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Tesoro uses more crude oils at Nikiski Refinery formerly used just Cook Inlet, North Slope crude oil; 14 new crude oils from around the world run at facility last year Kristen Nelson Petroleum News
Tesoro’s Nikiski refinery was built to process Cook Inlet crude oil and over the years as Cook Inlet production declined the refinery substituted Alaska North Slope crude oil and at one time was running 75 percent ANS crude, Tesoro’s Lynn Westfall told Alaska legislators at a March 24 presentation.
Crude oil is made up of hundreds of chemical components, and there are hundreds of different crude oils, he said.
Westfall, Tesoro senior vice president and chief economist, said the hundreds of crude oils in the world have varied quality, price and shipping costs and one of the economic decisions a refinery makes is which crude to run.
“ANS has become a very illiquid market,” he said. “Most of the producers of ANS are keeping it within their system and there is not a whole lot available to a nonproducer user of ANS.”
Like Cook Inlet crude, ANS production has declined, dropping from a peak of more than 2 million bpd in the late 1980s to some 700,000 bpd currently.
Westfall said Tesoro was the largest single buyer of ANS on the spot market.
“We saw that as a strategic disadvantage,” he said, because if a refiner is only buying from one supplier, “you have not done your best job in economics.”
Tesoro, an independent refiner, owns no crude oil, Westfall said, but buys all of the crude it uses at its seven refineries in the United States on the open market. In addition to the Kenai Peninsula refinery, Tesoro owns refineries in Mandan, N.D.; Salt Lake City; Anacortes, Wash., north of Seattle; in Martinez, Calif., east of San Francisco; in Wilmington, Calif., south of Los Angeles; and in Kapolei, Hawaii, on the island of Oahu.
About 4 years ago Tesoro reduced the amount of ANS it was running at Nikiski from 75 percent to about 50 percent. Since then the company has run crude oil from Russia, the Far East and the Middle East. “We can choose from any crude in the world that will fit into the refinery,” he said.
But new crude oils are a challenge: you don’t know exactly how that new crude will work, Westfall said.
“Running new crudes is a big deal for refiners” and Nikiski ran some 14 new crude oils last year. He said once you have experience with new crudes you know how they will run, “but it takes a while to go from one crude to another.”
The crude variety Two primary characteristics that vary among crude oils are gravity, how dense the crude is, and sulfur content. Gravity and sulfur content determine the price paid for crude oil.
The less dense a crude oil is, the more valuable it is, because “the more it already contains the desirable molecules we’re looking for,” Westfall said.
What refiners want is light oil and small molecules to make into gasoline. If the crude already contains a lot of small molecules then the refinery doesn’t have to do a lot of chemical work on those molecules, and can have a less sophisticated refinery to process very light crude oil.
“The opposite is also true,” Westfall said. Heavy, low quality crude requires a lot of chemical work, “which means you have to have a more complex refinery.”
Gravity is measured in API (American Petroleum Institute) degrees, with light crude having a gravity above 30 and heavy crude having a gravity below 30, he said.
Sulfur content is the other prime determinant of crude quality because “sulfur is actually a poison to the catalyst that we use in the refinery process,” Westfall said, deactivating the catalyst.
“The more sulfur there is, the more work we have to do to take sulfur out, so the cheaper that crude needs to be,” he said.
Crude oils are split between sweet crudes, less than 1 percent sulfur by weight, and sour crudes, more than 1 percent sulfur.
Westfall said that designation goes back to the days when kerosene from oil competed with kerosene from whale oil. The whale oil kerosene had a sweet taste if a drop was placed on the tongue; kerosene from crude oil had a sour taste because of the sulfur it contained.
Marker crudes fading Historically marker crudes have traded in large volume and sold to a lot of different refineries, providing a good idea of what the market price is for that crude, Westfall said.
West Texas Intermediate, Brent (North Sea crude), Alaska North Slope and Maya from Mexico range in gravity from almost 40 API for WTI to 22 for Maya, and from a sulfur content of 0.24 for WTC to 3.33 for Maya by weight percent.
Westfall’s example used prices from 2005, ranging from $56.43 per barrel to $40.40 per barrel.
Westfall said he was using 2005 prices, “because that was the last year that these marker crudes really made a lot of sense.”
The production of these crudes has fallen so much that they’re almost specialty crudes, he said.
He said those crude oils aren’t sold enough in the market today so “... there aren’t enough deals so that you can price it day-by-day to use that as the basis for pricing other crudes.”
And no satisfactory replacement method has been found, he said.
Issues with Nymex The predominant current pricing method is based on the New York Mercantile Exchange where futures contracts for crude are sold, but, Westfall said, between Nymex and the market in Europe, “They sell about 80 times the amount of crude that’s run in the world.”
So only about one contract in 80 is for refiners, people who actually run crude, he said, with the rest of the contracts used as financial instruments by hedgers and commodity funds.
Crude contracts are being bought the way people buy gold, he said: “They’re not buying it to take possession of the gold; they’re taking it as a hedge against inflation or a hedge against currency losses.”
So pricing based on the Nymex doesn’t reflect the value of crude oil to the refiner, Westfall said.
