The oil refining industry is under unprecedented scrutiny and Ian Salusbury takes a look at the business that powers the world.

What is refining?
The oil industry is in the spotlight. After the oil crises of the 1970’s ended, the industry has been through a period of relative calm and consumers have enjoyed low prices. However, prices have now risen for six consecutive years and recently they have soared to such an extent that there are fears that the global economy will be damaged. The effects of these unprecedented prices have yet to be fully felt and the price of crude still continues to outstrip expectations.

Only 6 months ago, some commentators warned that prices might reach as high as $100 in the next few years, whereas the price actually surpassed $140 in June. Greater demand, reduced supply and a dash of financial speculation have made for an explosive mix.

Oil is used primarily to make transportation fuels and to manufacture petrochemicals. Oil refining involves the fractional distillation of crude oil into its useful components, which range from gases such as butane and liquefied petroleum gas, to liquids like kerosene and gasoline and solids such as paraffin wax.

The main products are gasoline (approximately 50% by volume), diesel (20%), jet fuel (10%) and heating oil (5%). Oil accounts for 36% of the world’s energy consumption and according to BP’s Statistical Review of World Energy, oil consumption grew by 1.1% in 2007 to 85 million barrels per day (bpd); a barrel is equal to 42 US gallons. There were wide variations in demand though: while demand in the EU actually fell by 2.2%, Asia recorded an average increase of 5%.

Worldwide oil production fell by 0.2% in 2007, which partly explains the recent price rises.

The US Energy Information Administration (EIA) projects that demand for oil will continue to grow, reaching 118 million barrels per day in 2030, and that two-thirds of this growth will be down to transportation fuels. Asian countries (particularly China and India) will consume 43% of the extra oil supply. New car sales in China are expected to outstrip those in the US by 2030. Even then, there will only be 140 cars per thousand people in China (compared to around 500 cars per 1000 people in more mature economies).

So it is clear that the demand is there for oil, but who will meet it?

Who are the oil refiners?
There are over 700 refineries around the world. As might be expected of the nation that uses 25% of all the world’s oil resources, the US has the largest number of refineries at around 130 and the greatest overall capacity (16.7 million barrels per day). Russia is the country with the next largest capacity (5.4 million bpd), followed by Japan (4.7 million bpd) and China (4.5 million bpd).

Oil is produced in dozens of countries around the world, but the three largest oil producing countries in 2007 were Saudi Arabia (10.4 million bpd), Russia (10.0 million bpd) and the US (6.9 million bpd). Between them, these nations produced a third of the world’s oil.

The most influential group of producers is the Organization of the Petroleum Exporting Countries (OPEC). This cartel holds around two thirds of the world’s oil reserves and produces 43% of current oil supply. OPEC is made up of 14 countries from the Middle East (Kuwait, Iran, Iraq, Saudi Arabia, Qatar, United Arab Emirates), Africa (Algeria, Libya, Nigeria, Gabon, Angola), South America (Ecuador and Venezuela) and Australasia (Indonesia).

In the first part of the 20th century, oil production was controlled by a group of companies known as the ‘seven sisters’.

Following consolidation in the 1990’s, just four of these companies remain (Exxon Mobil, BP, Royal Dutch Shell and Chevron) and they are still the largest integrated oil companies in the world, producing crude oil as well as refining it. They are all multinational, publicly quoted companies and are known as International Oil Companies (IOC’s).

The IOC’s have shifted their strategy since the mid 1990’s. They used to aim for a widespread of operations in order to protect them from downturns in particular sectors, whereas they are now concentrating their resources on related businesses which require an intensive research effort or produce high value products.

State-controlled companies, known as National Oil Companies (NOC’s), play an increasingly important role in the industry though. A study by Stanford University pointed out that the oil business is unusual because, unlike most other industrial sectors, this is one where the state still dominates. As NOC’s control 75% of the proven reserves and demand is growing, these states will be increasingly able to manipulate their output for political purposes.

This influence, along with the higher revenues that can now be generated, explains the moves by Russia and Venezuela to strengthen state control of their oil resources. The new ‘seven sisters’ were recently named by the Financial Times as Saudi Aramco, Gazprom from Russia, CNPC of China, Iran’s NIOC, Venezuela’s PDVSA, Brazil’s Petrobras and Petronas of Malaysia.

These companies were identified on the basis that they hold one third of the world’s oil and gas reserves, in comparison to the 3% of reserves controlled by the four largest IOC’S.

Threats to the oil supply
The world is dependent on a reliable and continuous flow of oil, but this is prone to disruption from various factors. Many oil reserves are located in areas suffering internal unrest, such as Nigeria and Iraq.

Other supplies can be disrupted by extreme weather events such as hurricanes. After Hurricane Katrina hit oil rigs and refineries in the Gulf of Mexico in August 2005, emergency reserves were released to keep the flow going.

Political disputes can also affect oil supply, especially when NOC’s are involved. This was seen in 2005 when Gazprom cut supplies to Ukraine, in a quarrel over prices which also had political overtones.

There is disagreement about the impact of refinery capacity on the current oil price. BP says that the current rates of utilisation of refineries average 85%, the lowest since 2003, and that ‘by and large the discussion about whether crude oil price increases are caused by lack of refining capacity has ceased’.

