Refiner demand for discounted feeds will increase trade of high-acid crudes

March 17, 2008
Refiners looking for discounted crude supplies will import and use greater volumes of high total acid number (TAN) crudes, according to a study from Asia Pacific Energy Consulting (APEC).

Refiners looking for discounted crude supplies will import and use greater volumes of high total acid number (TAN) crudes, according to a study from Asia Pacific Energy Consulting (APEC).

The study states that incremental high-TAN crude output should rise by 1.8 million b/d during 2005-10, with 61% of that gain expected in West-of-Suez production regions. High-TAN crude production, trade, and use will increase globally and Asia-Pacific will be the focus of interregional acidic crude trade through the next decade, according to the study.

This study is different from previous forecasts because it does not include acidic crudes that do not affect markets or trade balances.

Asia-Pacific’s need for low-sulfur crude that produces a high volume of gas oil and residual fuel will be one “pull” factor attracting high-TAN output from West-of-Suez regions. The discount on high-TAN crudes will is another “pull” factor for Asian buyers, particularly as refiners look for less-expensive sweet crudes.

The study stated that “push” factors that will increase arbitrage sales to Asian refiners include a disproportionate buildup of high-TAN output in West Africa, Sudan, and Latin America; a lack of refining capacity, particularly that suited to handle high-TAN crudes in this area; and political supports, including Venezuela’s effort to increase sales to China and Asia-Pacific.

Crude markets

APEC believes that crude prices in a steady range of $90/bbl or greater are unsustainable, although short-term spikes of $100/bbl are likely and may occur on more than one occasion. The study assumes a medium-term average range through 2010 of $65-75/bbl for Brent crude, with increased price volatility in the short term.

A substantial crude production capacity buffer will emerge in the coming decade, and Asia-Pacific will continue to depend on ever-increasing volumes of crude imports, mainly from the Mideast Gulf, according to the study.

The further rise in crude prices during second-half 2007 to $90/bbl levels has begun to erode demand growth in OECD markets. The first signs of demand slowing in Asia-Pacific, both in advanced economies and developing markets, appeared in second-half 2007.

Although OECD markets have seen an absolute decline in oil demand, particularly in transport fuels, Asia-Pacific has experienced slower demand growth, even though overall consumption continues to rise moderately. APEC believes that world markets, even in Asia-Pacific, have entered a demand “killing zone,” with a moderating effect on crude prices.

Slowing demand growth, combined with substantial new refining capacity due to start up by 2010, will shift Asia-Pacific from a region in which oil prices were led by products’ availability, to that of markets, such as the Atlantic Basin, led by crude availability and price.

The Mideast Gulf, mainly OPEC producers, will continue to provide most extraregional crude supplies to Asia-Pacific, according to the study. A substantial minority share of imports, however, will continue to be low sulfur, medium-weight to heavy crudes. These crudes will be needed to meet Asia-Pacific’s tightening product specifications, to meet the high proportion of gas oil (diesel) consumption, to fill incremental crude needs in face of stagnant Asia-Pacific crude output, and to fill slates for less-sophisticated Asian refineries.

Acidic crude basics

High-TAN or acidic crudes are grades that contain substantial naphthenic acid. The amount of potassium hydroxide (KOH) needed to neutralize acidity is the measure of a crude’s acidity.

The study assumed that a crude with more than 1.0 mg KOH/g is a high-TAN grade because at this point, Atlantic Basin high-TAN crudes begin to be discounted heavily and move toward East-of-Suez markets. The only common element in acidic crudes is the high-TAN content; they can vary extensively in most other physical characteristics.

Although most high-TAN crudes have medium to heavy gravities (all less than 29° API), they are usually are low in sulfur content (with the notable exception of Venezuelan grades) and often produce a disproportionate gas oil yield when refined.

Although high-TAN crude output occurs in every oil-producing region of the world, this study focused on internationally traded acidic grades and their effect on Asia-Pacific markets.

High-TAN crude output

According to the study, China has been the big gainer in high-TAN crude production in recent years and will continue to dominate output through 2015. China’s output of high-TAN crude will increase to 736,000 b/d in 2015, from 330,000 b/d in 2006. Substantial production increases from the foreign-equity fields QHD and Penglai will occur by 2010.

Australia, which produces minimal acidic crude output from Wandoo field, will add substantial high-TAN output with the start-up of the Vincent, Crosby, and Van Gogh crudes, all moderately high-TAN grades that will be exported. Total high-TAN crude output from Australia will reach 180,000 b/d by 2015.

Domestic use of Indonesia’s Duri crude will increase and the country will remain relatively constant in terms of high-TAN crude output. Duri remains the closest thing to a regional high-TAN crude marker even though it is only mildly acidic.

West Africa added many new high-TAN grades since 2004 and, although only a few additional acidic crudes will be commissioned through 2010, overall high-TAN output will continue to grow. The region will increase high-TAN crude output to 1.155 million b/d in 2015 from 435,000 b/d in 2006.

