy. The majority of the gas produced by the third liquefaction train will provide energy for the Indonesian domestic market. The components of the turbocompressor strings supplied by GE will be manufactured at GE facilities in

Kuwait |

Sulfur recovery contract

S

chlumberger Reservoir Products FZE has entrusted Siirtec Nigi to design and supply two modular sulfur recovery units, which will be located, respectively, at the Sabriya and East Raudhatain gas treatment plants operated by Kuwait Oil Company. The contracts are part of the KOC Jurassic Production Facility (JPF) project to develop gas fields in the north of Kuwait.

Saudi Arabia |

T

Greenville, South Carolina, USA, and Florence, Italy, where the train will by assembled and load tested. It will be fully digitally enabled, including advanced sensors and monitoring capabilities to allow continuous equipment care to safely maximise availability. The equipment will be ready for shipment to Indonesia in mid‑2018. For the installation of the new LNG train, GE will leverage its local footprint and global engineering capabilities to provide onsite support and develop local talent through training programmes. Tangguh is operated by BP on behalf of its partners MI Berau B.V, CNOOC Muturi Ltd, Nippon Oil Exploration (Berau) Ltd, KG Berau Petroleum Ltd, KG Wiriagar Overseas Ltd, Indonesia Natural Gas Resources Muturi, Inc., and Talisman Wiriagar Overseas Ltd.

The two SRUs will produce 200 tpd of liquid sulfur, each with a recovery of 99.9% and will consist of the following sections: two 100 tpd Claus units, a gas treatment unit based on HCRTM, Siirtec Nigi’s proprietary technology, two degassing units based on Siirtec Nigi technology, an incinerator, two sulfur storage and loading sections and a steam condensate recovery and recycle system.

Mixed feed cracker startup

he Dow Chemical Company has announced that its joint venture in the Middle East, Sadara Chemical Company, has achieved a significant milestone: starting up its mixed feed cracker (MFC). The MFC is one of 26 manufacturing assets being built at the complex in Jubail Industrial City II, the largest of its kind ever built in a single phase. Ethylene and propylene produced by the MFC will be subsequently converted to a wide range of value added plastics and specialty chemicals through Sadara’s other manufacturing units.

The complex has already commissioned two polyethylene (PE) trains, qualifying 25 products to date and shipping PE to nearly 100 customers in more than 25 countries. Sadara remains on schedule for a sequenced startup process, continuing with the polyethylene and polyolefins envelope to maximise timing in the ethylene cycle, followed by ethylene oxide/propylene oxide and their derivatives. The more than 3 million t of performance-focused products will add new value chains to the Kingdom’s vast petroleum reserves, resulting in the diversification of the economy and region.

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WORLD NEWS IN BRIEF

nigeria

Chemex Modular, LLC has reached terms in principle with its long time client and business partner Niger Delta Petroleum Resources Ltd (NDPR) to expand NDPR's existing refining capacity from 1000 bpd of crude to 11 000 bpd. In addition to its existing diesel only (automotive gas oil) production capacity, the expanded refinery will allow NDPR to supply increased diesel capacity, jet fuel (aircraft turbine fuel), gasoline (premium motor spirits), and marine diesel oil.

usa

Honeywell UOP's Callidus Technologies business has inaugurated a new facility for the testing of gas combustion flares at its manufacturing facility in Beggs, Oklahoma. The new flare field was built to develop the next generation of low emission, open flame equipment and flame sensing technologies. Roughly half the size of a football field, the facility includes visual field and infrared cameras to monitor flame condition and quality, and extractive gas plume sampling equipment to validate performance criteria.

uk

ABB has been awarded a contract to support the dismantling of a former refinery in Milford Haven, South Wales. At its close in November 2014, the refinery produced 108 000 bpd. This project started in July 2016 and is planned to be completed in the next two years. ABB Consulting has been appointed as the project construction design and management (CDM) principal designers. The team will work closely with Waste Recycling & Decommissioning Ltd (WRD), the dismantling contractor, to identify and manage the hazards during the execution of the project.

korea

Veolia has delivered an MPPE® water treatment unit for the Ichthys LNG Project. The unit will be used to treat the gas/condensate produced water stream on the project’s floating production storage and offloading facility (FPSO), resulting in a zero harmful discharge to the environment. The ± 450 t MPPE module unit, containing two parallel MPPE units, has been successfully loaded to Korea and placed on the FPSO.

