2.3 Analysis of cost structure and functions in oil transport and refining

2.3.1. Oil transport Oil-producing regions are in most cases a long way from the industrialized countries, The various methods of transport which are the biggest consumers of oil. It is enough just to glance at a map In 2003, nearly 2.3 billion tonnes of crude oil showing the locations of the world’s and refined products were transported over great oil-producing and oil-consuming regions to distances. Crude oil accounted for 78% appreciate that massive quantities of of this tonnage. And this enormous oil have to be transported over enormous volume is constantly increasing (ϩ19% since distances (Fig. 1). 1996, ϩ7% since 2000) as world oil consumption rises. In short, some half of all the

465 840 425 755 320 170 215 810 485 935 985 EUROPE FORMER USSR 210 40 UNITED STATES - CANADA 80 730 60 OTHER ASIA 30 10 MIDDLE 170 280 25 90 260 OCEANIA 50 EAST 200 110 20 150 120 75 20 CHINA 200 375 165 330 10 75 15 1015 30 10 10 100 210 30 35 AFRICA120 130 560 120 220 60 155 400 295 10 35 515

LATIN AMERICA 50

15 15 30 185 data in million tons

production refining crude and 2002 crude and capacity (as of consumption petroleum LNG 1 January, 2003) 2002 product flow

Fig. 1. Petroleum worldwide in 2002.

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Table 1. Oil imports and exports (Oil trade 2002 in million tonnes)

To Rest Latin Other USA Canada Europe Africa China Japan of the Total America Asia From World

USA – 4,9 15,9 10,7 0,5 1,1 4,0 5,2 1,0 43,3

Canada 95,5 – 0,2 0,5 – – 0,2 0,1 0,2 96,7

Latin America 195,4 6,4 8,4 23,2 0,6 0,9 0,9 7,6 4,7 248,1

Western Europe 57,0 24,6 3,5 – 10,0 3,6 0,7 5,4 2,3 107,1

CIS 9,8 – 7,4 214,6 0,5 8,1 1,2 10,4 2,5 254,5

Middle East 114,7 6,9 14,5 161,1 36,9 38,9 195,4 324,1 3,2 895,7

North Africa 13,6 5,1 6,2 87,3 4,0 0,3 3,6 5,7 – 125,8

West. Africa 55,5 1,0 9,9 35,2 2,7 9,5 3,8 38,3 – 155,9

Other Africa – – – – – 6,4 1,5 0,8 – 8,7

Australasia 2,9 – – – – 1,6 4,4 11,6 0,3 20,8

China 1,3 – 0,5 0,3 – – 4,1 10,3 – 16,5

Japan 0,3 – – 0,1 – 1,6 – 2,2 0,6 4,8

Other Asia Pacific 8,3 0,1 – 4,5 0,3 28,4 28,3 32,0 – 101,9

Unidentified 6,7 2,5 – 49,9 – – 2,4 1,3 – 61,8

Total 561,0 50,5 66,5 587,4 55,5 100,4 250,5 455,0 14,8 2151,6*

* 10 million tonnes non unidentified.

crude oil produced in the world is transported a Oil is a liquid pollutant and its vapours are very long way (Table 1). combustible, so it presents certain transport An examination of maritime transport of problems. Sea transport of oil requires special hydrocarbons as a proportion of total world ships. Oil pipelines can eliminate the need for sea maritime trade reveals that oil represents a transport, but the amount of investment they significant, though decreasing, share of all trade. require and the permanence of their installation Oil currently accounts for 30% of total mean that they are only justifiable for large, tonne/miles covered (Fig. 2). long-term volumes.

Fig. 2. World marine 24,000 trade. 22,000 20,000 all goods 18,000 16,000 14,000 12,000 10,000 Gt/miles crude oil 8,000 6,000 4,000 petroleum products 2,000 0 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 year

86 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

Each form of transport (tanker and pipeline) pipelines at its disposal to pump crude from has its own advantages and drawbacks. Safety and Mediterranean ports: the South European Pipeline the environment are of increasing importance (Fos-Strasbourg-Germany), the TAL (Transalpine nowadays and are among the principal criteria by Line, Trieste-Austria-Bavaria) and the CEL which such pros and cons are measured. Pipeline (Central European Line, Genoa-Southern transport is clearly safer, even though pipelines Germany). can rupture or be sabotaged. Much progress has Most countries where oil consumption has been made in sea-transport safety in recent years; reached a certain level have developed their own despite such progress, however, the fact remains refining industries, which are capable of meeting that it takes only one tanker accident and the most of their needs. Therefore, and despite the resulting pollution to give an extremely negative existence of huge export refineries in countries image of the sea transport of hydrocarbons. such as Saudi Arabia and Venezuela, the transport Fortunately, such accidents are extremely rare in of refined products over considerable distances is proportion to the volume of traffic (Table 2). relatively insignificant in comparison with the In any event, most buyers of crude oil have no transport of crude. However, because of regional choice with regard to the mode of transport, imbalances between supply and demand for which is determined at the outset by the existing refined products (disparities which are becoming supply infrastructure. Sea transport is the least more acute with rising imports by the United costly, most flexible and most common method States and China), the transport of refined (and in many cases it is the only option). Oil products is still significant: in 2003, transport of produced in the North Sea, in most African refined products (requiring transport ships countries and in the majority of Middle Eastern smaller than the tankers used for carrying crude) states is transported by sea. represented 22%, or nearly 500 million tonnes, of In certain cases, however, the buyer does have total oil transport. a choice between sea-only transport and a Refined products are generally transported combination of sea and pipeline. For example, over shorter distances, but the dispersal of end Saudi crude can be transported to Europe either consumers and the diversity of the products via tankers circumnavigating Africa by way of the transported pose specific problems: for example, Cape Point or via Egypt’s Sumed pipeline, which the holds of transport ships must be cleaned links the Red Sea with the Mediterranean. between each product batch, and ships or Another major exporter of crude, Russia, uses pipelines specially built for carrying refined various pipeline/sea combinations, including products cannot always be used. Furthermore, pipeline plus sea transport from the Baltic and pipelines carrying refined products are relatively North seas, and pipeline only through Eastern and rare: they are largely confined to the US and, to a Central Europe to the former East German lesser extent, Europe. Even markets whose Republic (Deutsch Demokratische Republik, significance in terms of unit consumption is tiny DDR) via the Druzhba pipeline. require refined products in all their different As a further example, a refinery in the forms: solid (bitumen), liquid (fuel oils, gasoline Stuttgart region in southern Germany has three fuels) and gas (Liquified Petroleum Gas, LPG).

