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Palladian Publications Ltd 2017. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. All views expressed in this journal are those of the respective contributors and are not

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CONTENTS

JOIN THECONVERSATION

THIS MONTH'S FRONT COVER

May 2017 Volume 22 Number 05 ISSN 1468-9340

HydrocarbonEngineering

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03 Comment05 Guest Comment07 World News14 Quick to adapt

Currently, lots of changes are occurring in the North American refining sector. Contributing Editor, Gordon Cope, examines how US Gulf Coast refiners are making the most of them.

19 Bidding to innovateJim Ondyak, Dorf Ketal, USA, discusses how companies can change suppliers between bidding events, taking advantage of technical innovation and boosting profitability.

25 Lean and meanMarina Ivanova and Matt Adams, Douglas-Westwood, UK, explain why a leaner downstream maintenance market is experiencing renewed activity.

28 The devil is in the detailValentin Kotlomin and Ekaterina Kalinenko, Euro Petroleum Consultants, Russia, examine the thought process behind a development programme created for a refinery upgrade.

32 The challenge of changeRainer Pittnauer, Intergraph® Process Power & Marine, Austria, discusses the challenge of change management, and how modern engineering technology can assist.

37 Reliability is kingPhilip McCusker, Air Products and Chemicals, Inc, UK, explains how advanced data analytics has helped gas processing plants improve reliability and maximise operating efficiency.

41 Mindful maintenanceJake Davies, Emerson Automation Solutions, Permasense Technologies, explains how monitoring corrosion in a sour water stripping unit enables a refinery to plan maintenance activities, avoiding unplanned outages and increasing availability and reliability.

45 Environmentally mindedDr. Wolfgang Hater, Christian zum Kolk and Ingo Königs, Kurita Europe GmbH, Germany, discuss the growing movement towards environmentally friendly corrosion inhibitors that are zinc-free and contain minimum amounts of phosphorous.

51 Protective sprayStuart Milton, Metallisation Ltd, UK, explains how thermal sprayed aluminium coatings can help to protect vital equipment against corrosion.

155 Out of this worldStephen Karns, HarbisonWalker International, USA, discusses how petrochemical reformer efficiency can be improved with high emissivity coatings that were originally designed for rocket nozzles.

59 Rediscovering rupture discsOrhan Karagöz, Rembe, Turkey, examines the isolation and protection of safety valves using rupture discs on the upstream and downstream connections.

63 UnconventionalthinkingpaysoffVolker Becker, MAN PrimeServ (MAN Diesel & Turbo), Germany, discusses an equipment turnaround and upgrading case study for a refinery in Romania.

68 Getting creativeSean Phillips, FS-Elliott, USA, reviews the commissioning of a customised compressed air solution for a Middle Eastern oil refinery, and the recommendations for reducing project and maintenance costs while increasing system efficiency.

73 What to expectFernando Romero and Matt Walton, Mitsubishi Heavy Industries Compressor International, USA, examine the effects of impeller manufacturing tolerances on compressor efficiency.

79 A delicate taskMassimiliano Di Febo and Pasquale Paganini, IPC, Italy, discuss how advanced software can assist operators in achieving highly accurate compressor performance predictions.

84 A renewed interestBen Williams, Ariel Corporation, outlines the important role that reciprocating compressors play in renewable hydrocarbon diesel facilities.

189 Competitive edgeGreg Brumfield and Tony Slapikas, AMETEK Process Instruments, USA, outline how mass spectrometry determines flare gas heat values.

193 Fast and preciseThomas Knight, Orbital Gas Systems, USA, examines an option for providing continuous LNG sampling, vaporisation, conditioning and analysis on LNG applications.

198 LNG on the rise in RussiaInessa Shahnazarova and Ekaterina Vankova, Vostock Capital, Russia, present the findings of a recent study into the latest developments in the Russian LNG industry.

104 15 factsThis month we give you 15 facts about refining!

“Change is the only constant” said ancient philosopher Heraclitus, over 2000 years ago. Still today, many owner operators (OOs) struggle with change and how to manage it efficiently. Rainer Pittnauer of Intergraph® Process, Power & Marine discusses the challenge of change management, and how modern engineering technology can help in this issue on p. 32.

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COMMENTCALLUM O'REILLYEDITOR

Back in March, I had the pleasure of attending the 115th American Fuel & Petrochemical Manufacturers (AFPM) Annual Meeting in San Antonio, Texas,

US. While it’s safe to say that the global oil and gas industry is currently in a state of flux, the

atmosphere at the Annual Meeting was largely optimistic. The Trump administration’s ‘America First Energy Plan’ seems to have filled the US petroleum refining and petrochemical manufacturing industries with a degree of hope for the future. You can get a good sense of this optimism by simply turning to the next page of this magazine. In an exclusive Guest Comment for Hydrocarbon Engineering, the President and CEO of the AFPM, Chet Thompson, offers his insight into the current state of the US market and the AFPM’s expectations for the future under a Republican government.