October 2016

8

HYDROCARBON

ENGINEERING

Malaysia |

Ensuring electrical supply

T

hrough a strategic partnership with Prime Sourcing International (PSI), a subsidiary of Petroliam Nasional Berhad (Petronas) group, GE will supply 17 emergency diesel generator (EDG) packages, five transportable switch rooms and the electrical balance system for Petronas’ Pengerang Integrated Complex (PIC) in Johor. Upon completion, PIC’s refinery will be able to produce 300 000 bpd of oil, while the petrochemical plants will produce 7.7 million tpy of various chemical products. Each EDG package will consist of 616 diesel engines provided by GE’s Distributed Power business, which will be

China |

PTA analysis technology

S

ervomex has been selected by Jiaxing Petrochemical Co. Ltd to supply a complete analyser system for the second phase development of its purified terephthalic acid (PTA) production facility in Zhejiang Province. Four years after supplying a system for phase one of the project, Servomex will supply the plant with three SERVOTOUGH Oxy 1900 oxygen and three SERVOTOUGH SpectraExact 2500 toxic gas analysers. These will be integrated into a bespoke analyser house designed and built at Servomex’s systems integration facility at

Australia |

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coupled with the generators and electrical equipment bounded in e-houses. The 616 diesel engines play a critical role in enabling uninterrupted operation to ensure high productivity. These generators will be switched on to provide continuous power if the complex experiences an unexpected power shutdown. The diesel generator set will be integrated into one single package by GE’s Power Conversion business. The integrated package has a more compact design and low component count, meaning less installation costs and higher system reliability. The modular design also brings flexibility to the plant layout.

the company’s Asia Pacific Business Centre in Shanghai. In a typical PTA process a mixture containing p-xylene, ethanoic acid, a catalyst system and compressed air is fed into a reactor, where a two stage oxidation process creates purified terephthalic acid. As a result, precise, accurate and reliable monitoring and control of the oxidation reactions is critical. The high reliability of the existing phase one system was a major factor in Servomex being selected for the next stage of the development.

Automation services contract

hell Australia has chosen Emerson to provide automation maintenance and reliability services for its Prelude floating LNG (FLNG) facility, which will process natural gas collected from subsea wells 475 km (almost 300 miles) offshore from Broome, Western Australia. Since 2010, Emerson has served as main automation contractor on the project, responsible for process control and monitoring technologies that will help ensure safe operation. Under the new multi-year support contract, Emerson experts working both onshore and offshore will provide ongoing reliability and

maintenance services for an even broader range of equipment. Emerson and its local business partner, Western Process Controls, will provide equipment monitoring, diagnostic services, spares support, and maintenance for the facility’s control and safety systems, as well as thousands of instruments and valves. Prelude is under construction in Geoje, South Korea, before moving to Australia to begin operations. The facility is expected to remain on station at least 25 years as Shell and its partners develop gas reserves in the Browse Basin’s Prelude and Concerto fields.

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WORLD NEWS DIARY DATES 2 - 3 November Cyber Security: Oil, Gas & Power Conference London, UK Tel: +44 (0) 203 141 0623 Email: [email protected]

7 - 10 November ADIPEC 2016 Abu Dhabi National Exhibition Centre, UAE Tel: +971 (0)2 6970 529 Email: [email protected]

7 - 10 November Sulphur 2016 Hilton London Metropole, UK Tel: +44 (0)20 7903 2444 Email: [email protected]

14 November ERTC Energy Efficiency Conference Epic Sana Hotel, Lisbon, Portugal Tel: +44 (0)207 384 8013 Email: [email protected]

14 - 16 November ERTC 21st Annual Meeting Epic Sana Hotel, Lisbon, Portugal Tel: +44 (0)207 384 8013 Email: [email protected]

14 - 16 November Global Petrochemicals Summit Epic Sana Hotel, Lisbon, Portugal Tel: +44 (0)207 384 7974 Email: [email protected]

14 - 17 November API Fall Refining and Equipment Standards Meeting Hyatt Regency New Orleans, Louisiana Tel: 202-682-8195 Email: [email protected]

