REFINERY SECURITYElspeth Thomson and Dickson YeoEnergy Studies Institutefor ESI Energy Security Conference22 May 20091Outline1. What is Oil Refining?2. Oil Refining Globally- Physical, Economic and Political Vulnerabilities3. Oil Refining in Asia- Vulnerabilities4. Conclusion2What is Oil Refining? Crude oil itself is useless. It must be refined into various oil products. Procuring crude oil is one thing, procuring the right quantity and types of petroleum products (pps) is quite another. The worlds largest producers of crude are not necessarily also the largest refiners, e.g. Iran is the worlds 4thlargest oil producer, but often has to ration petrol due to lack of refining capacity.3Refinery Operations Typically process one hundred to several hundred thousand barrels of crude each day Usually operate 24/7 Require steam, cooling water, electric power, storage tanks for crude oil feedstock, intermediate products and end products4PP CategoriesThere are basically four types of crude:lightheavy (asphaltic, bitumen)sweet (non-sulphurous)sour (sulphurous)- High quality crude oil is increasingly harder to find Refining splits fractions based on boiling points and relative solubility. The crude is refined into:- fuels- lubricants- feedstock in petrochemical processes that make plastics, detergents, solvents, elastomers and fibers such as nylon and polyesters5Main PPsLight distillatesLPG, gasoline (petrol), naphthaMiddle distillateskerosene and related jet aircraft fuels, dieselHeavy Distillates and Residuumfuel oils, lubricating oils, paraffin wax, asphalt and tar6Vulnerabilities Physical Economic Political7Attacks on Refineries Operation Tidal Wave Allied strategic bombing of Nazi oil refineries in Polesti, Romania (June 1942). Negligible impact due to heavy air defense efforts and lack of precision targeting technology; most of the facilities recovered within weeks. Al-Khobar massacres- Al Qaeda attack on oil installations and foreign workers complex in Saudi Arabia. Large number of civilian casualties with no direct physical damage caused to oil refinery facilities. However,led to exodus of key oil industry personnel and impacted investor confidence.(April 2004) Abqaiq Oil Refinery complex - attacked by explosives-laden car. Heavy security and blast proof gates prevented terrorists from detonating their bombs. Paralysing Abqaiq would have devastated Saudi oil exports and led to an immediate hike in international crude prices.(Feb 2006)Attacks (cont) Laju Incident: Terrorists attempted to bomb Pulau Bukom: Singaporerefinery owned by Shell. They succeeded in detonating 3 explosives but caused little damage. Marine police and sentry guards managed to fend them off.(31 January 1974)Physical Vulnerabilities- key targets in WW II and the Iran-Iraq war (1980-1988)- Capital intensive industrial facilities which require intricate technical co-ordination to function, making them vulnerable to sabotage and sensitive to structural attacks.- Skilled manpower can become direct targets for saboteurs and terrorists.- The oil, waste gases, chemicals, etc., are typically flammable and can cause significant damage to surrounding civilian facilities when ignited. Many refineries around the world are in close proximity to major urban concentrations.- Refineries and their associated infrastructure have high media visibility which increases their attraction to saboteurs whom are intent on making a major statement.10Economic Vulnerabilities: Perpetual Imbalance Not just a question of total refining capacity matching demand, but the right production mix, e.g., sometimes a global shortage/excess of distillates, other times a shortage/excess of fuel oils. Recently, refining capacity globally has increased by less than 2 mbpd while demand for pps has increased nearly 4 mbpd. Several projects under construction now, butthe current global recession has caused demand for pps to fall sharply. Refinery capacity shortages contributed to the high oil prices in 2008 11Economic Vulnerabilities (cont) Ideally, all parts of the oil industry require continuous investment for supply/demand equilibrium. The current low oil prices have helped cushion the economic recession, but many refinery projects around the world have been cancelled.Many refineries are not operating at full capacity. Oil tankers parked offshore awaiting higher prices. Merrill Lynch estimates that global demand for pps will drop by 5.2 mbpd below capacity in 2009. Asian demand for pps was expected to grow at the fastest rates over the next couple of decades. Key question how long and deep will the current global financial turmoil affect Asia? 12Refinery Investment Refining industry was hit hard by the 2008 hurricanes in the US.With low crude oil prices, replacing that capacity is less appealing. Refineries cost billions to build, and take several years to complete. They are not generally hugely profitable. Factors influencing construction are: input prices,output prices (rate of return) and government regulation. In recent years, strict environmental rules have been put in place: rules governing the operation of the plants, and also the products they produce,i.e., cleaner fuels. Much of the worlds existing refineries are now undergoing modification to produce cleaner fuels. No new refinery built in the US since 1976.13Political Vulnerabilities: Energy Nationalism State-owned companies have both strategic and commercial interests, whereas private companies are generally focussed entirely on commercial interests. Private companies generally prefer upstream activities exploration, retrieval and production of oil. They are looking for high returns and tend to avoid activities with variable margins.14Political Vulnerabilities(cont) Target the facility itself Target the people working at them An attack may be a protest over a countrys activities elsewhere Civil war Inter-state war15Oil Refining in Asia Much of future global demand for pps is in Asia, and much of the worlds planned refinery capacity expansions this year and next are taking place in Asia, especially India, China and Vietnam. Much of the new capacity in Asia is designed to take the poorest quality crudes sour, heavy, highly acidic, etc. Some worry that the new refinery capacity may outpace demand for pps16Refining in Asia (cont) Much of Asia has regulated markets, i.e. prices for various oil products are considerably below international prices. This causes distortions and dulls global price signals, hence demand/supply often imbalanced. Refineries in Asia are relatively low-cost because wages are lower than in the west. Thus, they will not feel the pinch of the recession quite so much. Should countries aim to be self-sufficient in ALL pps?17Asian Refineries(cont) Most of the Asian refineries take crude from Middle East.It is expected that they will take on more from Russia and West Africa. Trying to adapt refineries to take cheaper grades18Strategic Petroleum Reserves1. IEA requires the holding of 90 days worth of reserves2. Japan and Korea are IEA members3. China and India are building SPRs4. Singapore has reserves5. Rest of Asia? 19Conclusion1. Refineries are indispensable in modern society.2. Many new refinery installations are under construction in Asia now and more are planned.3. Spurred by various local and/or international political motivations, these refineries, as refineries anywhere, are potential targets.4. A successful attack on a refinery would potentially cause not only loss of life and economic disruption, but also serious environmental damage.5. Great care must be taken to ensure the security of the new Asian refineries from within and without.6. Refineries can never be 100% secure but can be made almost completely impenetrable if the physical vulnerabilities are all well-considered in their design. 7. For practical and economic reasons, refineries must be made as flexible as possible with respect to the types of crude oil they can process.20THE END21