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30/10/2015

Making Light Work of Heavy Oil

Despite the wild, short term fluctuations in the commodities market, there are some predictable long term trends that will affect tomorrow’s energy mix. The world’s proven conventional oil reserves amount to 1.3 trillion barrels, enough for approximately 40 years at today’s rate of production1. The theory of “Peak Oil”, originally put forward by Marion King Hubbard, suggests that as there is a finite amount of accessible oil, there will be a date at which the maximum rate of extraction would be reached. When we reach the point of “Peak Oil”, whether due to uneconomic reserves or a lack of technology to retrieve it, production will inevitably decrease and demand will start to climb.

With the knowledge that long term energy demand will surely increase, alternative resources need to be identified. Heavy oil may be that resource as there are proven, recoverable supplies of around 500 billion barrels globally. With heavy oil accounting for 60% of all remaining oil supplies, it is unlikely that it will stay the largely untapped resource that it is for long.

Issues with Heavy Oil

Heavy oil (with an API gravity of less than 22°) and extra heavy oil/bitumen (with an API gravity of less than 10°) have remained relatively untapped resources due to the difficult and sometimes uneconomic methods that are required to extract and transport it. The issues with heavy oil that lead to additional costs consist of the recovery, the transportation and ultimately the quality of the product:

1. Initially, heavy oil requires an enhanced oil recovery method (EOR) such as steam stimulation or steam flooding in order to heat the oil to allow efficient extraction. This leads to higher extraction costs.

2. Heavy oil is very viscous, and therefore cannot be transported through pipelines as easily as conventional oil. Currently producers typically combine the heavy oil with either diluent (typically naphtha or condensate), the “Dilbit” method, combine it with a lighter, synthetic crude oil, “the Synbit” method. Both Synbit and Dilbit bring the viscosity of the oil down to a level that meets the pipeline specifications for transportation.

3. Lastly, when the heavy oil reaches its destination, the low API oil commands a much lower price than light oil as it requires further processing to remove impurities in order to match the standard of WTI at 39.6° API (West Texas Intermediate, commonly used as a benchmark in oil pricing).2

 

Figure 2: Comparison of Crude Oil benchmarks

 

In Venezuela and Canada, oil is being extracted as heavy as 8.5° API and the infrastructure is lacking to handle targeted volumes. In the Orinoco Belt in Venezuela, the heavy oil can be extracted at an average of $10/barrel but then incurs as much as $30/barrel to upgrade the oil to the valuable “Light Crude” benchmark level3. The upgrading process required involves different methods aimed at breaking down the large carbon chains of the oil and removing the impurities. These methods can include Vacuum distillation, De-asphalting, Cracking and hydro-treating. On top of these costs, transporting the oil can total up to $12/barrel4. From these studies, transportation and upgrading costs are clearly the most prohibitive factors in Heavy Oil ventures.

Current Solutions

In March 2013, Suncor announced that they were cancelling the Voyageur oil sands upgrader project stating:

“Since 2010, market conditions have changed significantly, challenging the economics of the Voyageur upgrader project"4

This signaled that, with the increase in light oil production from the U.S and OPEC, heavy oil was becoming decreasingly viable with the conventional value stream of produce, dilute, transport and upgrade. It is unsurprising then that over the past few years several new technologies have been developed in an endeavour to reduce costs aiming at making heavy oil as viable as it could be.

There is currently a large, varied range of technologies focusing on bringing down the transportation costs of heavy oil by improving the viscosity of the oil to a level where far less diluent is required. This would firstly reduce both the cost and exposure to supply risk of diluent (a key risk factor in the long run for the industry), and secondly improve margins by maximising the amount of oil that can flow through the pipeline. These technologies aim to deliver a “near pipeline ready” product, by partially upgrading the heavy oil in the field, ensuring that very little work is required to transport it to the upgrading facilities.

As most of these technologies are in the laboratory or scale up phase, detailed information is quite hard to find. One good source of information is a paper titled “Current situation of emerging technologies for upgrading of heavy oils”5. Within, it compares the different options in terms of their method of processing oil and how developed the technology is; laboratory level, pilot plant or a demonstration plant.

 

Figure 3: Comparison of current emerging technologies

 

Understandably there is a lot of interest in these technologies. The ability to reduce costs by more than $12/barrel on every barrel of heavy oil produced is an opportunity that will not be passed up for long. Currently, these technologies are on the edge of being implemented but, due to short term fluctuations in oil prices and a lack of initial investment, have not yet taken the final step to become fully commercialised and ready for large scale projects.

The Future of Field Upgrading Heavy Oil

The opportunity for technology to field upgrade Heavy Oil is clear. With the inevitable slowdown in production of conventional oil, Heavy Oil reserves are the potential next step to fill the accompanying future increase in demand. With current partial upgrading processes, producers have the opportunity to reduce their costs and therefore increase their margins with very little capital expenditure. Future attempts are likely to go even further with companies such as Fluid Oil and their technology “Viscositor®” that can upgrade Heavy oil to between 29.5° and 35° API for a cost of only $2-5 per barrel. This reduces transportation costs while also increasing the value of the product by supplying a higher grade oil directly to refineries6. In order to manage this, Fluid Oil uses a combination of carbon rejection and hydrogen addition technologies which leads to a high API without the need for high capital expenditure. We will be going into more detail on Fluid Oil and their technology in future articles.

The remaining challenge is for one of these technologies to prove and demonstrate the economics of field upgrading and establish the process as a viable alternative to encourage further investment in heavy oil. With limited capital investment required to deploy the technology and significant returns available to the first product to prove itself in the market, investment firms should take advantage of the opportunity to be at the front of the next shift in the energy industry. By working with energy sector investors, field upgrading technologies can make heavy oil reserves easily accessible as an economic alternative for tomorrow’s energy mix. 

Article by Aneurin Gordon - Consultant

 

References:

1)       Total E&P estimates 
http://www.total.com/en/energies-expertise/oil-gas/exploration-production/strategic-sectors/heavy-oil/challenges/reserves-future

2)       Venezuela’s upgraders are maxed out 
http://blogs.platts.com/2013/11/25/pdvsa-woes/

3)       Field Upgrading – Beyond Diluent 
http://www.albertaoilmagazine.com/2014/04/beyond-diluent/

4)       Suncor scraps Voyageur project 
http://business.financialpost.com/news/energy/suncor-scraps-voyageur-oil-sands-project

5)       Current situation of emerging technologies 
http://www.academia.edu/9889096/Current_situation_of_emerging_technologies_for_upgrading_of_heavy_oils

6)       Viscositor Heavy Oil Upgrading 
http://www.fluidoil.co.uk/the-technology.php

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