16 - 17 November Tank Storage Germany Hamburg Messe, Germany Tel: +44 (0)20 8843 8800 Email: [email protected]

29 November - 1 December Valve World Expo Messe Düsseldorf, Germany Tel: +49 (0)211 4560-541 Email: [email protected]

October 2016 10 HYDROCARBON ENGINEERING

Douglas-Westwood |

LNG market forecast

T

he LNG industry is undergoing a dramatic transformation, according to the Douglas-Westwood (DW) 'World LNG Market Forecast 2017 - 2021'. The company forecasts global LNG expenditure to total US$284 billion between 2017 and 2021. This represents a 50% growth compared with the preceding five year period. Liquefaction terminals will remain the principal driver of expenditure, with spend in the segment totalling US$192 billon. This will subsequently lead to a 42% increase in liquefaction capacity by the end of the forecast period. Despite challenging times for shipyards, with only four LNG carriers ordered in 2016 (YTD), unit orders are expected to bounce back in the near term. Overall DW expects expenditure on LNG carriers will represent 19% of global expenditure.

IEA |

Global oil outlook

G

lobal oil demand growth is slowing at a faster pace than initially predicted, according to the IEA Oil Market Report (OMR) for September. For 2016, a gain of 1.3 million bpd is expected – a downgrade of 100 000 bpd on the IEA’s previous forecast, due to a more pronounced 3Q16 slowdown. Meanwhile world oil supplies fell by 300 000 bpd in August, dragged lower by non-OPEC. At 96.9 million bpd, global oil output was 0.3 million bpd below a year ago, but near-record OPEC supply just about offset steep non‑OPEC declines. Non-OPEC supply is expected to return to growth in 2017 (+380 000 bpd) following an anticipated 840 000 bpd decline this year.

API |

T

As the final set of Australian LNG projects start operating in 2017, global LNG expenditure will be concentrated in North America. This regional swing in investment will result in the US and Canada accounting for 17% of global liquefaction capacity by 2021 – with Capex totalling US$105 billion. Over the long term, LNG demand will continue to grow, as countries seek to diversify their energy supply. It is expected that delays in committing to new nuclear capacity and limitations of renewable technology in base load applications will support the continued newbuild of combined cycle gas power plants. This, in addition to declining local production in some key consumer nations, will be a compelling driver for continued investment in these capital intensive projects.

OPEC crude production edged up to 33.47 million bpd in August – testing record rates as Middle East producers opened the taps. Overall OPEC supply stood 930 000 bpd above a year ago. The anaemic outlook for refining throughput extends further amid downward revisions to the IEA's 2H16 forecast. Refinery runs in 2016 are set to grow at the lowest rate in a decade. OECD total inventories built by 32.5 million bbls in July to a fresh record of 3111 million bbls. As refinery activities reached a summer peak, crude oil inventories refused to decline until an exceptional storm‑related draw hit the US in late August.

US petroleum demand increases

otal US petroleum deliveries in August 2016 moved up by 1.6% from August 2015 to average 20.1 million bpd. These were the highest August deliveries in nine years, since 2007, according to the American Petroleum Institute (API). Gasoline deliveries in August were the highest August level on record. Total motor

gasoline deliveries moved up 2.2% from August 2015, to average nearly 9.7 million bpd. Crude oil production was down 9.2% from August 2015 to average 8.5 million bpd in August 2016, while total petroleum imports averaged 10.7 million bpd, up 9.7% from the prior year.

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Of all the OPEC countries, Saudi Arabia stands out as a leader in many respects. Nancy Yamaguchi, Contributing Editor, explores the ways in which the Kingdom currently leads the global oil and gas industry, and how it may lead in a life after oil as well.

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T

he Organisation of the Petroleum Exporting Countries (OPEC) are a diverse lot in spite of their goals as a petroleum cartel. But among the members, Saudi Arabia stands out as a leader in many ways: the reserves base, the long history of developing and maintaining oilfields, the highest production levels, the highest levels of exports and the first moves into export refining, amongst many other aspects. OPEC as a cartel can achieve very little without Saudi Arabian participation, and, often, Saudi Arabia acting unilaterally can influence the direction of OPEC and the global oil market. Saudi Arabia has also recently announced leadership in a new direction: life after oil. The Deputy Crown Prince Mohammed bin Salman is leading a sweeping new initiative called Saudi Vision 2030, the purpose of which is to overhaul the economy and reduce reliance on oil. This article focuses on Saudi Arabia’s oil sector, and how its position and expertise have made it into an OPEC leader. Although Saudi Arabia is continually in the news where the oil market is concerned, it has been especially prominent recently.

