Sanctions against Iran, uprisings in oil producing nations – headlines often focus on what’s happening with global oil supply.
But they tend to overlook refining, the link between crude oil and consumers that is critical to assessing the strategic effects of those events.
Crude oil won’t run cars, fly airplanes or spin electricity turbines. Oil is useless to modern society until it’s refined into the products consumers need, like gasoline, diesel, jet fuel, and home heating oil. But refining capabilities vary almost as widely as the qualities of crude oil and make a crucial difference in how the world oil markets weather a supply disruption.
Oil varies greatly in the proportions of usable hydrocarbons and associated elements that come out of the ground as “crude,” ranging from the light sweet varieties like those from US shales to heavy bitumens like those from Canadian oil sands. The most important characteristics are the proportions between lighter and heavier hydrocarbons and the percentage of sulfur.
“Light sweet” crude has more of the smaller molecules in the oil range. It can be refined into a larger proportion of the lighter distillates – most importantly gasoline – and middle distillates – including aviation (kerosene) and diesel fuel – with relatively little processing. It is lower in sulfur, and so can meet increasingly stringent national environmental restrictions without additional processing.
Crudes with more of the heavier molecules and more sulfur need more complex processing to refine into higher-value products. So “heavy, sour” crudes command a lower price worldwide, costing refiners less than light sweet varieties.
Refining starts with simple distillation, the basic process that separates crude by molecular weight into light, middle and heavy distillates. All refining produces a suite of products, but runs are engineered to maximize desired products like gasoline or jet fuel.
Everyone is getting more complex,” – Stewart
Modern refining technology adds processes to “crack” the heavy distillates and create more of the profitable lighter fuels from every barrel, leaving refiners with less of the literal “bottom of the barrel” residuals on which they sometimes make no money at all.
“Cracking” and “coking” technologies can change the proportion of a barrel of heavy crude turned into high-value products like gasoline, diesel and aviation fuel from as little as 20% to around 80%, according to Natural Resources Canada.
But all that technology is expensive – in the hundreds of millions or billions of dollars to install – and more costly to operate.
Crucially, refinery processing lines are set up to handle an expected range of characteristics, which are determined by the anticipated supply and the desired output products. Most refiners can’t simply start feeding in crudes with significantly different qualities when a supply disruption occurs.
That fact made all the difference when civil war cut off Libya’s crude supply in 2011. Libya produces less than 2% of the world’s crude, but it’s a very low-sulfur crude that European refineries depended on to produce transportation fuels meeting tough European environmental standards.
Saudi Arabia could produce more barrels, but Saudi crude is heavier and higher sulfur. European refiners had not added technology needed and couldn’t simply substitute the Saudi crude for their Libyan feedstock.
That meant the Libyan crisis threatened fuel shortages in Europe, allayed when the US released light sweet crude from its strategic reserves.
Refining capabilities are shifting globally as capacity is being added in the growing demand centers of Asia. Older refineries that can’t compete are being shut down, mainly in Europe and North America, altering the strategic outlook.
“Everyone is getting more complex,” said Peter Stewart, Chief Energy Analyst for Interfax. While older refineries in Africa, Russia, China, and even Europe still don’t go much beyond simpler distillation processes, refiners building new want to be able to utilize a range of crudes.
That’s especially important for emerging economies with fast-growing fuel thirsts, like China and India, that have become dependent on world crude markets. So refineries like India’s giant Jamnagar have multiple capabilities, and can essentially take “whatever you want to throw in,” said Stewart.
Refineries in the US Gulf region, where more than a quarter of national capacity is located, have largely been upgraded to handle heavier crudes. In the last two decades, when upgrade decisions were being made in the US and worldwide, oil companies assumed that US production would continue to decline and that most new discoveries overseas would continue to be heavier.
That thinking justified adding cracking and coking capacity at refineries dependent on imported crude.
But hydraulic fracturing technology so far is freeing light sweet crude from US shales. In Saudi Arabia, Stewart said, the newest production is proving lighter than expected as well. Discoveries like these could portend future economic difficulties for refiners trying to amortize those costly upgrades.
This is the first of a two-part Breaking Energy series that covers the changing nature of the crude oil refining business.