Table 2. Tankers versus pipelines

Tankers Pipelines

Major Investments Limited (geopolitical implications) Operating Costs Planned, negotiable Low Flexibility Very flexible Not adaptable Volumes handled 100-400 kt/cargo 10 to 100 Mt/year Implementation time 2-3 years Long to very long Upgrading in progress Security/Environment Very good (impacts on image)

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Each of these products has to conform to certain steadily, reaching some 300 million dwt in 2004. standards and specifications, and the risk of Requirements in terms of transport capacity contamination across product lines means that fluctuate in line with world oil demand, while transporting or storing them in the same the emergence of non-OPEC (the Organization receptacle is out of the question. of the Petroleum Exporting Countries) Aside from ship and pipeline, the most production in regions nearer to consumption commonly used methods for transporting refined markets has also helped to dampen capacity products are barges, rail tankers and tanker requirements. Slowdown in demand can force trucks, the latter two being the only methods shipowners to mothball many of their larger capable of bringing products directly to the end tankers, something that happened in the early consumer 1980s when charter rates were so low that shipowners were unable to operate their fleets Sea transport profitably. Economic growth since 2000, in Asia especially, has sparked renewed chartering The various types of ship used demand. Three principal types of ship are used for Most (two-thirds) of the world tanker fleet is carrying oil, classified according to their dwt independently owned, while the other third (deadweight tonnage), i.e. the amount of cargo belongs to the oil companies themselves; of these, that the ship can carry in addition to its own fuel ownership by national companies is growing at and supplies. To these three principal categories the expense of the majors. The fleet mainly can be added the largest of all supertankers, the comprises large tankers and is currently Ultra-Large Crude Carriers (ULCCs), as well as undergoing refurbishment in the wake of new Panamax-class carriers: safety regulations. • Ultra-Large Crude Carriers (ULCCs) have a dwt of between 325,000 and 600,000. Very The different types of shipping charter few of these giant ships are currently active. Three types of tanker charter exist: • Very Large Crude Carriers (VLCCs), with a • Bareboat charters: the tanker is placed at the dwt of over 160,000, are used on routes from disposal of the charterer for a specific period the Persian Gulf westwards to the Caribbean, of time. The tanker is equipped by the US and Europe, and eastwards to Southeast charterer, which also pays its operating costs. Asia (Japan, Korea and Singapore). The The charter hire rate (paid monthly) reflects largest VLCC tankers are used for supplying the capital costs of the tanker. Bareboat Europe and the US. When empty, these ships charters are therefore similar to leasing can negotiate the Suez Canal. agreements, and generally incorporate a • Suezmax, with a dwt of between 100,000 and purchase option. 160,000, is specially designed to be able to • Time charters: the tanker is placed at the use the Suez Canal when loaded. Suezmax disposal of the charterer for a specific period vessels are also used for transporting crude of time (anything from six months to several from West Africa to the Caribbean, the US and years) and operating costs are borne by the Europe. ship-owner. • Aframax ships, which have a dwt of between • Spot or voyage charters: the shipowner agrees to 80,000 and 100,000, are used in regional traffic transport cargo from one designated port to (North Sea, Mediterranean, Caribbean/US). another and applies a cargo tariff per tonne of This is the largest carrier-class allowed to enter cargo transported, with all costs included. Spot American ports when fully loaded. charters can cover consecutive stages on the • Panamax carriers are used on certain routes same itinerary. Although they were practically only. Their size (60,000 dwt or less) means unheard-of in the early 1970s, these are now the that they can use the Panama Canal (serving most frequent form of charter agreement. such routes as California/the Gulf of Mexico or the Pacific coast of South America/the US The cost of sea transport eastern seaboard). For shipowners, costs per tonne transported The world oil-tanker fleet-capacity peaked at are a key factor, as owners are unable to operate about 330 million dwt in the late 1970s before for long under a certain threshold without having falling to under 250 million dwt with the oil to lay up part of their fleet. These costs comprise crisis of 1986. Since then, it has been rising two components: depreciation of the tankers

88 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

(which is connected to investment costs), and Thus the consumption of fuel oil, which can operating costs, including port duties and fuel. be expressed as a function of speed3, rises steeply Depreciation of tankers. The price of tankers as speed increases, while for most other costs the depends partly on construction costs and partly on greater the speed, the lower the cost per tonne market equilibrium. While the life expectancy of (and the quicker the voyage). Bunker prices per a tanker is theoretically quite long, in many tonne depend on the refuelling port and on countries the legal depreciation period is eight provisioning agreements. years. Furthermore, tanker life expectancy is Port and canal duties are fixed costs charged reduced as a result of rapid obsolescence due to in proportion to tonnage. Port duties vary greatly advances in technology and tighter safety from one port to another. The principal canals regulations. used by oil tankers are the Suez, the Panama and Construction costs fell in the 1960s, mainly the Kiel (which serves the Baltic Sea market). due to the trend set by Japanese shipyards: Canal authorities publish tariffs of their reduced steel consumption, productivity drives applicable transit duties at regular intervals leading to faster construction times, new (usually once per year). technology and more. But while progress in this Personnel costs have significantly decreased area has continued, costs have since risen in recent years due to reductions in crew size, markedly as a result of ever-stricter construction but crews cannot be cut much further for regulations. reasons of safety (and the bigger the tanker, the For a 280,000 dwt double-hulled VLCC, the higher the level of safety required). Tankers 2005 order price is in the region of $300 per dwt. also have to undergo port maintenance, the Construction costs per dwt decrease with size up costs of which can rise steeply if the tanker’s to 200,000 dwt; a tanker of just 80,000 dwt, for crew is too small to carry out part of the example, costs about $500 per dwt. Hull costs rise maintenance work while the tanker is at sea. at a rate that is less than proportional to tonnage. Tankers of over 100,000 dwt have crews of The cost of propulsion gear is proportional to about 30. Total personnel costs also depend on power, which is a function of the square root of the nationality of the crew and the country in tonnage. Beyond 200,000 dwt, costs per which the tanker is registered: social security deadweight tonne vary little as there are few dry charges, for instance, are much higher for docks big enough to accommodate tankers of this European- and North American-registered size, which also need a double propulsion system. tankers than for open-registry tankers. Since the oil fleet occasionally finds itself in Then there are demurrage charges, or periods of overcapacity, the market for penalties for exceeding time allowances; in second-hand tankers is very active. Prices and certain cases, these can be applied on top of port write-downs relative to new tankers are expressed duties in oil terminals that are particularly in dollars per dwt; of course, they also depend on congested and which consequently assign time the age and condition of the tanker, as well as on limits for tankers to load and unload. These costs, market conditions. stated in dollars per day in excess of the The lowest price limit on the second-hand contractual limit, can be significant. market is the scrapping price, at which ships are It is difficult to give precise indications of sold for scrap to special breaking yards. transport costs per deadweight tonne as these Operating costs. Most operating costs remain clearly depend on a large number of factors. We the same regardless of the voyage; of these, can, however, assign approximate shares to the tanker-depreciation and capital costs, repair, principal operating cost items for tankers (Fig. 3). maintenance and inspection duties can all be We can also compare daily operating costs for directly charged to the tanker, while general different types of tanker and trace recent cost company costs are harder to break down. trends; costs in the early years of the present Other operating-cost components vary, decade ranged from $6,000 per day for a ‘large’ depending on the voyage: salaries and associated (80,000 dwt) tanker carrying refined products, to social security expenses as well as supply and over $11,000 per day for a VLCC. provision costs all rise as the length of the voyage increases; port dues, canal charges, and piloting and The price of sea transport tug duties depend on the route; and consumption of This is the price of transport as paid by the bunkers (fuel oil, diesel fuel) and lubricants buyer, a rate generally negotiated between the depends on distance, tonnage and speed. shipowner and the charterer. As in every

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insurance The published Worldscale rate (flat, or level administration 100) represents typical transport costs for a given supply and stocks voyage (or route). It is expressed in dollars per repairs and maintenance tonne for a ship with a capacity of 75,000 tonnes manpower sailing fully loaded at a speed of 14 knots, making a return trip between the designated port 37% 13% 14% 25% 11% of loading and the port of unloading, in standard conditions of size, speed, consumption and time spent in ports of call. If the shipowner and charterer negotiate a Fig. 3. Breakdown of VLCC price at Worldscale 85, this means that operating costs. transport costs for the charterer are 85% of the flat rate. For example, the flat rate for a voyage between Quoin Island and Augusta via the market, oil transport prices vary in accordance Cape was set at $18.24 dollars per metric tonne with demand and supply and can fluctuate for 2003; so, in the instance cited, the cost greatly, occasionally diverging significantly would be $15.50 per metric tonne. The flat rate from actual costs. The setting of tariffs for for the same voyage via Suez was only $7.60 voyage charters operates according to a dollars, but Suez Canal charges would have free-market model whereby the law of supply had to be factored in. Transport prices and demand enjoys carte blanche. Deals are expressed as a Worldscale percentage struck by brokers, who are based in London and obviously vary greatly depending on the size of New York for the most part. the ship used, and therefore on the amount of Of all the different indices used for setting cargo transported. For VLCC-class tankers, spot and time-charter prices, the most widely rates usually remained well below Worldscale used is the Worldscale index; this is reviewed 100 until the early years of the present decade; regularly (usually every 1 January) by the by the end of 2004, however, they had reached London-based Worldscale Association, in 200%. Rates for small tankers carrying refined accordance with changes in certain costs, such products can be as high as 300 or 400% of as bunkers and port dues. This index gives Worldscale flat. nominal transport prices for every possible Spot-chartering rates are particularly combination (or route) between port of loading volatile since they are extremely sensitive to and port of unloading. fluctuations in supply and demand (Fig. 4).