In 2006, Angola, Chad, and Sudan (which the study included in the West-of-Suez region) were the major African countries with high-TAN production, Sudan will expand substantially its acidic crude output, a rise of nearly 325,000 b/d by 2012 compared with 2006 levels, particularly for the highly acidic Fula grade. A lack of refining capacity in most of these African countries will spur exports of high-TAN output, according to the study.

Although total North Sea production will decline, the UK and Norway will see marginal gains in high-TAN output, increasing to 585,000 b/d in 2015 from 553,000 b/d in 2006. Most acidic crude produced will be used in Northwestern Europe, although the US market receives regular imports of Norwegian cargoes. Only some small-volume new high-TAN grades may emerge in this region by 2012.

Latin America’s high-TAN output will have more of an effect on Asia-Pacific by 2010. Venezuela will push sales to China and Brazil already has bought its first refinery in the region. Although PDVSA’s impetus for increased exports is political and Petrobras’ is commercial, the net result will be the same—a sharp increase in interregional sales of mainly acidic crude grades.

Although Venezuela will struggle to maintain crude output through 2010, Brazil will steadily add new crude grades to its production list and steadily increase overall oil output, according to the study. Latin America will increase high-TAN output to 2.91 million b/d in 2015 from 2.37 million b/d in 2006.

Iran’s Norwuz will likely remain the only high-TAN crude grade produced in the Middle East. APEC expects that Central Asian and US high-TAN crude output will remain within the respective country and will not be exported as high-TAN grades. If exported, acidic crude output will be blended off into moderate-TAN crude streams to allow for pipeline exports.

Total vs. acidic crude

The study only considered tradable high-TAN crude production and regions producing and exporting high-TAN grades. Overall, in countries already producing and marketing acidic crudes, the proportion of high-TAN crude to overall output will rise substantially through 2010, reaching a high of 25%, up from less than a fifth of all output in 2006.

When compared against total regional crude production in Asia-Pacific, Africa, Europe, Latin America, and the Mideast Gulf, acidic crude will rise to 10.7% in 2010 from an 8% share of overall oil output in 2006. West-of-Suez producers will add more total volume of high-TAN crude through 2015 and consistently will produce a larger percentage of world traded high-TAN crude than East-of-Suez producers.

High-TAN crude’s share of output for the West African countries in the study (Angola, Cameroon, Chad, Congo, Gabon, Ivory Coast, and Sudan) will increase to 27.5% of total crude, up from 16.0% in 2006.

Brazil, Venezuela, and Trinidad and Tobago’s proportion of high-TAN crude will increase to 56.2% in 2015 from 51.4% in 2006, the study reported. China’s proportion of high-TAN to total crude output will increase to 16.7% from 8.5% during 2006-15.

Potential Suez arbitrage

The study examined the potential for arbitrage of high-TAN crudes for East and West of Suez. It excluded the Mideast Gulf because it is a swing production area, selling to both regions.

Acidic crude made up 25.4% of West-of-Suez crude supply in high-TAN exporting countries in 2006; in contrast, it made up 11.4% of crude output in high-TAN exporting countries worldwide (Figs. 1a and 1b).

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Although East of Suez high-TAN output will rise sharply by 2010, it will likely peak at less than a quarter of total East-of-Suez output in high-TAN exporting countries. In contrast, West of Suez high-TAN production will grow, albeit at an uneven pace, to make up nearly a third of the oil production in West-of-Suez acidic crude exporting countries by 2015, according to the study.

Acidic crude production, measured against total Asia-Pacific output, peaks at slightly more than 15% between 2010 and 2012. In contrast, West of Suez high-TAN production will continue to rise as a proportion of total oil output through 2012 and in that year will peak at 41.4% of all oil production, according to APEC.

Fig. 2 shows total high-TAN output divided into East and West of Suez. West-of-Suez output consistently is far greater than East-of-Suez output and continues throughout the time frame of the study to dominate the world’s total of internationally traded acidic crude.

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In the past, few acidic crude grades from Asia-Pacific made their way to West-of-Suez markets and, for the most part, consisted of Indonesian Duri as well as some Chinese crude, according to the study. Yet East-of-Suez refiners were consistent importers of high-TAN crude from West-of-Suez producers.

Although APEC believes there may be an increase in the export of high-TAN grades from China to West-of-Suez refiners, mainly ConocoPhillips and Chevron Corp. if they desired to bring in equity production from China, in addition to Duri, the tendency will be for high-TAN crudes to move from western producers eastward.

High-TAN prices

West-of-Suez crudes, including Sudanese exports, are usually marked off of Brent, and most Asia-Pacific crudes still tend to use Duri as the basis. Many Asia-Pacific crudes are, however, valued more for their specialty utilization than a relationship to Duri, mainly in fuel-oil blending, lubes, and asphalt manufacture.