Saudi Arabia as an OPEC leader Impact on global oil prices Saudi Arabia is one of the few OPEC countries to strategically maintain spare oil production capacity. The country has used this spare capacity to stabilise prices, pumping

HYDROCARBON 13

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October 2016

Figure 1. Monthly spot prices, Brent crude ($/bbl).

Figure 2. Saudi Arabian and other Middle Eastern countries' oil reserves (billion bbls).

Figure 3. Crude production, Saudi Arabia and other OPEC countries (1000 bpd).

additional crude when prices spiked and cutting back when the market was oversupplied. OPEC members historically had been assigned crude oil production allocations to help manage global supply. But the allocations were too difficult to monitor and enforce, and Saudi Arabia sometimes found that it was forced to reduce production in order to compensate for other countries that exceeded their quotas. OPEC gave up on this production allocation approach and began to adopt a target production level for the cartel as a whole. Saudi Arabia still tended to be moderate in its marketing. But, in late 2014, the country backed away from this role, the reason being that it had lost too much market share. Prices promptly collapsed. As Figure 1 shows, Brent crude spot prices had averaged US$111.80/bbl in May 2014. In January 2015, Brent prices had plummeted to US$47.76/bbl. Prices have risen and fallen since then, but they have not come close to their prior levels of over US$100/bbl. Most recently, in late July and early August, crude oil prices had been languishing. West Texas Intermediate (WTI) crude prices were dipping below US$40/bbl. Many of the smaller OPEC producers called for a meeting in September 2016 to discuss measures to stabilise prices. Initially, the market shrugged this off. Market watchers recalled the lead up to the OPEC meeting in Doha, Qatar, in April 2016, when OPEC members intended to discuss a freeze on production levels. Crude oil prices rose in anticipation, but no agreement was made. However, for the meeting in September 2016, Saudi Arabia’s Energy Minister Khalid al-Falih added credibility to the event by announcing that OPEC members and non‑members would meet in September to discuss the market situation, and that they would indeed discuss measures necessary to stabilise prices. The Saudi announcement caused an immediate upward movement in prices. The market is showing remarkable faith in what some are calling ‘verbal intervention’ by Saudi Arabia. Nothing has actually been done yet to change the global oil supply and demand balance, yet prices are rising. OPEC is a grouping of diverse countries, and it is often difficult for the group to act with the unity of a true cartel. But time and again, it has been shown that few measures within the cartel can succeed without Saudi Arabia’s participation. Saudi Arabia truly is a leader within OPEC. It led the way into the current price war, and crude producers are now wondering if Saudi Arabia will lead them away from it.

Middle Eastern oil reserves

Figure 4. Saudi Arabian oil and natural gas production (million tonnes and million tonnes of oil equivalent).

October 2016 14 HYDROCARBON ENGINEERING

Saudi Arabia possesses the largest crude oil reserve base in the Middle East, though there has been a continual debate as to the true extent of the resource base – there is some fluidity between classes of reserves notes as proved, probable, or possible, and Saudi Aramco has not shared specific data on how it has identified or classified reserves. Figure 2 provides BP’s data on Middle Eastern reserves. Saudi Arabian reserves are 267 billion bbls, largest of the top five countries in the Middle East. Iran and Iraq possess massive reserves, but many geologists note that the structures vary, and that Saudi production costs tend to be lower. Saudi Arabia has become well known for managing its oil resources, extending the life of wells and attaining high production rates. As two famous examples, Saudi Aramco had

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In 1988 - 1989, Saudi Arabia revised its reserves up from around 170 billion bbls to 260 billion bbls, without offering specific data. Ever since then, Saudi Arabian proved reserves have not grown much on paper, but each year millions of barrels are produced. The producing fields are being maintained and expanded, and some new wells are added as needed, and somehow the reserves base remains essentially unchanged. According to BP, Saudi Arabia has an oil reserves to production ratio of 60.8 years. Additions to natural gas reserves have come more quickly, and Saudi Arabia’s reserves to production ratio is calculated by BP at 78.2 years.