Fig. 4. Spot rates. 450

400 Mediterranean-North-West Europe 350 25,000-30,000 dwt (products)

300 Arabian Gulf-East 70,000-100,000 dwt 250

200 Worldscale

150

100

50 Arabian Gulf-Europe 200,000-300,000 dwt 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 year

90 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

They are susceptible to seasonal variations and crew, maintenance and repairs, oil and supplies, are also influenced by the occurrence (or insurance and management costs anticipation) of other phenomena: war, ϩ political tensions, changes in crude prices, and new regulations. Time chartering rates are less volatile. economic depreciation ϩ Chartering transactions are performed by margin brokers, whose duties include an obligation to ϭ ensure transparency in dealings. Average DNR ($/d) chartering prices, expressed as percentages of the (freight charge given by the spot market-minus variable costs ) Worldscale index, are regularly published by various bodies. When entering into a chartering agreement, Fig. 5. DNR: the shipowner’s shipowners have to weigh the freight rate against margin. their operating and capital costs, which are directly proportional to the time elapsed and can therefore be expressed in dollars per day; they are Transport by pipeline measured against the Daily Net Return (DNR), which expresses the daily margin against variable Overview costs (Fig. 5). The use of pipelines for carrying hydrocarbons In case of spot chartering, variable costs refer in liquid and gas form was first adopted on a to bunker charges, port dues and so on, which are, significant scale in the US and is now common keep in mind, paid by the ship-owner. worldwide. The total length of the global trunkline DNR can vary considerably for the same network (i.e. pipelines not including gathering chartering rate, depending not only on bunker lines, storage systems and final distribution) is costs but also on the age of the ship, as a new ship well in excess of 1.2 million km. Gas pipelines consumes much less fuel than an old one. If a account for over half of this figure. chartering agreement gives a DNR higher than Among the many active pipelines worldwide, the sum of daily costs (operating costs plus the foremost include: capital costs), the difference represents the • In the US, the Trans-Alaska crude-oil pipeline shipowner’s profit. linking the Prudhoe Bay oil fields to the Pacific seaboard, and the Capline, which runs Transport prices and costs roughly parallel with the eastern bank of the Margins as defined above have frequently Mississippi. been negative since the 1990s, which means • Also in the US, three major US pipelines transport costs were usually higher than transport carrying refined products: the Plantation, the selling prices. While costs are relatively stable, Colonial and the Explorer. selling prices depend on market conditions and • In Canada, three major Canadian crude-oil fluctuate considerably. pipelines: the Interprovincial, linking The market itself is equally volatile and Edmonton to Toronto, the Mackenzie Valley has changed considerably since the beginning and the Kitimat-Edmonton. of the present decade; it is now • In Eastern Europe, the Russian pipeline network, predominantly a seller’s market, with many operated by Transneft, a state-owned company tankers laid up as a result of the introduction with a monopoly on the pipeline transport of of drastic safety regulations, fewer new crude oil. Via its subsidiary Transnefteproduct, it tankers and increased traffic; furthermore, also has a monopoly on the piping of refined average charter rates are often higher than products. Crude-oil pipelines link the Urals to those employed in the 1990s. With a strong Central and Eastern Europe (the Druzhba increase in demand for oil and a consequent system), to Novorossijsk on the Black Sea and to increase in sea traffic, rates in 2004 were Primorsk on the Baltic. The Ventspils terminal in higher than they had been for many years: the Latvia, formerly the mouth of a major pipeline, is average rate for VLCCs was Worldscale 150. no longer used by Transneft. In the same region The introduction of new tankers in 2005 has we should also mention the Eastern eased demand on the tanker fleet and thus Europe-Russia network, linking the Siberian reduced rates. refineries with Angarsk, and the Caspian

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Petroleum Consortium (CPC) pipeline, which So what are the principal technical and links Kazakhstan to Novorossijsk via Russia. operational constraints in pipeline transport? There are very few refined-product pipelines in In the case of crude oil, the principal this region. Among the most significant of this constraints are those imposed upon the type are the Samara-Briansk-Leninvaros transporter by the refiner: (Hungary) pipeline and another serving the Baltic Preservation of the quality of the crude during (the Transnefteproduct system). transport. The risk of contamination, although • In Western Europe, major crude pipelines lower for crude than for refined products, is include the north-south system linking the nevertheless real. Crude oils of different qualities North Sea ports with Germany and Belgium, can become mixed during storage at the terminal and the south-north system, which links the prior to pumping, while the risk of contamination Mediterranean ports to Central Europe (South is also present in the pipeline itself between European Pipeline, TAL and CEL). Western successive batches of crude. This problem does Europe also has some major refined-product not arise when the entire storage and pipeline pipelines, such as the Trapil system in France, system handles only one class of crude, which in the Mediterranean-Rhone pipeline, the fact is often already a blend of specific quality; Rotterdam-Venlo-Ludwigshafen pipeline and this is the case, for example, with the Urals Blend the Spanish network. that is pumped from Russia via the Druzhba • In the Middle East, major crude oil pipelines pipeline. include the Tapline, which links Abqaiq and Preservation of quantities. This requires Sidon (partially closed), the Kirkuk-Tripoli accurate and reliable metering methods at the pipeline (also closed), the Sumed pipeline upstream terminal, the destination refinery and (which enables the transport of oil from the the downstream terminals. Maximum admissible Gulf states to the Mediterranean without using loss rates are contractually established. Barring the Suez Canal) and the Abqaiq-Yanbu major incidents on the pipeline, most losses occur pipeline in Saudi Arabia. Most of the oil during storage. pipelines from Iraq and Saudi Arabia have Logistical and batch-sequencing constraints. been closed for political reasons, as they As an example of this, it takes an average of 15 represent obvious targets for sabotage. days for the Société du Pipeline Sud Européen (SPLSE) to pump a batch of oil from the The principal constraints on pipeline transport Mediterranean (Lavéra) to Karlsruhe. Oil pipelines work in conjunction with sea Refined products are usually pumped via transport as one more link in the crude-oil supply multi-product pipelines of smaller diameter than chain. Relatively few pipelines directly link the those used for carrying crude. These pipelines are place of production to the refinery; and, as we capable of carrying practically every kind of saw above, pipelines carrying refined products refined product (including LPG under certain are relatively rare except in the US, where they conditions) with the notable exception of heavy were first used in about 1930. We also examined fuel oils. In the rare event that they are the comparative advantages and disadvantages of transported by pipeline, heavy fuel oils are only pipeline and tanker transport above. pumped over very short distances, usually via One important consideration here is that the special pipelines that are heated to a temperature notion of ‘capacity’ in the transport of of about 90°C. hydrocarbons via pipelines is not a totally reliable In Europe, refined-product pipelines have a parameter: it depends on many factors, such as diameter of 32" and pump 15 million tonnes per the viscosity of the product being pumped. Initial year. The capacity of a pipe depends not only on capacity can be considerably augmented by the its diameter but also on the viscosity of the installation of secondary pumping facilities. product being transported and the power of the The key advantages of pipelines relative to pumping stations; for example, using the same other modes of oil transport (coastal shipping via plant, a given pipeline can pump twice as much small tankers, river navigation, railway and road) petrol as liquid fuel oil. include low operating costs, direct routes and In the more common instances where two or immunity to climatic conditions. However, even three light-refined products are transported pipelines require heavy investment, with (i.e. gasoline, kerosene/jet fuel and diesel), the enormous infrastructure responsibilities for the different products are sent by batches following oil companies and absolutely no flexibility of use. certain procedures that regulate, for instance, the