According to the study, some western high-TAN crudes, while maintaining a price relationship to Brent, such as Chad’s Doba, are in reality much more affected by low-sulfur fuel oil prices in Northwest Europe and low-sulfur waxy residual. Venezuelan exports to Asia are somewhat difficult to value but may depend on factors besides Brent linkage and for asphalt-production grades, such as Boscan, and may well have no relationship to any crude marker.

Producers of high-TAN crude with extensive downstream systems have a price advantage vs. acidic crude producers without their own refining capacity.

The emergence of any major new high-TAN grade tends to discount all acidic crudes. This is most noticeable when a high-TAN crude begins export from a producing country with little alternative but to sell output abroad, according to the study.

Future price trends

Price and domestic demand increases will be primary factors in Brazilian efforts to increase sales to Asia-Pacific. Brazil’s sharp oil output rise in recent years has been mainly in medium to heavy sweet grades, a good percentage of which has been in high-TAN grades.

Domestic refiners need more light sweet crude; Petrobras has been trading out heavy sweet grades, often acidic, to Asia-Pacific, gaining a premium for the sweet character of these exports, while balancing its domestic refining by importing more light crude from the Atlantic Basin.

Three exporting countries will substantially influence prices in the medium term: Brazil, Sudan, and Australia. Brazil will export more Marlim, Albacora Leste, Roncador, and possibly Polvo to Asia-Pacific through 2010, using its new Okinawa refinery as a crude break bulk and reexport facility for East Asian sales, according to the study.

Sudan’s growing diplomatic isolation will make it depend more on close economic ties with China. APEC feels that most Fula output, as well as a substantial portion of Dar production, will move to China, though Indian and Malaysian buyers may also take a great share of export sales.

Australia has three substantial high-TAN crude grades starting up by 2010 and because both are in Western Australia, most output will be exported to Asian buyers. Smaller, but regular volumes of West African crudes will appear in Asian markets in the medium term and, if PSVSA meets its stated goals, much high-TAN crude will be sold to China as well as smaller-volume exports to other Asian markets.

Product quality

According to the study, product quality will be a more important support for the import of high-TAN crudes East of Suez. Although reducing sulfur will be a primary refining goal for gasoline and residual, the key pressure remains to reduce and then virtually eliminate sulfur in gas oil, particularly road diesel.

By 2010-11, most major Asia-Pacific countries will have sulfur limits approaching 50 ppm for road diesel and refiners will be hard-pressed to meet this standard without running at least some sweet crude. Many grades of acidic crude yield large volumes of low-sulfur gas oil.

Most crude grades produce gas oil with a relatively low cetane value, implying that diesel derived from high-TAN crudes would have to be blended. Yet acidic crudes also have blending value in residual, both for viscosity and for their low sulfur content, when blended with high-sulfur residual, according to the study.

High-TAN crude refiners

The study identified different groups as potential high-TAN crude buyers:

  • Refineries with specialized metallurgy.
  • Large refineries that can dilute acidic crude and use it as trim.
  • Those refiners with sufficient specialized facilities to handle high-TAN crudes when discounted.
  • Specialized, nonprocessing utilizations.
  • Risk-adverse refiners that will only occasionally experiment with high-TAN grades.
  • Large and sophisticated refineries buying discounted acidic crude in the hope of a double-dip in profits, using residual from high-TAN grades as cat-cracker feedstock.

Refiners can handle acidic crudes safely using three different methods: dilution (blending with nonacidic crude), chemical injection to neutralize acidity, and through the selection and use of specialized materials in the refinery, particularly special alloy steels.

Extensive refining capacity designed to handle high-TAN crude has been operating in Northwest Europe and the US gulf and Atlantic Coast regions for some time.

In high-TAN exporting countries in Latin America and Africa, however, refining capacity for acidic crude is either antiquated and needs renovation (Venezuela); is inadequate for increased domestic high-TAN production (Brazil); or total refining capacity is inadequate for domestic needs, whether running high-TAN grades or not (most of West Africa). Sudan has made an effort to build refining capacity capable of handling its surge of incremental high-TAN output, but growing acidic crude output is outpacing new special-build refining capacity, according to the study.

With the exception of Brazil, most new capacity to handle acidic crude will be built in Asia-Pacific by 2010. China is adding two new refineries specially built for high-TAN crude slates. In India, the new Reliance refinery will be able to handle large volumes of high-TAN crude, and Petronas and ConocoPhillips had approved a substantial revamp of its Melaka plant at yearend 2007, according to APEC.

Other refiners have considered plans to revamp their refineries to handle acidic crudes, notably in China, South Korea, and Thailand.

China will continue to dominate high-TAN production, consumption, and imports for Asia-Pacific at least through the medium term. APEC expects, however, a significant increase in high-TAN use by South Korea, Taiwan, Malaysia, Singapore, and India. Chinese exports to the US West Coast may also rise, depending on system needs of Chevron and ConocoPhillips.