Although an air of quiet optimism may be resonating from the US downstream sector at the moment, the industry is fully aware of the challenges that lie ahead. In his Guest Comment, Mr Thompson is quick to mention the proposed Border Adjustment Tax provision, which is continuing to cause concern for refiners, particularly those serving the domestic market.

Compounding these concerns, an analyst with Wood Mackenzie believes that US gasoline demand is nearing its peak, and is set to decline in the long-term due to “stringent fuel efficiency standards and shifting demographics.”1 Speaking at the AFPM Annual Meeting, Andrew Shepard forecast that US gasoline demand would decline by over 1.5 million bpd by 2030, which will move the country closer to a gasoline surplus. Shepard contends that US refiners will need to start looking for new export markets beside Mexico and Latin America, with Asia Pacific offering an attractive option. He believes that US Gulf Coast refiners will be competitive enough to ship into Asia, although exporting into this market could bring down gasoline prices.

However, Wood Mackenzie holds that the situation will be more complicated for refiners in the Midwest and East Coast. As demand declines, PADD II is set to move into a gasoline surplus. Shepard argues that the outlet for this surplus will be key to the fortunes of Midwest refiners: “If PADD II must push into PADD III to clear the surplus, Midwest gasoline pricing would be severely depressed […] To avoid drastic shutdowns, Midwest refiners must gain increased access to the higher-priced PADD I market.” East Coast refineries, which are already at a disadvantage as they have to pay for imports, face an uphill battle. Shepard believes that approximately half of refining capacity on the East Coast will be shut down in the forecast period, as gasoline prices decline across the Atlantic Basin in the wake of new exports from the US Gulf Coast. However, he warns that even more East Coast capacity could be at risk if competition from PADD II is greater than expected or if new capacity is added from PADD III.

In this issue of Hydrocarbon Engineering, Contributing Editor, Gordon Cope, examines the opportunities and challenges for refiners on the US Gulf Coast (p. 14). And in the build up to the AFPM’s Reliability & Maintenance Conference & Exhibition, this issue includes a number of articles looking at the downstream maintenance market, plant upgrades and asset integrity.

1. SHEPARD, A., 'What happens to US refineries when demand declines', Wood Mackenzie, presented at the AFPM Annual Meeting, San Antonio, Texas, US (March 2017), https://www.woodmac.com/reports/refining-and-oil-products-what-happens-to-us-refineries-when-demand-declines-46278045

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GUEST COMMENT

May 2017HYDROCARBON ENGINEERING

5

W hat a difference a year makes. From a change in administration to a new Congress, the petroleum refining and petrochemical manufacturing industries

have every reason to be optimistic.The US Energy Information Administration (EIA)

predicts that through the middle of the 21st Century, petroleum products will continue to supply more than a third of US energy demand – and more than 40% of global energy demand. US refineries are among the most competitive in the world. They supplied more than 225 billion gal. of transportation, heating, and other fuels to consumers in the US, as well as in Latin America, Europe, Africa and Asia. The rapid growth in oil production creates thousands of high-paying jobs and decreases the US’ dependency on foreign supplies.

A decade ago, we imported 12.4 million bpd of crude and refined products. In 2016, that number was slashed to only 4.8 billion bpd – the lowest since 1985. In fact, in the latter part of 2016, for the first time ever, we exported more crude and refined products to Latin America than we imported from the region.

Simply put, we are the world’s refiner.While I am hopeful about the state of the

industry, I am also realistic about the work that needs to be done to ensure growth continues at the current rate. Cutting back on the red tape and abusive regulations needs to go hand-in-hand with tax reform to guarantee that the US oil and gas industries remain competitive, and able to keep up with demand.

The America First Energy Plan is a primary example of how both Congress and the new administration can work to promote business and economic growth.

With the goal of improving public infrastructure and lifting restrictions – sound energy policies can finally be put back on the table.

In addition, Congress has taken crucial steps to rollback aggressive regulations. The Midnight Relief Act, the REINS Act, and the Regulatory Accountability

Act will bring back faith in the US economy. President Trump’s freeze on new or pending regulations will scale back years of a regulatory legacy that put our security and prosperity second. The REINS Act will require agencies to get Congressional and Executive approval before enacting ‘major rules’. In simple terms, it will ensure that large actions taken by agencies are responsible, fair, and economically sound.