92 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

sequence in which the products are pumped. must also consider the costs incurred in keeping Since refined products must meet precise the pipeline working. However, operating costs specifications (density, sulphur content and such as those for personnel are not really water content), precautions have to be taken to variable because, unless the pipeline is closed prevent contamination at interfaces. for extended periods, staff members remain Contaminated products can either be returned to employed. the refinery for recycling to the required These costs tend to vary in line with the specifications or mixed with a lower-grade installed capacity of the pipeline rather than its finished product. real throughput. Although pipelines require little in the way of labour, the latter is highly Pipeline transport costs specialized and therefore costly. Automation and Contrary to the situation with sea transport, remote management are deployed to the full in an pipeline transport makes it difficult to draw a attempt to reduced labour costs. distinction between the pipeline transport selling Energy bills can account for up to one-third of price, or transport tariff, and cost price. In the operating costs. This percentage depends on the case of crude oil, the companies that produce or number of pumping stations, i.e. on the refine the oil are in most instances the owners of throughput and geology of the pipeline. Energy the infrastructure by which the oil is transported. consumption per tonne pumped varies with the There are exceptions however: the Sumed square of the pipe’s throughput. Consumption pipeline linking the Red Sea and the rises in areas where head loss is significant Mediterranean, for example, and the (mountainous regions, an arrival point at a higher state-owned pipelines of oil producing/exporting altitude than the departure point and so on) and countries. when, for a given throughput, the product being Despite these exceptions, the companies in pumped is more viscous. charge of managing pipeline infrastructure can Modern pipelines require practically zero generally be regarded as overseeing an asset maintenance. However, the greater the automation whose purpose is not to generate its own of the line, the higher the maintenance costs for profitability but rather to ensure the profitability pumping stations and metering apparatus. Among of related upstream and downstream activities. other cost items, we can also cite insurance costs, Oil pipeline transport costs break down into administrative expenses and rent charges. two main components: the depreciation of investment and the operating costs. Tariffs Capital expenditure and depreciation. Laying While the tariffs proposed (or imposed) by a pipeline involves a whole series of operations the companies operating oil pipelines take into that are straightforward in essence; however, they account costs classified as fixed (capital must be carefully planned and sequenced if depreciation, personnel and maintenance costs) operations are to proceed quickly enough to and variable (mainly energy), they also prevent the accumulation of crippling capital comprise elements that are wholly commercial. expenditure costs. These depend on the location-related Investment comprises materials, pipe-laying, advantages enjoyed by the oil pipeline, i.e. the right-of-way and damage compensation to extent to which it can offer significant savings landowners, sundry expenses and pumping on sea transport. The Sumed pipeline, for stations. In some cases, it also includes the example, obviates the need for a long and terminal (storage) costs associated with the costly voyage around the African continent by construction of the line. tankers that are too big to use the Suez Canal Equipment depreciation periods vary. The pipe (Table 3). itself generally has a depreciation term of 20-25 years. The real deterioration of the pipe generally Other forms of transport takes much longer, thanks to such highly effective All other means of transporting liquid anti-corrosion methods as cathodic protection. hydrocarbons – cabotage (home trade, coastal Pumps and metering gear depreciate fairly shipping), inland navigation, and rail and road quickly due to technological progress and the transport – almost exclusively involve refined modernization that results. products, though there are exceptions like Russia, Operating costs. In addition to fixed costs where substantial volumes of crude oil are such as depreciation and financial expenses, we transported by rail.

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Table 3. Pipeline transportation costs

Construction costs (Cap Ex)

Pipes, valves, piping equipment Base: 5 €/in/m Installation cost

Acquisition of right-of-way, compensation, reimbursement of damage 15 €/m Surveys and control

Pumping stations 1 to 5 M € Terminals 2 to 4 M €

Operating costs (Op Ex)

Salaries and wages, energy costs, maintenance Other charges: rents - telecommunications, insurance, overheads

Table 4 provides a comparison of four methods Oil companies often own their own coastal fleets of transporting refined products, indicating and charter additional freight requirements from relative cost elements for each method and the specialist companies. Coastal ships range in size constraints affecting each. from a few thousand to tens of thousands of tonnes. Cabotage (home trade, coastal shipping) Transport tariffs for international cabotage are It is difficult to make a clear distinction among the highest on the Worldscale index. As between cabotage and general maritime traffic. for national cabotage, many countries require The definition of cabotage (trade or transport in ships to be locally registered and rates vary coastal waters) and its etymology (navigation greatly according to the regularity of traffic. from cape to cape) point to short-haul coastal traffic. As this suggests, cabotage generally takes Transport by inland navigation place within view of the coast or within one In river transport, the slower the barge travels, country’s territorial waters, as opposed to long- the lower the cost of transport: fuel consumption haul (i.e. open-sea) voyages. The role played by is extremely sensitive to speed. Inland navigation cabotage varies in line with regional geography. is therefore perfectly suited to the transport of Cape-to-cape navigation is especially suitable heavy products that do not require special as a method of transporting refined products in handling and whose economic feasibility is countries with exceptionally rugged coastlines. scarcely affected by considerations of time. Cabotage is thus widely practised as a means of Cost-effectiveness is therefore increased with the distribution in Japan and the Philippines, while in transport of less-expensive products. Inland the US it is hardly practised at all outside the Gulf navigation is ideal, for example, for the transport of Mexico and the eastern seaboard. of fuel oil as long as a considerable distance is The situation in Europe falls somewhere involved. As it is less cost-effective for the between these two extremes. Many areas are transport of white products, however, inland particularly suited to this kind of transport: the navigation is becoming less and less significant, Pyrenees, several regions of Italy, the Dalmatian even though two-thirds of global storage capacity coast and the refineries of the are connected to a waterway. Amsterdam-Rotterdam-Anvers (ARA) zone, the The vessels used on canals and rivers range in last of which serve the major ports of Germany, size from self-propelled barges with capacities of Britain and France. between 300 and 1,500 tonnes to the large pusher Coastal tankers are capable of carrying all convoys of the Mississippi, which can be as big as types of refined product, from LPG to bitumens, 40,000 tonnes, and the 5,000-tonne barges that in vessels specially designed for specific cargoes. ply the Rhine between Rotterdam and Basle. Some of these ships are multi-product tankers, In Europe, inland navigation is most intense with separate holds for different refined products. on the Rhine, via which barges carry supplies to