Figure 5. Saudi Arabian and other OPEC countries' exports (1000 bpd).

Figure 6. Saudi Arabian crude oil exports by destination (1000 bpd).

Figure 7. Evolution of Middle Eastern crude refining capacity (1000 bpd).

the Abqaiq Well #49 drilled in 1949 and the Abqaiq Well #84 drilled in 1961, which have now been producing for over 66 and 54 years, respectively. According to the company, in 2015, these two fields respectively reached cumulative outputs of 144 and 233 million bbls. Many countries produce far more oil than would seem possible from their initial reserve estimates. Reserve growth from existing oilfields, also known as field appreciation, is common as time passes. But how Saudi Arabia has maintained an essentially unchanging reserves base, on paper, remains a bit of a mystery. October 2016 16 HYDROCARBON ENGINEERING

OPEC crude production Saudi Arabia is the largest crude producer within OPEC. Figure 3 is based on OPEC data that combines direct communication to the OPEC Secretariat from OPEC member countries with data from secondary sources. Direct communication production levels are given priority, and secondary sources are used to fill in data gaps. According to OPEC, Saudi crude production fell from 9.763 million bpd in 2012 to 9.637 million bpd in 2013. In contrast, production among other Middle Eastern OPEC countries jumped from 22.043 million bpd in 2012 to 22.8 million bpd in 2013. By 2014, Saudi Arabia made the decision to raise production in order to recapture market share. Saudi Arabian production recovered to 9.713 million bpd in 2014. Production in other Middle Eastern OPEC countries contracted to 22.31 million bpd in 2014. The price war was intended to force high cost producers out of the market. For the most part, these producers were seen as the light tight oil (LTO) producers in US shale plays, and, of course, many of these wells have been shut in. However, the oversupplied market is also proving a challenge for smaller and less efficient OPEC producers. Note that production in other OPEC countries is also presented in the figure, but that their production is stagnant to declining. These countries include Latin American and African OPEC countries that, in many cases, are already producing at capacity, and/or have been experiencing production outages. In 2015, Saudi Arabian crude production increased to 10.193 million bpd. Production in other Middle Eastern OPEC countries jumped to 23.353 million bpd. OPEC has provided its estimates for production in the first seven months of 2016. Saudi Arabia and other Middle Eastern OPEC members are continuing to strive for higher production levels in spite of global oversupply and low oil prices. In July 2016, Saudi Arabian production was estimated to have hit a record of 10.673 million bpd. Production in other Middle Eastern OPEC countries climbed to 25.692 million bpd. Production in other OPEC countries is generally decreasing, falling to 7.076 million bpd in July 2016. The future of Saudi crude production is viewed as being more flexible than production in many other OPEC countries. Investments are being made to maintain production capacity, but there is little motivation to greatly expand capacity, given low prices and the emerging focus on restructuring the economy to shift away from oil. The government has stated that it could raise crude output by over 1 million bpd immediately, if the demand was there. Another 1 million bpd could be brought to the market in six to nine months. Therefore, production could rise to 11.5 million bpd immediately, 12.5 million bpd within six to nine months, and up

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in million tonnes (MT) and million tonnes of oil equivalent (MTOE) for side by side comparison. Natural gas production has grown slowly and steadily, while crude oil production has experienced massive ups and downs in response to price and market conditions. Over the 45 years shown in the chart, however, the amount of natural gas produced has increased at a rate of 8.1%/y, while the amount of crude oil produced has grown at a rate of only 2.0%/y. Saudi Arabia’s work on increasing natural gas development and utilisation has freed up oil for export, fuelled the domestic economy, and helped give birth to a major petrochemical industry.

Crude oil exports Figure 8. Saudi Arabian CDU capacity (1000 bpd and % of Middle East).

Figure 9. OPEC members' refined product exports (1000 bpd).