It’s a transition out of the old way of pricing crudes “and we really haven’t found a good substitute at this point in time.”
Other price factors Crude oil can contain other things that affect the price, such as nickel and vanadium. The price drops for crudes which contain those components because the refiner has to remove them.
Crude oil can also contain a lot of acid, Westfall said, which requires special metallurgy in the refinery so the acid in the crude doesn’t “eat your refinery up in a short matter of time.” Because of the cost to put in specialty steel to run such crude, the price will be lower to compensate the refiner for those extra costs.
And there isn’t as big a market for high-acid crude as for normal crude, he said.
Ranges of products Since there are hundreds of chemical components in crude oil, most of the products refineries make are not pure components, Westfall said.
“What we make are ranges of products.”
A basic refinery process distills products out by boiling them: “Gasoline in a refinery is everything that boils between about 100 degrees and 400 degrees (Fahrenheit). It’s not a thing — it’s a series of components,” Westfall said.
And there is overlap: Jet fuel boils between about 300 degrees and 550 degrees, while diesel is “that combination of components that boil between about 350 and 650.”
Refineries are different Each refinery is different based on what units it has to do chemical work and how big those units are, Westfall said.
“And that’s determined by what crude you want to run and what products you want to make out of that crude.”
There are three types of refineries, he said.
“Topping plants are plants that really don’t do chemical work on crudes; they just separate out molecules that they’re looking for, so they’re very simple plants.
“Most of the refineries here in Alaska are topping plants,” he said.
Cracking plants are the next type: These are refineries built to make gasoline. “They’re built to take very heavy molecules and crack them apart into the smaller molecules that fit into gasoline.”
Coking plants are the most complex: Westfall said those refineries “can take the worst quality of crudes and turn them into the highest quality products.”
Westfall said he believes the only refinery in Alaska with a cracking unit is the Tesoro Nikiski plant; there are no coking plants in Alaska.
Distillation process There are three refinery processes, no matter how many units you have, Westfall said: distillation, conversation and desulfurization.
“Distillation is simply the separation of molecules because they have different boiling points,” he said, and involves no chemical work.
Substances are heated until they reach the boiling point of certain compounds which vaporize out; the vapors are condensed and separated.
The big towers at refineries are distillation towers, he said.
Because of the overlap in the boiling point of products, part of what comes off can go, for example, to either gasoline or jet fuel; there is another overlap between jet fuel and diesel.
It’s one of the first economic decisions a refiner makes, he said: how much of what can go in either place gets put into one place?
Chemical conversion Conversion is the second thing refineries do and that “is where we start changing the chemical nature of the components that we take out of crude to get the products that we want,” Westfall said.
Refineries generally use catalysts because “we want to target the reaction very specifically to make one thing and not everything.”
Conversion is almost exclusively directed at producing gasoline, he said. About 80 percent of all the diesel and jet fuel that’s produced is simply separated from crude, without any chemical work.
Gasoline generally has between three and eight carbon atoms, so components that are heavier than that are broken up chemically to make them lighter; components that are lighter than those needed for gasoline are combined. The other thing that conversion units do is improve octane.
A coker takes heavy components and uses high pressure and high temperature to break up the heaviest part of the crude.
The next heaviest molecules are broken up in a hydrocracker, using high pressure and catalysts.
FCC, fluidized catalytic cracking, breaks up the next heaviest component.
Alkylation units bond together components that are too light for gasoline, using sulfuric or hydrofluoric acid.
Reformers and Isomerization units are used to improve the octane of naturally occurring molecules—making rings or branched molecules out of straight chains.
The blended product But there is no one unit in a refinery that produces gasoline, Westfall said, because gasoline is a blended product with from three to eight components.
And it’s all the same.
“As it comes out of a refinery gasoline is gasoline,” he said. Tesoro makes the same gasoline that Exxon makes and the same gasoline that Chevron makes.
“The industry really has to work that way because there is ... no company that has a refinery in every location where they have retail,” Westfall said, so gasoline is traded to meet the need.
Where the product is differentiated is in the additive package, one quart per 8,000 gallons. Additive packages are required by law, “so it’s a matter of is theirs that much better than anybody else.”
Refining is expensive Desulfurization, removal of sulfur, is done with hydrogen.
At 600 pounds of pressure you can remove sulfur down to about 500 parts per million, Westfall said, but to go all the way down to 5 parts per million it takes 1,800 pounds per square inch of pressure, which requires an expensive unit because of the pressure.
In the last 10 years the industry has spent in the neighborhood of $40 billion for units to remove sulfur as regulations have required lowering the sulfur content of gasoline, he said.
It’s an example of why refineries are so expensive and why no new refinery has been built in the United States for a long time.
As for the cost to build from scratch, Kuwait wanted to build a new refinery about two years ago, a world-class refinery — about four times the size of Tesoro’s Alaska refinery, Westfall said.
Kuwait put the project out to bid, expecting bids at about $8 billion, but the bids came back at about $12 billion.
Not liking those results, they went out for another round of bids.
But when those bids came back at $16 billion the project was cancelled.
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