94 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

Germany, North-eastern France and Switzerland. and, once tonnage reaches significant levels, However, traffic on the Rhine, and therefore the construction of a pipeline becomes feasible. provisioning of all the regions it serves, is vulnerable to fluctuations in water levels. Road transport Nearly all terminal transport of refined Rail transport products takes place by road, as does some bulk Rail transport remains the main way of transport between refineries and depots. Most supplying depots that are not connected to the heavy products (such as bitumen and fuel oil) that source of production either by a network of cannot, except in special circumstances, be pipelines or by sea or waterway. Although the rail transported by pipeline, are also transported by companies offer reduced tariffs, rail remains, in road. Tanker trucks are ideal for bringing small general, a costly mode of transportation. volumes to almost any destination, making them Compared with other bulk-transport methods, it is an extremely flexible means of transport. especially costly in Europe, but somewhat more Road transport also includes the supply of competitive in Canada and Russia, where tariffs retailers like service stations and fuel pumps, and are significantly lower; in fact, a significant the delivery of domestic fuel to end consumers proportion of refined product is transported by via smaller trucks equipped with pump meters. rail in Russia. In the case of bulk transport, the vehicle most In Europe, the longest trains can carry up to often used is a semi-articulated tanker truck with 2,500 tonnes, while certain products such as LPG a capacity of 40 tonnes. These trucks cover an and lubricants can be delivered in single-wagon average of 100,000 km per year, cost over consignments of between 30 and 80 m3. Price $120,000 to buy, and are usually owned by greatly depends on the volume to be transported, specialist transport firms. As for terminal

Table 4. Comparison of methods of transport

Road Rail River Pipeline

High by unit if sound Low by unit, high Moderate by unit, Very high and made Investment cost-effectiveness overall high overall over a short period is required (push boat)

Mainly borne High, and borne Infrastructure costs – Toll duties by State entirely by company

High for Low (personnel ϭ Personnel costs Very high Fairly high self-propelled barges, high in skills but low low for push boats in numbers)

High except when volumes justify collective Maintenance costs Very high Very low installations and automation

Return costs Empty return Empty return Return in ballast Nil

Outward, practically Fairly dense and everywhere; natural The most circuitous Length of route limited by natural The most direct obstacles impose route, where it exists obstacles significant detours

Climactic conditions during Very sensitive Not very sensitive Sensitive Not affected transit

Flexibility of use Very high Very limited Very limited Nil

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transport, this is generally carried out by tanker until the construction of the world’s first trucks with a capacity of 20 tonnes or even less in distillation unit in Boston in 1863. Its purpose certain regions. was to produce lamp oil, the only petroleum product consumed at the time. Then the car was invented, sparking a rapid expansion in 2.3.2 Oil refining consumption of petrol and diesel. At the same time, new techniques such as continuous Technical background distillation and thermal cracking emerged; these were followed by thermal reforming and then, Introduction just before the Second World War, by the Refining is a vital link in the oil industry. In introduction of catalysis in transformation fact, absolutely no one consumes crude oil; we processes. consume refined products only, as used in At present, the principal refining operations transport, domestic and industrial applications, fall into four categories: a) separation of crude oil and the petrochemical sector. The refined into various cuts; b) enhancement of the qualities products most often consumed are gasoline, of certain cuts; c) transformation of heavy cuts diesel and fuel oil. The fastest-growing refined into lighter cuts (conversion); d) final preparation products in terms of consumption are jet fuel and of finished products through blending (Fig. 7). diesel; consumption of fuel oil is declining. Refineries comprise a number of distinct Worldwide consumption of refined products, parts: a) the processing plant proper, where the refinery fuel included, is currently in excess of crude is separated into cuts, certain cuts are 3.6 billion tonnes per year, or 80 million barrels enhanced and heavy cuts are converted into per day. According to International Energy lighter ones; b) utility works, i.e. facilities Agency figures, annual consumption in 1973 was producing the energy (fuel, electricity, steam, a mere 2.75 billion tonnes. etc.) needed for refining processes; c) tank farms; The purpose of refining is to transform the d) reception and dispatching facilities, and various kinds of crude oils into finished products blending units. that meet certain precise specifications (Fig. 6). For the present purposes, we shall not examine Processing facilities upgrader plants, whose job is not to create finished Every crude oil on the market is unique, products, but rather to transform ultra-heavy crude depending on the deposit it comes from. The most into so-called synthetic crudes using conversion common crudes have a density of between units. The resulting synthetic crude is of much 0.8 g/cm3, i.e. around 45°API, and 1.0 g/cm3, i.e. higher quality and is therefore easier to market. 10°API (the API, or American Petroleum Institute Venezuela has a few plants of this type. degree, is the standard unit of measurement of Oil refining, i.e. the transformation of crude crude density). Light crudes yield higher into end products, used to be a perfectly quantities of light products (motor fuels) while straightforward affair: a simple distillation heavy crudes yield heavier fractions like heavy process was enough to separate out useful fuel oil. fractions such as lubricants. The modern Atmospheric distillation or topping separates refining industry did not really come into being the crude into different cuts ranging from lighter

crude oil main petroleum products

Middle East liquefied petroleum gases propane, butane, Saudi Arabia, Iraq, LPG automotive fuel Iran, Kuwait, UAE gasoline regular, premium, unleaded Africa jet fuels Nigeria, Gabon, Congo, Angola, Algeria, Lybia diesel fuel, home-heating fuel North Sea heavy fuel oils normal, low sulphur content, very low sulphur content other countries bitumen naphthas, special gasoline CIS (ex USSR) (white spirit, aviation gasoline), Venezuela, Mexico other products kerosene, light marine diesel, special fuel oils, lube base stocks, paraffins-waxes

Fig. 6. Refining target.

96 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

fractions through to petrol, kerosene cuts, diesel is Fluid Catalytic Cracking, FCC); cuts and finally atmospheric residue. In the hydrocracking, where a vacuum-distilled condition yielded by distillation, these cuts cannot charge is treated by high-pressure hydrogen in generally be used without further processing. one or more catalysts. Atmospheric residue, for example, is generally The refining sequence to be used largely reprocessed in a vacuum-fractioning tower to depends on the kind of crude being processed and separate a light fraction (vacuum distillate) and a on market requirements in terms of finished heavy fraction (vacuum residue). The vacuum products (volume and quality). As an example, distillate can then be used as feedstock for the FCC cracking is better suited for yielding production of lighter cuts by processes such as gasoline bases, while hydrocracking is ideal for catalytic cracking, while the vacuum residue can producing high-quality diesel and, in some cases, be used as the base for making bitumen or fuel jet fuel. oil. Similarly, since the octane rating of the heavy gasoline produced by this phase of refining is too Utilities, storage, blending and dispatch low for it to be used as the base for motor Utilities such as fuel, electricity, steam, gasoline, it is further processed in a compressed air and cooling water are largely catalytic-reforming unit. Another process also produced within the refinery. In many cases, designed to increase the octane rating (of however, refineries have to import part of their high-gravity gasoline) is isomerization. electricity needs from the grid. Additional processing is increasingly End products are obtained by blending the required nowadays to eliminate the sulphur intermediate and semi-finished products (which content from refined products. Fuels now have are also called bases) proceeding directly from to comply with extremely strict regulations on the refining units. Blends are calibrated to meet sulphur content (in Europe, 50 ppm of sulphur the specifications and requirements of for petrol and diesel as from 2005; in the US, commercial products. 30 ppm for the same products as from 2006). Storage areas occupy significant amounts of Most cuts are therefore processed in space: some tanks can hold over 100,000 m3 of hydrodesulphuration units. oil. The tanks used for storing end products are Most modern refineries also include smaller. Refineries must also be equipped with conversion units, in which heavy hydrocarbon facilities for discharging crude oil and molecules are cracked to yield lighter dispatching products. molecules. We can distinguish between various types of cracking: thermal cracking (viscosity Types of refinery breaking or vacuum residue coking); catalytic Refineries can be classed into three cracking (of which the most common process categories, depending on their sophistication: • Topping or hydroskimming refineries, which essentially comprise atmospheric fractioning towers as well as, in most cases, a catalytic reforming unit and hydrodesulphuration units quality for middle distillates. • So-called complex refineries, which are also equipped with conversion units ranging in improvement nature from catalytic cracking (FCC) to conversion hydrocracking and visbreaking (Fig. 8). • So-called ultra-complex refineries, which also separation feature standard and deep conversion light installations capable of directly processing blending residues to yield value-realizable products (light refined products, gas, electricity and so heavy on). Ultra-complex refineries are still fairly rare, unless we include simple coking processes in this category. A number of ultra-complex refineries are to be found in the US, where they are specially designed for Fig. 7. Refining principles. processing heavy crudes.