Along with regulatory reform, it is time that the government executes sensible, pro-growth tax reform. At the forefront of this issue is the proposed

Border Adjustment Tax provision. The AFPM supports comprehensive tax reform, but refiners are concerned that a border-adjusted tax could have considerable impacts on the industry, consumers and the economy. We hope to work closely with the House Ways and Means Committee to implement the best plan forward.

At the American Fuel & Petrochemical Manufacturers Association, we are proud to serve the American people. For 115 years, we have made progress possible, and we don’t plan on slowing down now.

The AFPM supports comprehensive tax reform, but refiners are concerned that a

border-adjusted tax could have considerable

impacts on the industry, consumers and the economy.

CHET THOMPSONPRESIDENT & CEO, AMERICAN FUEL & PETROCHEMICAL

MANUFACTURERS (AFPM)

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WORLD NEWS


7

USA | Williams Partners to sell interests in Geismar olefins facility

W illiams Partners L.P. has agreed to sell 100% of its membership

interest in Williams Olefins LLC, which owns an 88.46% undivided ownership interest in the Geismar, Louisiana, olefins plant and associated complex, to NOVA Chemicals for US$2.1 billion in cash, subject to customary closing conditions.

Upon closing of the transaction, Williams Partners' subsidiaries will enter into long-term supply and transportation agreements with NOVA Chemicals to provide feedstock to the Geismar olefins plant via Williams Partners’ Bayou ethane pipeline system in the US Gulf Coast.

These agreements secure a meaningful long-term fee-based revenue stream for the partnership.

Williams Partners plans to use the cash proceeds from the Williams Olefins transaction to pay off its US$850 million term loan and to fund a portion of the capital and investment expenditures that are a part of the partnership’s extensive growth portfolio. Williams expects that for federal tax purposes, any taxable gain generated from the transaction will be sheltered by its net operating loss carry-forwards.

India | Reliance commissions ethane project

Reliance Industries Ltd has announced the successful

completion of its ethane project, including commissioning of its ethane receipt and handling facilities and ethane cracking, at its Dahej Manufacturing Facility in Gujarat in less than three years.

The project involved seamless

integration of several elements across a complex infrastructure value chain. This includes securing ethane refrigeration capacity in the US Gulf Coast; delivery of dedicated very large ethane carriers (VLECs) to carry ethane from the US Gulf Coast to the West Coast of India; construction

of ethane receipt and handling facilities; laying pipelines and upgrading crackers (to receive ethane) at its Dahej, Hazira and Nagothane manufacturing facilities.

The execution of this project at this scale and magnitude is a world first.

USA | GE Oil & Gas awarded LNG project contract

NextDecade LLC has entered into an agreement with GE Oil & Gas

to advance its LNG export projects and associated pipelines in Texas.

GE Oil & Gas has been selected as the exclusive supplier of gas turbine and compressor equipment for the liquefaction trains of the Rio Grande LNG project and the associated Rio Bravo Pipeline.

In addition to technology and services, GE Oil & Gas is providing NextDecade with a common equity investment, and is granted the right

to invest up to a specified amount in project-level equity and debt financing for Rio Grande LNG at the time of final investment decision (FID).

NextDecade also recently announced that it had entered into a definitive merger agreement with Harmony Merger Corp. The proposed merger is expected to close in late 2Q17. Consummation of the proposed merger will result in NextDecade becoming a publicly listed company.

Egypt | Bechtel to deliver petrochemicals project

Bechtel has been awarded two contracts by Carbon Holdings

of Egypt: one to provide project management services for the Tahrir Petrochemicals Complex at Ain Sokhna, Egypt, and one to build two new polypropylene units at an adjacent site. In its project management role, Bechtel will have oversight of project execution and contractor performance on what will be the largest petrochemicals complex in Egypt.

Bechtel will also design, build

and procure all the equipment and materials for the polypropylene production expansion at the complex's existing Oriental Petrochemicals site.

Basil El Baz, the Chairman and CEO of Carbon Holdings, said: "We are very pleased to be working with Bechtel. The selection of a world-class contractor is critical to ensuring the successful delivery of a facility as large and as complicated as Tahrir Petrochemicals."

WORLD NEWSIN BRIEF

May 2017 HYDROCARBON ENGINEERING

8

USA | Air Liquide to supply hydrogen purification PSA unit

A ir Liquide Engineering and Construction will supply a

hydrogen purification pressure swing adsorption (PSA) unit to one of the largest methanol production facilities to be built by Yuhuang Chemical Inc. (YCI) in St. James Parish, Louisiana.