Figure 10. Middle Eastern oil demand (1000 bpd). to a maximum of 20 million bpd if additional investments were made. For the time being, investments are focusing on expanding the Shaybah oilfield to 1 million bpd from 750 000 bpd. This is intended to maintain production capacity at 12 million bpd. Saudi Aramco has also announced that it will complete the expansion of the Khurais oilfield to 1.5 million bpd in 2018. But no investments are currently being made that would bring Saudi production capacity to its supposed maximum of 20 million bpd. Saudi Arabia is also a major producer of natural gas, as Figure 4 shows. In this figure, oil and natural gas are expressed October 2016 18 HYDROCARBON ENGINEERING

Saudi Arabia is also the single largest exporter of crude oil among OPEC countries, as indicated in Figure 5. Saudi Arabian crude exports declined from 7.571 million bpd in 2013 to 7.154 million bpd in 2014, before increasing slightly to 7.163 million bpd in 2015. Exports also fell from other Middle Eastern OPEC countries, dropping from 8.964 million bpd in 2013 to 8.712 million bpd in 2014. In 2015, however, exports from other Middle Eastern OPEC members rose to 8.982 million bpd, a jump of 270 000 bpd. Exports from OPEC countries in Africa and Latin America grew from 6.523 million bpd in 2013, to 6.738 million bpd in 2014, to 6.874 million bpd in 2015. A number of OPEC countries have pumped more oil as the price has decreased because of budgetary requirements. The need to sell additional barrels has served to weaken prices further, as discussed further in a following section, and the lower prices have reduced overall revenue. Nonetheless, the only way to stick with the plan of regaining market share will be for Saudi Arabia to continue to expand production and exports. Reflecting back on the years surrounding the global economic recession, Saudi Arabia bore a great deal of the necessary reduction in exports. Saudi crude exports had reached a high of 7.322 million bpd in 2008 before falling sharply to 6.268 million bpd the following year, when many key consumers fell into recession. Exports climbed back to 7.218 million bpd in 2011, and 7.566 million bpd in 2012, but they remained roughly flat in 2013 at 7.571 million bpd. Although OPEC data extends only through 2015 for Saudi exports, showing exports of 7.163 million bpd, preliminary data for the first half of 2016 shows that crude exports have increased to an average of approximately 7.52 million bpd. Figure 6 presents a look at Saudi Arabia’s crude exports by destination, annually, from 2011 through 2015, as reported by OPEC. Exports to Latin America, Africa and other Middle Eastern destinations have been flattish or declining. Exports to Europe fell from 991 000 bpd in 2012 to 877 000 bpd in 2015. Crude exports to North America had been growing, until the growth in US production backed out some Saudi crude. Saudi crude exports to North America rose from 1.313 million bpd in 2011 to 1.439 million bpd in 2013. Then, the increase in North American production supplanted some imported crude, and Saudi exports to North America dropped by 268 000 bpd to average 1.191 million bpd in 2015. Although US LTO producers are typically thought of as the key target of the price war, note that the Asia Pacific market remains far and away the chief customer for Saudi exports. Exports rose to 4.586 million bpd in 2013, dipped to 4.417 million bpd in 2014, then recovered to 4.592 million bpd

Figure 11. Middle Eastern primary energy use (million tonnes of oil equivalent).

in 2015, or 64% of total Saudi crude exports for the year. In the Asia Pacific market, and in the European market as well, Saudi Arabia is competing more with Russia and other Middle Eastern producers, such as Iran. Much has been made of a presumed rivalry between Saudi Arabia and Iran. But Saudi Arabia has a much, much larger impact on export markets than Iran does – first because Iran’s top priority this year was to restore crude production to pre-sanctions levels, and second because so much of Iran’s production is going to fuel its own domestic market. Saudi crude exports were 7.163 million bpd in 2015, while Iran’s were 1.081 million bpd. Based on the OPEC data, only 34% of Iranian crude output in 2015 was exported, while more than twice this percentage (70%) of Saudi Arabian crude output was exported. There is no doubt that the international sanctions hurt Iran’s oil industry, and no reason to doubt Iran’s stated resolve to restore production and exports. But Iranian crude exports were 2.583 million bpd in 2010. Clearly, it will take steady work to restore this level of exports and, even then, Iranian exports will remain a fraction of what Saudi Arabia can export.