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Economic factors This expansion of refining capacity has been accompanied by an even faster proliferation of The global refining situation secondary processing capacity (reforming, Global refining capacity, expressed in terms cracking etc.) in attempts to augment yields and of atmospheric distillation capacity, was on the improve the quality of light and medium order of 4.1 billion tonnes per year, or distillates (fuels) while simultaneously reducing approximately 82 million barrels per day, in 2004. the production of heavy fuels, for which demand In 1950, capacity was a little over 1 billion has collapsed. tonnes, but from that point rose quickly to reach The real challenge facing the refining industry the 4 billion tonne mark by 1980. The apparent is how to keep up with changes in the market. stagnation in capacity between 1980 and 2004 While the decline in demand for heavy fuel oil conceals the fact that capacity had in fact fallen to and the solid growth in consumption of fuels are under 3.6 billion tonnes in 1985 in the wake of hardly new phenomena, some recent the second energy crisis, only to rise again after developments in requirements on product quality the oil-price slump of 1986 (Fig. 9). have had a major impact on refining: This apparent stability since 1980 in terms of • The elimination of lead from petrol: the global capacity also conceals some considerable octane index is a key indicator of petrol geographic disparities. Roughly speaking, we can quality as it indicates the fuel’s resistance to say that North America (which remains the self-ignition, the phenomenon that causes world’s leading refining region) has seen its knocking in spark-ignition engines. The higher capacity remain practically unchanged since the octane index, the higher the resistance to 1980, while Western Europe has lost 30% of its knocking. To improve the octane index, lead capacity in the same period. Most new refineries compounds were traditionally added to petrol. have been built in the Middle East and Asia; The prohibition of lead has brought about the furthermore, plans to build new refineries are emergence of new processing techniques essentially focused on Asia. designed to produce high-octane petrols that In total, there are just over 700 refineries are lead-free. worldwide. Average refinery capacity is thus on • Reduction in the sulphur content of fuels the order of 6 million tonnes per year or 120,000 (gasolines and middle distillates), achieved barrels per day. However, the largest refineries through the construction of desulphuration can handle over 25 million tonnes per year units and the conversion of existing plants. (500,000 barrels per day) while many small • The introduction of new restrictions on fuel refineries with capacity of 1 million tonnes per quality, such as limitations on olefin and year are to be found in oil-producing countries aromatics content in fuels, which has led such as the US and in countries where refiners to rethink conventional production consumption is low. processes.

gas Fig. 8. Refining scheme-conversion. C3 LPG ϭ HCO Heavy Cycle Oil; C4 LPG LCOϭLight Cycle Oil. light naphtha

reformer gasoline heavy naphtha 1 Mt/y naphtha jet fuel gasoline

gas oil 4 atmospheric distillation iC diesel oil/ catalytic heating oil 8 Mt/y vacuum distillate

cracker HDS 1,8 Mt/y

atmospheric residue 1,8 Mt/y 3,5 Mt/y vacuum LCO HCO distillation fuel oil visbreaking vacuum residue (20%) 1,5 Mt/y

98 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

Fig. 9. Refining 1,031 capacities in 1980 and 2004 1,089 689 1,019 734 and projects. 528

11 Eastern Europe 11 Western and other former Europe 1,002 North America Soviet countries 484 627

275 357 335 18 75 Africa and Asia 14 Middle East South and Central America capacity in Mt/y (at 01/2004)

19804,068 Mt/y 2004 4,102 Mt/y projects 135 Mt/y

Refining costs Complexities notwithstanding, size generates some significant economies of scale: if we double Investment the charge processed by a reactor, the quantity of The construction of a new refinery is a long, steel necessary for the construction of this reactor costly and complex operation. Some three years (and its cost) increases roughly by only two-thirds elapse between the decision to build the refinery (in fact, the quantity of steel needed is and its opening; this period is preceded by proportional to the surface area of the reactor, months, if not years, of preliminary research. The which increases with the square of the scale of investment involved in the construction dimensions; volume increases with the cube of of a refinery depends mainly on its size, its the dimensions). These economies are confined, complexity and its location. however, by the limitations on the size of certain Size and complexity. In general, it is units. The maximum capacity of an atmospheric estimated that a refinery built in Europe with a distillation unit will, for example, be some 12 capacity of 160,000 barrels per day (8 million million tonnes per year, so refineries with larger tonnes per year), equipped with catalytic capacities will therefore have two atmospheric cracking, visbreaking and gasoline units, would distillation columns. currently cost some $1.5 billion. This cost could Location. Equipment transport and assembly rise considerably with the addition of costs are significant factors in total construction exceptionally restrictive anti-pollution costs. A refinery that is built at a great distance regulations that address not only the immediate from the factories that produce its principal environs of the refinery (waste) but also the components (columns, reactors etc.) will quality of products. therefore be more expensive than an identical In the case of a slightly smaller (5 million refinery built near its equipment suppliers (which tonnes per year) simple refinery (atmospheric is the case in the leading industrialized countries). distillation with catalytic reforming and Shortages of qualified local labour mean that hydrodesulfuration plants), the cost would be less external technicians have to be sent in, and this than half of the figure for the larger refinery too has a significant impact on costs. Finally, above. Conversely, a refinery equipped with a severe climactic conditions (as in Siberia and the deep conversion unit, such as fluid coking with far north of North America) can also add to coke gasification or residue hydrocracking, would equipment costs. cost at least a billion dollars more than a refinery Other factors. Since off-sites (utilities, equipped with a conventional (e.g. FCC) storage, loading and discharging areas) can conversion plant (Table 5). account for over half the investment costs of a

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simple refinery, the configuration of the refinery catalyst is continuously removed from the unit has an important impact on investment. For and new catalyst introduced. Total catalyst costs example, autonomy of electrical energy (bought can come to several dollars per tonne of crude from the grid or produced locally) and the size of processed. the tank farm, as well as the size of the loading To highlight immobilization costs, we can and discharging areas and the methods employed, look at a typical European refinery that processes all affect costs. In certain cases, the refinery can crude from the Middle East. It takes some 40 days be designed to handle special crudes such as sour to transport the crude to the refinery; before it is crude, and this significantly increases reactor processed, the crude is stored for several weeks to costs. allow impurities to settle out and to ensure sufficient reserves for avoiding stock outages and Breakdown of costs meeting legal requirements on emergency stocks. Costs are traditionally broken down into: Processing is rapid, but the end products then variable costs, which are directly proportional to spend a further few weeks in storage. In all, the amount of crude processed; fixed outlay costs, weeks or even months elapse between the which are process-independent; capital costs. purchase of the crude and the sale of the products Variable costs. These include the price of it yields. In the meantime, the cost of the crude, chemicals and catalysts, and the financial already paid for but with no value realized on it, expenses associated with the immobilization of has to be covered: by a loan, for example. crude and products during production and Immobilization costs can therefore be over two storage. dollars per tonne of crude processed. Chemical products have accounted for limited Fixed outlay costs. These costs include variable costs since the virtual disappearance of personnel and maintenance costs, insurance, tetraethyl lead, formerly used as a fuel additive. charges and general expenses, all of which are However, other additives are increasingly largely unaffected by the quantities refined. incorporated into refined products to improve Personnel costs are the same whether or not the their properties (but this does not always take refinery is working to full capacity. The number of place at refinery level). employees in a refinery varies enormously. A Catalysts are used in many refinery processes simple refinery will employ a minimum of 200 to such as reforming, cracking, isomerization, 250 people. However, personnel numbers depend alkylation and hydrodesulphuration. The much more on the complexity of the refinery than catalysts used in reforming contain precious on its size. A large, fairly complex refinery in metals, and their price can reach several hundred Europe can employ up to 1,000 people. Other dollars per kilogramme or even higher. The factors can also lead to increased personnel needs, catalyst is then regenerated (continuously, in such as the presence of several small units in the modern units), and at the end of the process same refinery or an extensive social services cycle the precious metals are recovered and infrastructure (as in the refineries of the former re-used. In catalytic cracking, however, the spent USSR).