Purified hydrogen will enable higher efficiency of methanol production, with less natural gas consumption per ton of methanol.

In 2014, Air Liquide was selected

as the technology provider for the methanol plant. A year later, it was contracted to supply oxygen for its world-scale methanol manufacturing complex. Air Liquide Engineering & Construction also provides detailed engineering and procurement services for the complex.

Construction of the methanol complex has begun this year, with the first phase of the methanol project beginning operations by late 2019.

austriaOMV has announced that it has invested approximately €110 million for a planned turnaround at the petrochemical units of its Schwechat refinery. There will be a comprehensive, routine safety inspection, carried out in cooperation with TÜV Österreich. This turnaround is mandatory and is held once every six years. The 2017 turnaround will take place in parallel with the turnaround at the neighbouring Borealis plant.

belgiumVopak and Exmar have released a joint statement confirming that Vopak will not be pursuing its proposed acquisition of Exmar's participation in floating storage regasification unit (FSRU) assets. The two companies previously announced a conditional agreement on the deal in December 2016. Finalisation of the deal was subject to consent and cooperation of multiple stakeholders.

usaFluor Corp. has been selected by a division of Marathon Petroleum Corp. to execute the engineering and procurement scope for a major reconfiguration at Marathon’s Galveston Bay and Texas City refineries. The reconfiguration will allow the two refineries to achieve updated US Environmental Protection Agency (EPA) Tier 3 gasoline sulfur standards. The scope of the contract includes a new unit, modernisation of several existing units, and modifications to the utilities and offsites to support the scheduled process changes and refinery connections.

China | CB&I announces technology award

CB&I has been awarded a contract by Zhejiang Petroleum and

Chemical Co. Ltd (ZPC) for the license and engineering design of a single train 220 000 tpy diphenyl carbonate (DPC) unit, based on Versalis technology, for a refining and petrochemical complex in China.

CB&I previously announced the CDAlky® license and two Chevron

Lummus Global (CLG) hydrocracking units for the project. CLG is a joint venture between Chevron and CB&I.

"CB&I appreciates the opportunity to provide an additional technology to ZPC's complex in China, making it the largest single train DPC plant in the world," said Philip K. Asherman, President and Chief Executive Officer of CB&I.

Czech Republic | Neste Jacobs wins refinery energy study contract

Neste Jacobs has been awarded a contract to perform a

comprehensive energy efficiency study of Unipetrol's Litvinov oil refinery in the Czech Republic.

The energy efficiency study will be performed by utilising Neste Jacobs' proprietary NAPCON energy performance analysis.

The study will review existing energy consumption and production within the refinery process units. This includes pinch-analysis to identify opportunities to improve heat

integration of the process. This is combined with fired heater optimisation to maximise the benefits. The study also includes waste water optimisation assessment to minimise the water usage and recycling of waste water.

Meanwhile, Neste has announced that it has started to distribute its Pro Diesel in its Estonian station network.

Distribution will start with four stations and will be expanded throughout May to cover 20 Neste stations in Estonia. A World of Solutions

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WORLD NEWSIN BRIEF


10

USA | ExxonMobil and SABIC select San PatricioCounty

ExxonMobil Chemical Company and SABIC have each announced

the selection of a site in San Patricio County, Texas for potential development of a jointly owned petrochemical complex on the US Gulf Coast.

The proposed multibillion dollar investment would include a world-scale ethane steam cracker capable of producing 1.8 million tpy of ethylene, which would feed a monoethylene glycol unit and two polyethylene units.

The proposed project, one of 11 that ExxonMobil announced as part of its 10 year, US$20 billion 'Growing the Gulf' initiative, is expected to create thousands of jobs during the construction phase, as well as 600 new, full-time jobs and 3500 indirect jobs during operations. It is also expected to generate more than US$22 billion in economic output during the construction phase and more than US$50 billion in economic output during the first six years of operations.

usaClearSign has received a follow-on order from a refinery based in California. The order follows DuplexTM technology's successful pilot project. In this project, ClearSign retrofitted the company's vertical cylindrical refinery heater with its technology to comply with air emissions requirements. After the retrofit, independent testing conducted by a third-party confirmed NOX single digit emissions.

germanyGlobal Bioenergies has succeeded in producing isobutene by fermentation at the scale of the Leuna Demo plant, with run length and performances exceeding those performed on the pilot plant in Pomacle, France. Success in this phase of the process' scale up was obtained less than five months after start-up of the fermentation unit at the Leuna Demo plant.

chinaZhejiang Petroleum and Chemical Co. (ZPC) has awarded and signed contracts for the engineering, technology license and proprietary equipment for a MECS® sulfuric acid regeneration unit, licensed by DuPont Clean Technologies. ZPC is constructing a greenfield refinery and petrochemical project on Dayushan Island. The US$15 billion project is the largest privately led project in China’s history, and will be executed in two phases; the first coming online in 2018.

usaThe US Department of Energy (DOE) has signed an order authorising Golden Pass Products LLC to export up to 2.21 billion ft3/d of LNG to countries that do not have a free trade agreement (FTA) with the US. The LNG will be exported from the company's Golden Pass Terminal near Sabine Pass, Jefferson County, Texas.