Refining Saudi Arabia is the site of the largest refining industry in the Middle East, with capacity currently at around 2.9 million bpd. Figure 7 presents BP’s view of how crude distillation capacity has grown in the key Middle Eastern countries. Before the Iranian Revolution, Iran had the highest nameplate crude refining capacity, but capacity collapsed just as Saudi Arabia was launching its programme of refinery expansion. The start of this programme was ill-timed, because it coincided with a period of global refinery overcapacity, but the Saudi Arabians stayed the course. They were the first in the region to enter into export refining at a significant level. Saudi crude distillation capacity more than doubled from 700 000 bpd in 1980 to 1.5 million bpd in 1985, rose to 2 million bpd by 2003, and rose again to approximately 2.9 million bpd at present. Neighbouring countries began to follow suit, launching their own refinery expansion programmes. Middle Eastern crude refining capacity rose from approximately 4.6 million bpd in 1985 to 5.8 million bpd in 1995, 7.3 million bpd in 2005, and 9.3 million bpd in 2015. Although Saudi Arabia remains the single largest refining centre in the Middle East, the ambitious refinery investment programmes in neighbouring countries have created a great October 2016 20 HYDROCARBON ENGINEERING

deal of variability in Saudi Arabia’s relative role in the region. As Figure 8 illustrates, Saudi refining capacity has grown remarkably, but its percentage share of capacity in the region swings up and down significantly. In the early years, Saudi Arabia accounted for only 17% of Middle Eastern capacity. This has gone up and down as new refineries have been commissioned in Saudi Arabia and in other countries in the region. Saudi Arabia’s share of regional refining capacity has ranged upward as high as 38% in 1990, subsided to 26% in 2002 and 2012, and rose again to 31% in 2014 - 2015. Among Middle Eastern OPEC members, Saudi Arabia has the closest ties to the US, including interests in US refining. In 1998, Saudi Aramco and Royal Dutch Shell formed Motiva Enterprises LLC, a 50/50 joint venture in three US Gulf Coast refineries: the 600 000 bpd Port Arthur, Texas, refinery, the 230 000 bpd Convent, Louisiana, refinery, and the 235 000 bpd Norco, Louisiana, refinery. In March 2016, Shell and Saudi Refining, Inc. (SRI), the wholly owned subsidiary of Saudi Aramco, announced that they intended to separate the assets of Motiva. SRI will retain the Motiva name, and it will assume sole ownership of the Port Arthur refinery, which is the single largest refinery in the US. SRI will also retain the right to use the Shell brand name in Texas and other key markets in the south, southeast, and mid-Atlantic markets. Shell will assume sole ownership of the two Louisiana refineries and the Shell branded markets in Florida, Louisiana and the Northeastern region.

Refined product exports Saudi Arabia remains the largest exporter of refined products among OPEC members, though, as Figure 9 illustrates, several other OPEC members are now major exporters as well. In 2015, Saudi Arabia exported 1.155 million bpd of petroleum products, a large jump from 988 000 bpd in 2014. Saudi Arabia was followed by the UAE, with 950 000 bpd of exports, then Kuwait, with 739 000 bpd of exports, Algeria (605 000 bpd), Qatar (521 000 bpd) and Iran (514 000 bpd). In August 2016, Saudi Arabia announced that its combined exports of crude and product in June 2016 had set a new record for the month, a total of 8.83 million bpd.

Oil consumption and total primary energy Saudi Arabia is the largest consumer of petroleum in the Middle East, as shown in Figure 10. According to BP, market demand was approximately 3.895 million bpd in 2015. Iran has the second largest oil market, with a demand of 1.947 million bpd in 2015. Saudi oil use has grown at a rate averaging 4.7%/y over the 50 years reported by the BP data series, and the rate of demand growth has been more rapid in the last two decades – 5.4%/y growth. However, the lion’s share of oil use is considered a ‘productive’ use rather than a purely ‘consumptive’ use. The gasoline market is large, for example, but according to OPEC data, gasoline accounts for only around 17% of demand, while a great deal of diesel, fuel oil, LPG and naphtha are flowing to the power sector, petrochemical plants, and other industries. As Figure 11 indicates, Saudi Arabia is not the largest consumer of commercial primary energy in the Middle East. Iran overtook Saudi Arabia in 1995. Saudi Arabia’s oil market remains larger than Iran’s because a larger portion of Iranian demand is being met by natural gas. BP reported that Iran consumed