Table 5. Refinery investment cost (M$)

Basic refinery Upgraded refinery Deeply upgraded refinery 5 Mt/y 8 Mt/y 8 Mt/y

Process units 230 360 360 (excl. cracking)

Cracking complex – 375 375 (FCC, Alkyl., visbreak.)

Deep conversion complex – – 700

Offsites (Utilities production 550 740 1,020 units, storage, shipping facilities)

Total 780 1,475 2,455

100 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

Maintenance costs are more or less Expressed in terms of tonnes or barrels of proportional to initial investment and can crude processed, these costs are comparable to the represent between 3 and 4% of investment refining margins obtained by the operators annually. (margins that fluctuate with market conditions). General expenses include charges, insurance Other factors, aside from capital costs, play a and miscellaneous operating expenses. more or less-significant role; the foremost of Capital costs (recovery and returns). Capital, these is capacity utilization rate. In a refinery whether the initial investment cost of a new working at 66% of its capacity, unit-fixed costs of refinery, the costs of revamping an existing one or processing are 50% higher than for a refinery of constructing a new plant in an existing working at 100%. In theory, therefore, it is in the refinery, has to be recouped. It also has to refiner’s interest to work at the highest possible produce revenue. If an investment is financed capacity. Practices may differ in cases where entirely by loan, the corresponding capital costs excess output in a given refining region can flood include yearly repayments and interest. If the the market and therefore reduce the margins investment is fully self-financed, the refiner has achieved; in this situation, it may be more in the to recover its capital and generate revenue. refiner’s interest to reduce its capacity utilization To return to the example of the refinery with rate, at least temporarily. an annual capacity of 8 million tonnes and As we saw, according to the law of economies costing 1,5 billion dollars, imagine that the of scale, the larger the refinery the smaller the capital investment is financed entirely by loan unit investment and, consequently, the lower the with a repayment period of 10 years and an capital costs. Furthermore, for a given operating interest rate of 8%: the average annual cost will capacity rate, the larger the refinery is, the lower be about 200 million dollars for the first 10 years the unit processing costs, minus capital. The size of the refinery’s life, then nil in subsequent years. of the refinery has very little bearing on This figure breaks down as follows: capital ϩ personnel costs and general expenses, and interest ϩ (with the refinery working to full maintenance costs rise at a rate far slower than capacity) a charge of $25 per tonne of crude increases in size; hence the notion of a minimum processed. cost-effective threshold, which is on the order of Total cost and attendant factors. Refining 5 million tonnes per year (100,000 barrels per day) costs depend, as we have seen, on a great many for atmospheric distillation. At present, except in factors, and this makes it difficult to give accurate some very special cases, no smaller refineries cost estimates. Fixed costs can represent up to exist. 80% of the total cost of processing every tonne of The complexity and the location of the crude. Of these fixed costs, capital charges are refinery influence not only its capital costs but particularly significant. This means global costs also costs relating to labour, maintenance and can vary greatly depending on whether or not the other issues. As we shall see in the next section, installation has reached payback point. complex refineries are capable of obtaining If we take the case of the new refinery higher margins than simple refineries, which equipped with a conventional conversion plant as enables them to cover higher refining costs. described earlier, total costs per tonne of crude processed are on the order of $35 or more – on Refining margins condition, that is, that it is working to its full annual capacity of 8 million tonnes. Costs per Definitions tonne, of course, increase significantly if the The (gross) refining margin for each tonne of refinery is working well under capacity. crude processed is the difference between the If, on the other hand, we take the example of a ex-works value of the products obtained and the refinery whose investment has been largely cost of the crude entering the refinery; the value recouped (which is the case with most refineries realization of the products is calculated by in operation in the principal refining regions), multiplying their price by their respective yields, costs are much lower, even as low as $15 per which vary from one refinery to another. tonne. But these refiners too are subject to The net margin is equal to the gross margin expenses resulting from investment in necessary minus variable costs, which include chemical modernizations, even if only to improve the products, catalysts and carrying charges related to quality of their products or reduce the the immobilization, especially the storage, of environmental impact of the refinery. crude and products.

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To reach break-even point, gross margin must A better margin does not necessarily mean cover total processing costs; to put it another way, greater profitability, as the costs for a complex net margin must cover fixed costs, i.e. all outlay refinery are higher than those for a simple costs and capital costs. The result is thus equal to refinery. In reality, the margins obtained are net margin minus fixed costs. sometimes considerably higher than the published We should note that the value realized on margins. There are a number of reasons for this. products takes into account the net (i.e. sold) The published margins refer to the principal output of the refinery, that is, after deduction of products only (such as motor fuels and fuel oil) internal consumption of refinery gas and fuel oil but not to specialist products (oils, bitumens, for the utilities. This consumption is not LPG, petrochemicals and so on), which are often insignificant: in a refinery equipped with a a more lucrative activity. For example, stock oils, conventional conversion plant, it represents some which are obtained via increasingly complex 5-6% of the crude processed. For the present refining processes, and even in some cases purposes, although it is classified as a variable finished oils, generally offer attractive returns. cost, we shall not include this consumption in Some refineries play this situation to their processing costs as compared against margins. advantage by producing for niche markets. Typical margins for typical refineries, known Similarly, a refinery that is part of a as margin indicators, are published by oil petrochemical complex is better positioned to companies and trade journals. In Europe, margin realize value on certain cuts (naphtha, etc.) and indicators typically refer to an imaginary refinery benefit from lower raw-material rates. located in Rotterdam and operating in a highly More generally, prices (even prices of the competitive environment. major products) are often higher than those It is also possible to calculate a per-unit applied in margin-indicator calculations where the margin, equal to the difference between the value refinery has a favourable geographic location: a of the products yielded by the unit and the value refinery located inland, and moreover in an of the feedstock. Unlike finished products, oil-importing region, will sell its products at feedstock and intermediate products do not yet prices higher than those given by the international have any market value. We can however evaluate indices (Rotterdam, US Gulf, Singapore, etc.). the prices of these feedstocks and intermediary products on the basis of their potential uses; to do Changes in margins so, we use an opportunity cost, i.e. the price that Until the mid-1970s, margins had remained at the feedstock or product would command if put to levels that were broadly satisfactory for the an alternative use. industry. Increasing consumption of refined Per-unit margins are of great interest to products ensured margins that were capable of refiners as they indicate which units are covering long-run marginal costs, including the profitable, which have to work at maximum recovery of invested capital and the returns capacity and which should work at a slower rate. generated. The principal concern of the oil These economic imperatives are frequently companies (and of many governments) was how unworkable owing to technical constraints, to satisfy demand. In the larger European however. countries, this meant building one new refinery, or installing the equivalent new capacity, every Factors that influence margins year. The gross margin obtained by a refinery Over the decade as a whole, prices for a essentially depends on its degree of complexity. A typical refinery remained at an average of $2 per refinery equipped with cracking units for barrel. Taking into account monetary erosion, this high-octane gasoline bases produces lighter figure would be about $7 per barrel in today’s products (fuels) that meet extremely strict money. specifications and have a higher market value. At the turn of the decade, though, the situation Furthermore, a sophisticated refinery can changed drastically and margins fell right across more readily process heavy or sulphur-rich the board. Increases in crude prices in 1973 (as a crudes, putting its conversion plant to maximum result of the Yom Kippur war) and in 1979-80 use. These crudes offer price differentials that are (with the Iranian revolution) caused consumption often substantial in relation to lighter, low-sulphur to level out and then to decrease. The enormous crudes, and with higher oil prices, price surpluses of fuel oil caused by a decline in differentials widen further. demand and the lack of conversion capacity had