Canada | Parkland to acquire Chevron Canada's downstream fuel business

Parkland Fuel Corp. has entered into an agreement with Chevron

Canada Ltd (CCL) to acquire all of the shares of Chevron Canada R&M ULC, which operates its Canadian integrated downstream fuel business.

The acquisition places important British Columbia (B.C.) infrastructure under experienced Canadian ownership.

The business acquired as part of the acquisition consists of 129 Chevron-branded retail service stations principally located in Metro

Vancouver; 37 commercial cardlock and three marine fuelling locations; as well as a complimentary refinery in Burnaby, terminals located in Burnaby, Hatch Point, and Port Hardy, B.C., and a wholesale business that includes aviation fuel sales to the Vancouver International Airport.

Subject to satisfaction of customary closing conditions, Parkland will pay approximately CAN$1.46 billion, plus an estimated CAN$186 million in working capital for the acquired business.

Japan | Nikkiso Co. Ltd to acquire Cryogenic Industries

N ikkiso Co. Ltd has agreed to acquire the business and

trademarks of Cryogenic Industries Inc. and Cryogenic Industries AG.

The deal will include all of the company’s operations, including ACD, Cosmodyne and Cryoquip, as well as their respective subsidiaries. The acquisition is expected to close mid-2017, subject to

regulatory approvals.Cryogenic Industries aligns with

Nikkiso’s philosophy of operating each of its product companies as a distinct entity, while utilising the synergy of service capabilities and logistics across all product groups. Cryogenic Industries also adds additional service centres to Nikkiso's global service network.

INNOVATIONINNOVATION

Engineered for reliability.As LNG demand increases, reliability is fundamental to avoid costly unplanned maintenance and production shortfalls. For compact separators used in the liquefaction section of an LNG plant, feed distribution is a critical component of the overall separator design.

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INNOVATIONINNOVATION

Engineered for reliability.As LNG demand increases, reliability is fundamental to avoid costly unplanned maintenance and production shortfalls. For compact separators used in the liquefaction section of an LNG plant, feed distribution is a critical component of the overall separator design.

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WORLD NEWS


12

IGU | Growth in LNG supply projects

The International Gas Union’s (IGU) 2017 ‘World LNG Report’ notes a

significant growth in LNG supply projects in 2016, as well as increases in demand for LNG as a fuel from new and existing markets across the globe.

Global LNG trade in 2016 climbed 5% from 2015 to reach a record 258 million t. This increase is noticeable when compared with the average 0.5% growth rate of the previous four years. The IGU attributes the growth to a significant increase in new supply, due largely to the start of exports from the US Gulf of Mexico, as well as the start of

commercial operations in Australia Pacific LNG, among others.

The most pronounced increase in LNG demand comes from Asian markets, with China’s LNG consumption increasing by approximately 35% to 27 million tpy.

Global liquefaction capacity reached 339.7 million tpy in 2016. This growth includes new projects such as Sabine Pass LNG, as well as Gorgon LNG and Australia Pacific LNG. Global liquefaction capacity is expected to grow significantly over the next few years, with 114.6 million tpy of capacity under construction as of January 2017.

EIA | Chinese crude imports from non-OPEC countries

China is the world’s largest net importer of crude oil, and in

recent years its crude oil imports have increasingly come from countries outside the Organization of the Petroleum Exporting Countries (OPEC). While OPEC countries still made up most (57%) of China’s 7.6 million bpd of crude oil imports in 2016, crude oil from non-OPEC countries accounted for 65% of the growth in its imports between 2012

and 2016. Leading non-OPEC suppliers included Russia (14% of total imports), Oman (9%), and Brazil (5%).

On an average annual basis, China’s crude oil imports increased by 2.2 million bpd between 2012 and 2016, and the non-OPEC countries’ share increased from 34% to 43% over the period. Market shares for China’s top three non-OPEC suppliers (Russia, Oman, and Brazil), all increased over these years.

API | US petroleum demand increases

The American Petroleum Institute (API) reports that total petroleum

deliveries in March 2017 climbed 0.2% on the corresponding period of last year to average nearly 19.7 million bpd. These were the highest March deliveries since 2008.