However, the International Energy Agency (IEA) believes that investment in refineries has not kept up with demand and states that refineries are running almost at full stretch when the time required for maintenance is factored in.

Dr Fatih Birol, Chief Economist of the IEA, has warned that refinery investment of $18.7bn is required each year until 2030 in order to meet demand. This is needed to develop new capacity, to maintain existing facilities, and also to convert existing plants to deliver a different mix of oil products. World refining capacity is currently around 103% of demand, so there is very little spare capacity.

This resulted from several years of low margins for refining companies and over-capacity. As it takes an average of 5 years to build a new refinery, investment in new facilities requires confidence from the oil companies that demand and price levels will be maintained. New capacity is now being added at twice the rate compared to earlier in this decade.

Indeed, the EIA predicts that there is a risk of oversupply in the Middle East. They also suggest that the growing use of biofuels will add to the excess supplies of gasoline that already exist in Europe, but will help address the shortages of diesel which have arisen as drivers opt for more economic vehicles.

A spokesman for BP said that it was unlikely that new capacity would be developed in Europe or North America as it was too difficult to obtain planning approval and that new refineries were more likely to be built in the Middle East and Asia. He noted that refineries were being updated in order to produce cleaner fuels and to cope with heavier petroleum. In the EU, all transportation fuels must be sulphur-free (a maximum of 0.001% sulfur content by weight) by January 2009.

Some commentators predict that we are either at or near ‘peak oil’, the point at which the discovery of new reserves does not keep up with the rate of consumption. The limited reserves (estimated at less than 50 years at current levels of consumption) have already prompted the exploitation of new resources that were previously uneconomic.

Oil fields are now being planned in deeper waters offshore, oil shale is being mined in vast quantities in Alberta, Canada, and coal-bed methane is being extracted from coal fields in Australia and China. Coal and gas are also being transformed to transportation liquids.

If we really are near peak oil, then other fossil fuels will be needed to eke out our resources. In particular, new ways of producing transportation fuels are needed. Natural gas is already being utilised via the gas to liquid (GTL) process, a technology with a long history but which is only now coming of age. GTL involves the partial oxidation of natural gas (using oxygen from an ASU) to syngas (a mixture of carbon monoxide and hydrogen). Syngas can then be converted to petrochemicals or liquid fuels using the Fischer-Tropsch process.

GTL is said to be economically viable once the price of oil remains above an average of $20/barrel and Hart Energy Consulting forecasts a 7-fold increase in GTL production in the Middle East by 2025. Shell is developing the world’s largest integrated plant, the Pearl GTL plant in Qatar. Production will begin by the end of this decade, and when it is in full flow the plant will produce 140,000 barrels of liquid hydrocarbons each day (naptha, GTL fuels, paraffin, kerosene and lubricant oils), plus up to 120,000 barrels per day of condensate, LPG and ethane.

Linde are constructing eight large ASU’s for the plant, producing 860,000 cubic metres of oxygen each hour. It was the largest single contract ever awarded for ASU’s. Other major GTL plants are also planned by Sasol in Qatar and Nigeria. Jeroen van der Veer, Chief Executive of Royal Dutch Shell, said of GTL, “In Shell, we believe strongly in its potential – and have been pursuing this for more than three decades... According to the International Energy Authority, it could account for 2% of world oil supply by 2030.”

Demand for coal is already growing faster than for any other fuel and this seems likely to continue. At current consumption rates there are enough proven coal reserves to last around 150 years. Gasification of coal (also known as the coal to liquid (CTL) process) is one way of expanding its use beyond power stations.

According to Dr David Gray of Noblis, the CTL process is economically viable if oil prices remain above $50 per barrel. Although use of these new fuels will do nothing to address the problem of global warming, CTL and GTL do have the advantage of producing fuels that are free of sulphur, aromatics and heavy metals.

Environmentalists would much prefer to make use of renewable resources though. Although doubts have recently been cast on the benefits of biofuels, biomass to liquid conversion could provide one environmentally-friendly source of fuels. If the world could move from its reliance on liquid fuels for transportation by developing electric vehicles and a new refuelling infrastructure, then the hydrogen economy becomes a viable option.

This would also require huge investment in electricity generation by renewable energy.

Rises stimulate energy efforts
Oil Price rises will also stimulate efforts to reduce energy use and to improve energy efficiency. This was symbolised recently by GM’s decision to close several plants that manufacture gas-guzzling sports utility vehicles and to consider divesting its Hummer division.

However, some countries (such as China and India and a number of oil exporting nations) subsidise oil. These countries have accounted for most of the growth in consumption,
partly because their consumers have not felt the effect of the price rises.

Effects of peak oil
So far the effect of the record prices on the global economy and prices of other goods has not been as dramatic as might have been expected. Some would say that peak oil is a good thing as it will force the world to develop new ways of generating energy.

Environmentalists hope that this will be via renewable energy but coal and nuclear seem the most likely options to fill the energy gap in the medium term. As 1.6 billion people still lack electricity in their homes, it is certain that we will need to keep pumping oil to meet the demands of existing and new consumers.