102 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

the effect of widening the gap between fuel-oil products taken as a whole was growing very prices, which were already very low, and those of slowly (1-2% per year) during this period; on the light products. other hand, refinery capacity-utilization rates, At the same time, refining capacity began to always a key factor for margin trends, were low, far outstrip supply, especially in Europe and the although they were improving towards the end US. This overcapacity had two consequences: of the decade. since marginal processing costs per barrel were While capacity was significantly reduced in very low, more and more refiners began to most regions (with the notable exception of the process more crude, and therefore to add to the former USSR, which on the very eve of its surplus of products (a short-term gain with long- demise and the ensuing collapse in demand term consequences). The ultimate result was a fall found itself with a gigantic overcapacity in margins. problem that, even today, has not yet been fully As total refinery costs had to be spread across absorbed), the mismatch between the supply quantities of products far in excess of the optimal structure of the refineries and the demand volumes owing to overcapacity, unit costs grew structure of the economy persisted for years. In significantly. their efforts to reduce fuel oil surpluses This ‘scissor effect’, in conjunction with associated with the lack of conversion capacity, stagnation in consumption in the 1980-85 period, some refiners found themselves forced to cut made itself felt in the form of low profitability, back on their output. which forced refiners to reduce their capacity. In Here, it is worth noting an aggravating factor the US, this reduction occurred rapidly and to a in times of overcapacity: real refining capacity is relatively limited extent; however, with the often higher than the published or stated capacity. restructuring of the refining industry, many There are several reasons for this: smaller, independent refineries closed down. In • Some indicators underestimate real capacity, Europe it came later but with far more drastic and some countries only take into account effect: of 150 refineries, some 50 had to close distillation capacity necessary for supplying down. Also, many of the refineries that survived cracking units. In the former USSR, the real saw their distillation capacity slashed as a result capacity of most of these units was well above of the closure of older plants; there was even, in the design capacity. some cases, the conversion of distillation plants • Mothballed capacity can be quickly into visbreaking units. In Japan, restructuring was reactivated. more limited in scope as the country was a major • Major progress has been made in addressing importer of products (primarily from Singapore stoppage times for maintenance work. and the Persian Gulf) and had no excess capacity Intervals between stoppages have stretched problems. from every two or three years to every five This drive to reduce capacity came to an end years; this means a refinery can now operate around 1985, at the time of the oil crisis (OPEC more than 95% of the time. production quota policy and crude oil prices • The phenomenon known as ‘capacity creep’: based on netback agreements). The sharp drop the tendency to step up capacity from initial in crude oil prices that resulted from this policy design capacity caused by limited investments relaunched product consumption, which was by refiners in certain units also stimulated by new demand from emerging (‘de-bottlenecking’) that have not yet been economies. The fall in the value of the dollar in factored into estimates. the same period was another contributing So far this decade, the situation has changed factor. from one year to another: the significant rise in The situation by this time was the reverse of margins in 2000 was followed by a decrease in the 1970s crisis. Margins increased until the end 2001, which became more accentuated in 2002, to of the 1980s, reaching levels that, for the first be followed by a net improvement with high time in a decade, were entirely satisfactory to margins since 2003. operators. The reason for this rise in margins is the Margins remained moderate throughout the significant increase in world demand, driven 1990s at no more than a few dollars per barrel – mainly by the US and by such emerging far lower than total costs for a new refinery. economies as China. This rise in demand is also There were a number of reasons for this: on the the cause of the extremely high one hand, world consumption of refined capacity-utilization rate of refineries in many

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Fig. 10. Gross refining 12 margin (refinery with Arabian Light 10 cracking – North West Brent Blend Europe). 8

6

4 $/bbl 2

0

Ϫ 2 crude cost: CIF Europe products cost: FOB Rotterdam Ϫ4 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 year

regions. It is no longer any exaggeration to Moreover, major oil consumers such as the US speak of saturation in the refining sector, and Europe (Figs. 10 and 11) are becoming especially in conversion units, with the United increasingly dependent on imports for supplying States worst affected. Worldwide refining their oil-product demands (Japan has always been capacity, not including the persistent a major importer). overcapacity in the former USSR (which is currently on the order of 3 million barrels per Margins according to region day), can be estimated at a little less than 81 Margins vary greatly from one region to million barrels per day. According to the another in the United States, but in general they International Energy Agency, global production are still much higher than in Europe. The lowest of crude oil and liquid natural gas reached a margins are those obtained by complex FCC-type similar level in 2004, at slightly over 81 million refineries in the Gulf of Mexico region. This is a barrels per day (a uneasy equilibrium that is the highly competitive, import-intensive region where perfect illustration of the tension that grips margins are affected by refined products arriving today’s oil market). principally from Europe and South America.

$/bbl Rotterdam-Brent-cracking 7 Rotterdam-Brent-hydroskimming 5 3 1 Ϫ1 $/bbl Ϫ3 8 US Gulf-LLS-cracking 95 96 97 98 99 00 01 02 03 04 6 4 2 $/bbl Singapore-Dubai-hydrocracking 0 7 Singapore-Tapis-hydroskimming Ϫ2 5 Ϫ4 3 95 96 97 98 99 00 01 02 03 04 1 Ϫ1 Ϫ3 95 96 97 98 99 00 01 02 03 04

Fig. 11. Development of net refining margins. In the legends: refining centre, crude type, refinery type. LLSϭLight Louisiana Sweet.

104 ENCYCLOPAEDIA OF HYDROCARBONS ANALYSIS OF COST STRUCTURE AND FUNCTIONS IN OIL TRANSPORT AND REFINING

Margins are much higher in the Midwest and even swept the region at this time and the simultaneous more so in California, due partly to the better introduction of new and significant refining balance between supply and demand and partly to capacity. higher prices for products. Californian motor fuel In Europe, the margins of a typical complex specifications (the California Air Resources refinery located in Rotterdam remained extremely Board, CARB, regulations) are more stringent low throughout the 1990s (on the order of 1 or $2 than federal requirements, and this situation is per barrel) but recovered early this decade. reflected in prices. In refining regions like the Gulf of Mexico and California, where many refineries are equipped to handle heavier crude Bibliography oils, refiners can enjoy particularly high margins when the price differential between heavy and Favennec J.-P. (sous la coordination de) (1998) Exploitation light crudes widens significantly. This has been et gestion de la raffinerie, in: Le raffinage du pétrole, Paris, Technip, 1994-1999, 5v.; v.V. the case since 2003. Masseron J. (1991) L’économie des hydrocarbures, Paris, In Asia, the situation was favourable until Technip. mid-1997. Margins often reached 3 or $4 per Olivier Appert barrel due to heavy demand and protectionist measures in certain markets. Serious shortages in Jean-Pierre Favennec refining capacity made Asia a major importer, Centre for Economics and Management mainly from the Middle East. Margins collapsed IFP School in 1997 as a result of the economic crisis that Rueil-Malmaison, France

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