In 1Q17, total domestic petroleum deliveries were up 0.4% compared with 1Q16 to average 19.5 million bpd.

Gasoline deliveries in March were up from the prior month, but down from the prior year, and the prior first quarter. Total motor gasoline deliveries increased 4.3% from February, but were

down 1.7% from March 2016 to average 9.2 million bpd.

US crude oil production decreased 0.2% from March 2016 to average 9.2 million bpd. NGL production was up from the prior month and the prior first quarter, but was down from the prior year, averaging 3.4 million bpd.

US total petroleum imports in March averaged nearly 10 million bpd. Total petroleum imports were down 3.8% from the prior month, and down 0.1% compared with the prior year. Total petroleum imports were up 4.4% in 1Q17 compared with 1Q16.

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HE_full page_2015_Feb 2016.indd 1 2/4/2016 10:25:38 AM

May 2017 14 HYDROCARBON ENGINEERING

Currently, lots of changes are occurring in the North American refining sector. Contributing Editor, Gordon Cope, examines

how US Gulf Coast refiners are making the most of them.

Quick to

adapt


T he US has the capacity to produce 19 million bpd of fuel and associated products. Slightly over half that (9.8 million bpd) is located in Petroleum Administration for Defense Districts (PADD) III

district, which includes the Gulf States of Texas, Louisiana, Mississippi and Alabama.

One of the most eventful changes over the last several years is the evolving mix of refinery feedstock in the US Gulf Coast (USGC). Traditionally, refiners have relied on a blend of lighter domestic crude, lighter imported crude, and heavy stocks delivered by tanker from Mexico and Venezuela.

Over the last several years, however, changes have occurred. While Mexico and Venezuelan imports have dropped due to decreases in output in their respective countries, Canadian heavy crude from the oilsands has increased dramatically due to the recent completion and repurposing of various pipelines that allow product to flow from PADD II terminals to the Gulf. Some of the projects include the Seaway Twin Pipeline from Cushing, Oklahoma, to the Enterprise Crude Houston (ECHO) terminal in Texas, and, hence, to numerous destinations along the coast.

There has also been a 3 million bpd surge of light tight oil (LTO) coming from unconventional shale oil production. USGC refineries have accommodated increased purchases of domestic LTO by reducing purchases of imported light oil. This has been a costless way of absorbing increased domestic production, but other approaches are being considered in order to optimise profitability.

Low cost refinery modifications include de-bottlenecking, such as replacing gathering trays and condenser units needed to collect the larger volumes of lighter distillation products at the top of the atmospheric distillation unit (ADU) column. More expensive options include capacity expansion; increasing ADU capacity, secondary processing capacity, and integrated projects that include both ADU and secondary modules.

Refiners are analysing the opportunities and adjusting accordingly. ExxonMobil, for instance, is expanding output at its 345 000 bpd refinery in Beaumont, Texas. The expansion consists of two separate projects. The first, due for completion in 2018, involves the installation of a 40 000 bpd SCANfining unit (short for selective cat-naphtha hydrofining) that will produce gasoline that

Clearwater Beach, Florida, on the Gulf of Mexico.


16

meets the US Environmental Protection Agency's (EPA) Tier 3 gasoline sulfur specifications. In addition, ExxonMobil is adding a 20 000 bpd module that will allow it to process light crudes from US shale. The latter project is expected to be operational by late 2017.

In late 2016, US refiners set a gasoline production record of 10.5 million bpd. Since domestic use has been stagnant, refiners have been exporting over 1 million bpd. Over half of the exports, some 600 000 bpd, originate in PADD III Gulf Coast facilities.

USGC refiners are using their proximity to Latin America to deliver increasing amounts of fuel to countries that lack capacity to meet domestic needs. Mexico is a case in point; while Pemex, the state-owned monopoly, has 1.6 million bpd refining capacity, chronic underinvestment in recent years has resulted in outages and decreased efficiencies to the point where it only produces approximately 330 000 bpd of gasoline, less than half the daily consumption of 820 000 bbls. Most of the shortfall of 490 000 bpd is made up from USGC refiners, who shipped slightly under 400 000 bpd in late 2016.

Most of the shipments arrive at the port of Tuxpan, Vecacruz, on Mexico’s east coast. The increased traffic has placed a heavy strain on Pemex’s existing import infrastructure. Fortunately, the country has passed legislation to de-monopolise the oil and gas sector, and private entities are now stepping into the breech. In August 2016, TransCanada announced it was joining a consortium with Mexico-based Sierra Oil and Gas and marine shipper Grupo TMM to build a US$800 million project that includes offloading and storage facilities in Tuxpan, and a 265 km pipeline to the interior town of Tula (located north of Mexico City) capable of handling 100 000 bpd of fuel.

