The heavy-oil niche

Nov. 19, 2012
Extra-heavy oil is forming subtle intrigue out of the commercial and political practicalities that shape its destiny.

Extra-heavy oil is forming subtle intrigue out of the commercial and political practicalities that shape its destiny.

The commercial practicalities are that refiners able to run heavy crude usually want to buy low-quality feedstock as intensely as producers of the stuff want to sell it. Owners of cokers and hydrocrackers tend to want to use them.

The political practicalities are more complex. The country with the world's greatest concentration of conversion capacity on its southern coast has been unenthusiastic about growing supply of heavy oil from the north. US President Barack Obama stunned Canadian industry and government leaders last year when he delayed approval of the Keystone XL pipeline, which would open transport capacity from Alberta to refining centers on the Texas Gulf Coast.

Sop to carbophobes

Although clearly an election-year sop to carbophobes, the move awakened Canadians to the need for more than one buyer of the synthetic crude oil and blended bitumen flowing out of Alberta at growing rates by pipeline, road, and rail.

Most observers see China as the likely alternative buyer of Canada's viscous hydrocarbons. For now, though, China doesn't have enough conversion capacity to absorb all the heavy material Alberta soon will be producing. And transport of Canadian oil to China requires tankers, which require water, connections with which from Alberta remain eminently deficient.

An alternative to TransCanada's Keystone XL project, Enbridge's proposed Northern Gateway pipeline, would carry Albertan oil to the Pacific. But that project faces environmental opposition, too—much of it, to the irritation of Canadian authorities, funded by US groups dedicated to saving the world from so-called dirty oil.

Somehow, Albertan oil must find a route to the sea, any sea. And it will. The economics are compelling, the environmental opposition unreasonable.

What's more, suitably equipped refiners outside Texas crave the cheap feedstock.

In the first week of October, Reliance Industries Ltd. (RIL) of Mumbai announced a 15-year deal to buy 300,000-400,000 b/d of extra-heavy crude from the state-owned company of anti-US Venezuela. In conjunction with the crude buy, RIL signed a memorandum of understanding to jointly explore Venezuela's richly endowed heavy oil belt with Petroleos de Venezuela SA (PDVSA).

RIL needs heavy feedstock for its two refineries at Jamnagar in the western Indian state of Gujarat, which have total capacity of 1.3 million b/d—largest in the world at a single location. The refineries have 125,000 b/d of coking and 110,000 b/d of hydrocracking capacity. And RIL is adding world-scale capacity to gasify petroleum coke.

Nearby at Vadinar, Essar Energy, like RIL not owned by the Indian government, this year completed an expansion of its refinery to 405,000 b/d of crude capacity in an upgrade enabling the facility to make ultraheavy crude 60% of its feed slate.

Jamnagar and Vadinar are on the southern shore of the Gulf of Kutch, across which at Mundra is a tanker terminal feeding a 1,014-km pipeline connected with the new, 180,000 b/d Guru Gobind Singh refinery at Bathinda, Punjab. The zero-bottoms facility, built by a joint venture of state-owned Hindustan Petroleum Corp. Ltd. and Mittal Energy Ltd. of Singapore, is designed to run heavy, sour, high-acid crudes.

The Gulf of Kutch thus has become a destination for waterborne heavy and extra-heavy oil.

Taking note

PDVSA obviously has taken note. So, apparently, have Canadian officials.

Soon after RIL and PDVSA announced their heavy-oil sales agreement, Canada's minister of natural resources, Joe Oliver, spent 4 days in Delhi and Mumbai talking trade. A press release afterward said the meetings include one with then-Minister of Petroleum and Natural Gas Jaipal Reddy "to advance Canadian energy objectives and increase the potential for Canadian oil and liquefied natural gas exports to India." RIL was on the meetings list.

Interest by heavy-oil producers in the Gulf of Kutch market niche must provide at least some comfort for India, where imports fill 70% of inexorably rising oil demand.

Meanwhile, Venezuela has a steady buyer for some of its extra-heavy crude. And the US has a decision to make.