After being a leader within OPEC in so many ways, Saudi Arabia is now trying to provide leadership in a new direction: life after oil. Earlier this year, Deputy Crown Prince Mohammed bin Salman presented his plan for a major overhaul of the Saudi Arabian economy. His plan is called ‘Vision for the Kingdom of Saudi Arabia’, or Saudi Vision 2030. Its goal is to reduce the kingdom’s reliance on oil. Being too dependent on oil is difficult for oil exporting countries, as well as for oil importing countries, and most, if not all, OPEC countries are facing budget problems after two years of low prices. Even a relatively wealthy country such as Saudi Arabia is cutting spending and is planning to reduce fuel price subsidies this year. These types of reforms are unpopular, and they can cause huge upheaval in countries where oil provides the majority of government revenue, and where this revenue is used to subsidise fuel and social services. It is often difficult to calculate exactly how important oil is to the OPEC countries, but the US Energy Information Administration (EIA) recently released results of its analysis, and the conclusion was that OPEC net oil export revenues in 2015 had fallen to their lowest level since 2004. The EIA calculates that 2015 net export revenues totalled US$404 billion. This is a 46% drop from US$753 billion earned in 2014, and a 56% drop from the estimated US$921 billion received in 2013. The Saudi Vision 2030 blueprint seeks to raise non-oil government revenues from SAR163 billion currently to SAR1 trillion (US$266.6 billion) by the year 2030, and to transform Saudi Arabia into one of the 15 largest economies in the world. One of the steps will be to sell a small portion (less than 5% is planned) of the Saudi Arabian Oil Company. The valuation has not been completed, but the Deputy Crown Prince places the value at over US$2 trillion, and outside sources estimate the value at closer to US$10 trillion. A sale of even 5% would be the largest IPO ever. The plan envisions the establishment of a huge Sovereign Fund to hold state assets and to help develop other economic enterprises. As discussed in the section on refining, Saudi Arabia now owns the largest refinery in the US, via Saudi Aramco’s subsidiary Saudi Refining, Inc. (SRI). This has opened the door to speculation that it may be a part of a listing of Saudi Aramco’s assets in a public offering. Downstream assets are typically offered well before any upstream assets would be offered. It is unknown how quickly Saudi Aramco will be required to sell assets, but this refinery has the advantage of already being in the US and already conforming to regulations regarding financial reporting and transparency. As noted, Saudi Arabia has been far from transparent about its oil reserves, and the extent of these reserves would be a huge part of the company’s valuation.

Conclusion Saudi Arabia has been a leader within OPEC and in the Middle East in many ways: reserves, production, crude and product exports, refining, petrochemicals, and now, perhaps, life after oil. Its actions have a huge and immediate impact on global oil prices, and the current price war is attributed mainly to Saudi Arabia backing away from its role as market moderator and aggressively pumping oil to regain market share. Just as Saudi Arabia was viewed as the main cause of the current oversupply and low prices, Saudi Arabia is looked to as the possible solution. With so many OPEC countries strapped by the reduction in oil revenues, members have called for a meeting in September to discuss the oversupply and ways to stabilise prices. Initially, this idea had little impact on the market. But when Saudi Arabia joined the discussion and agreed to participate, crude prices began to rise. It is not clear that any concrete production cuts will be made. Prices are strengthening nonetheless, and many international agencies are of the opinion that the supply glut is coming to an end anyway. Most long term forecasts anticipate a balancing of supply and demand, and a return to crude prices of approximately US$50/bbl, by the end of the year. The more cautious analysts warn of another potential price spike, pointing to how the regime of low prices has caused companies around the world to neglect oil exploration and development. Saudi Arabia itself is now at a crossroads, with a plan to use oil revenues and the sale of oil-related assets to reduce dependence on oil. Can Saudi Arabia lead the market away from the current price war and, in the longer term, lead OPEC countries toward a life after oil?

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172.1 million toe of natural gas in 2015, compared to 95.8 million toe in Saudi Arabia. Saudi Arabia has promoted natural gas development and utilisation, but it remains dependent on petroleum for approximately 64% of its primary energy mix.

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