Howard Midstream is also building the Dos Aguilas project, a 287 mile, 12 in. pipeline that will carry refined products from Corpus Christi, Texas to Nuevo Laredo, Tamaulipas, and Monterrey in northern Mexico. The project, which is expected to be in service by mid-2018, will include 1.2 million bbls of storage. Nustar Logistics and Pemex are building a refined products line from Edinburg, Texas, to Pemex’s Burgos gas plant near Reynosa, Mexico. The 10 in. line will be 46 miles in length.

ChallengesSafety continues to be a major concern at refineries. In late November 2016, a fire broke out at a compressor in ExxonMobil’s 502 000 bpd refinery in Baton Rouge, Louisiana. Six people were injured. In August, a fire broke out at Motiva Enterprises 227 000 bpd refinery in St James Paris, Louisiana. It occurred in the H-Oil unit; emergency crews quickly contained the incident, with no injuries reported. In April, Houston Refining reported a fire in the coker at its 268 000 bpd refinery located in the Houston Ship Channel. The fire was quickly extinguished, and no injuries were reported.

The US Chemical Safety Board (CSB) called for greater diligence. It noted: "Despite some positive initial steps toward improvement in process safety management at the federal level, CSB investigations have emphasised the

need for a more comprehensive process safety management system in the US to protect worker safety, public health, and the environment."

Although refiners have not suffered as badly as producers in the recent downturn, their profits are diminishing. According to Muse, Stancil & Co., 3Q16 margins averaged US$13.25/bbl for Midwest refiners, US$14.61/bbl for West Coast refiners, US$8.54/bbl for Gulf Coast refiners, and US$3.31/bbl for East Coast refiners1. In the same time frame for 2015, refining margins were US$24.12/bbl, US$25.68/bbl, US$12.62/bbl, and US$6.88/bbl, respectively.

The lower margins are reflected in lower profits. Valero Energy Corp., for instance, reported a net income of US$645 million for 3Q16, less than half (US$1.4 billion) reported in 3Q15. Analysts and operators largely blame the cost of renewable identification numbers (RINs) for lower returns.

EPA regulations under the Renewable Fuel Standard (RFS) programme stipulate a renewable volume obligation (RVO), a percentage of renewable fuel that must be blended into fuel that is sold to US consumers. The RVO quota increases every year under statutory mandates. If a refinery cannot meet its RVO by directly blending renewables into its fuels, it must purchase RINs, which are credits attached to each gallon of renewable fuel produced. In 2016, refiners paid approximately US$2.2 billion for RIN credits, pushing many refineries to the point of bankruptcy.

Further complicating the matter, the RFS also requires the inclusion of cellulosic biofuels (essentially ethanol produced from the non-food portions of plants, such as corn husks). The original statutes called for the inclusion of 4.25 billion gal. by 2016, but the EPA, recognising that the biofuel sector did not have enough capacity to meet the mandated target, used its waiver authority to reduce the amount to 230 million gal. In late 2016, the American Fuel and Petrochemical Manufacturers (AFPM) calculated that the biofuel sector was only able to deliver approximately 174 – 190 million gal., 40 – 56 million short of the target. Since the shortfall by third-parties would require refiners to buy cellulosic RINs worth up to US$75 million for ‘phantom fuel’, the AFPM petitioned the EPA to grant a partial supplemental waiver in an amount equal to the shortfall.

Although the sulfur content of transportation and heating fuels has been declining for several years due to federal and state mandates, new international regulations on limits are set to take effect in 2020. The fuel market for large marine vessels represents a significant percentage of refinery output. The International Maritime Organization (IMO) is now calling for allowable sulfur limits in bunker fuel to be reduced from 2.5% by weight (approximately 25 000 ppm) to 0.5% (500 ppm).

While refiners can add new sulfur-removing modules to clean up bunker fuels, it is a costly proposition, and one in which the payoff is uncertain. Owners that operate ships in coastal waters (such as ferries and cruise ships) have been adding scrubbers to their vessels in order to meet obligations, while still using bunker fuel. Other

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18

operators have switched to lighter fuels, and even LNG. All options mean lower demand and lower profits for refiners, compounding the decision-making process.

Positives (and politics)Refiners are moving to shore up their finances through various means, including mergers and acquisitions. In November 2016, Western Refining agreed to merge with San Antonio-based Tesoro for US$6 billion. The deal gives Tesoro several new refineries located in New Mexico and Minnesota, as well as the 131 000 bpd refinery in El Paso, Texas. Upon completion of the deal, Tesoro will own 10 refineries with a combined capacity of 1.1 million bpd. Tesoro has also publicly stated that it is evaluating opportunities to enhance its portfolio in the lucrative Permian basin in Texas.

The long-standing dispute with the EPA over the RFS may be reaching a conclusion. Carl Icahn, a special adviser to President Donald Trump and the partial owner of

CVR Energy refineries, has publicly called for the reform of the renewable fuel credits.

On inauguration day in January 2017, the White House released the America First Energy Plan, which stated: "For too long, we’ve been held back by burdensome regulations on our energy industry, President Trump is committed to eliminating harmful and unnecessary policies such as the Climate Action Plan and the Waters of the US rule. Lifting these restrictions will greatly help American workers, increasing wages by more than US$30 billion over the next seven years.” The plan intends to leverage the US$50 trillion worth of hydrocarbons on federal land to help pay for infrastructure.

It also indicated that the administration will focus the EPA on its primary mission of protecting the nation’s air and water: “Protecting clean air and clean water, conserving our natural habitats, and preserving our natural reserves and resources will remain a high priority.”

In late 2015, the White House under President Obama announced that the Keystone XL project, a 590 000 bpd pipeline designed to deliver heavy crude directly from Alberta to Gulf Coast refineries, was rejected. When President Trump took office in January, he signed an executive order to accelerate approval of the project. TransCanada subsequently submitted a new Presidential Permit application to the US Department of State. Although the project still faces many hurdles, the addition of a reliable source of heavy crude would be most welcome in the USGC.

Other moves may create complications, however. The Trump Administration has proposed a Border Adjustment Tax (BAT) to reduce trade imbalances with certain nations, such as China and Mexico. Although details remain sketchy, a 20% border tax on imports, including roughly 10 million bpd of crude, has been floated. Some refiners in the USGC could adjust by increasing domestic LTO consumption, but refiners located on the east and west coast, where pipeline access is relatively limited, would still have to rely primarily on imports for their crude slates. Since the proposal also includes a cut in export taxes, USGC refiners would benefit from gasoline and diesel exports, but refiners providing for the domestic market would have little succour. Industry executives estimate that the BAT would add as much as US$0.40/gal. to the price at the pump, which, in turn, would depress consumption.

ConclusionWhile the Republican victory in the 2016 election is a harbinger of relief for the refining sector, many challenges remain. Stakeholders in not only the USGC, but throughout North America, will have to work diligently to anticipate and respond to the shifting supply and demand, regulatory and legislative landscape in order to maintain profitability, and persevere.

References1. 'Refining Margins', Muse, Stancil & Co., OGJ Statistics,

(12 December 2016) .2. 'Approximating the Disproportionate Growth in the Cost of Capital

Projects', white paper, Westney Consulting Group, (July 2014).

Associated petrochemical projectsThe USGC is also undergoing a rapid expansion of its petrochemicals sector. Both oil and chemical companies are taking advantage of inexpensive natural gas and abundant ethane supplies to build new capacity. According to the US EIA, domestic ethylene nameplate capacity stood at approximately 29 million tpy in 2012

Between 2013 and 2015, a series of 15 projects involving capacity expansions, feedstock conversions or restarts added approximately 2 million tpy nameplate capacity (and 140 000 bpd ethane throughput capacity) to the industry. They include Dow Chemical’s restart of the Hahnville, Louisiana plant, LyondellBasell’s expansion at LaPorte, Texas, and Westlake Chemical’s feedstock conversion at Calvert City, Texas.

In addition, five new plants are expected to come onstream in 2017, including Dow Chemical’s 1.5 million tpy facility in Freeport, Texas; Oxychem/Mexichem’s 544 000 tpy plant in Ingleside, Texas; Chevron Phillips’ 1.5 million tpy and ExxonMobil’s 1.5 million tpy projects in Baytown, Texas; and Formosa Plastics' new 1 million tpy plant in Point Comfort, Texas.

In all, the 2016 expansions and 2017 greenfield projects in the USGC and other jurisdictions will add over 7 million tpy nameplate capacity (and 400 000 bpd of new ethane throughput capacity). By the end of 2017, the US ethylene nameplate capacity is expected to exceed 38 million tpy, which represents almost 40% growth.

While the repatriating of the petrochemical sector is a positive step, it is having consequences. Westney Consulting reports that construction costs, which have held relatively steady at 20 – 25% of total capital costs on large construction projects since the 1970s, have now risen to 40 – 45%.2 Part of the increase is due to rising labour costs where skilled trades are in short supply.

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