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February 2018

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CONTENTS

THIS MONTH'S FRONT COVER

February 2018 Volume 23 Number 02 ISSN 1468-9340

03 Comment

05 World News

12 Australia: seeking balance in fossil energy dependenceDr Nancy Yamaguchi, Contributing Editor, considers the future of fossil energy developments in Australia.

21 Integrating informationJason Hoover, Siemens Process Industries and Drives, USA, explains how to optimise drive train availability and productivity to prevent costly downtime in hydrocarbon processing facilities.

26 The key to successMarkus Iatropoulos, MAN Diesel & Turbo, Germany, outlines the collaborative approach that was taken at a major refinery turnaround project in Austria.

32 Getting aheadMichael Andrews and Tushar Patel, Atlas Copco Gas and Process, USA, explain how integrally-geared technology is making room for margin growth downstream.

37 FluidflowsYousef Jarrah and Motoyasu Ogawa, Nikkiso Cryo Inc., USA and Japan, reveal the fluid dynamics of rotating stall in LNG pumps.

41 Pump Q&AHydrocarbon Engineering questions a number of pump experts on efficiency, quality control, safety, maintenance and the future of the pump market.

48 Innovation in gas treatingJoseph Priestley, Fahd Fathi and John Sarlis, Shell Global Solutions International B.V., the Netherlands, introduce a new contacting technology for absorption columns.

57 InthefiringlinePhani Patchipulusu and Clark Dickson, Dickson Process Systems LLC, USA, outline a catalytic combustion technique for natural gas purification.

61 A continuous streamJulie Liberti, AirSep Corp., a Chart Industries Company, USA, outlines how non-cryogenic air separation technologies offer economical, low maintenance, uninterrupted gas supply solutions for modern process plants.

66 Seeking harmonyS. V. Seleznev, G. A. Derevyagin, A. M. Derevyagin and P. C. Lyon, Vympel, Russia, explore the problem of measuring the condensation temperature of hydrocarbons in natural gas.

73 Laser detectionDr Lars Hildebrandt, nanoplus, Germany, provides an overview of gas sensing using semiconductor laser spectroscopy.

77 A new generationGijs van Heeringen and Jan Klok, Paqell, along with Peter Hauwert, Frames, the Netherlands, consider the economic impact of next generation direct treat sulfur removal and recovery processes.

83 A collaborative successMarco van Son and Rien van Grinsven, Jacobs Comprimo® Sulfur Solutions, Canada and the Netherlands, and Khalid S. Ghazal, Saudi Aramco ExxonMobil Refinery (SAMREF Refinery), Saudi Arabia, recall a sulfur upgrade project.

89 Filling the gapInnovative ceramic designs simplify field installation and address the critical manufacturing skills gap. Heather Higgins, Will Russell and Uday Parekh, Blasch Precision Ceramics, USA, explain.

93 A root and branch approachBahador Sadeghian, Zafaran Industrial Group Co., Iran, outlines the role that sulfur granulation drums play in the production of sulfur coated urea fertilizer.

The Shell Turbo Tray, a new contacting technology based on innovative tray design, is presented. The technology is applied to the removal of contaminants from natural gas. It results in significant opportunities for greenfield CAPEX reduction and debottlenecking of existing facilities. Case studies are available at: gasprocessing@shell.com and www.shell.com/business-customers/global-solutions.html

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COMMENTCALLUM O'REILLYEDITOR

Back in 2012, shortly after I took on the role as Editor of Hydrocarbon Engineering’s sister publication, LNG Industry magazine,

Shell began construction on a major new project that was (and still is) the talk of the

LNG sector. Five years later, the Prelude floating LNG (FLNG) facility arrived at its final location in the Browse Basin, Western Australia, last year. Mooring, hook-up and commissioning activities are now underway before the project is expected to start operations later this year. Once up and running, the giant Prelude FLNG facility – which is longer than four soccer fields – will have a production capacity of at least 5.3 million tpy of liquids (3.6 million tpy of LNG, 1.3 million tpy of condensate and 0.4 million tpy of LPG).

Prelude FLNG is one of three remaining LNG projects currently under construction in Australia that is set for completion this year, alongside Inpex’s Ichthys LNG project and the second train at Chevron’s Wheatstone project. According to the latest ‘Resources and Energy Quarterly’ from the Department of Industry, Innovation and Science, these three projects are set to bring Australia’s total nameplate capacity to 88 million t, as the country readies itself to dethrone Qatar as the world’s largest LNG exporter.1 The report suggests that Australia’s LNG export volumes will reach 77 million t in 2018 – 2019, up from 52 million t in 2016 – 2017.

All of this follows a “watershed year” for Australia’s LNG industry in 2017, as described by EnergyQuest’s CEO, Dr Graeme Bethune.2 The energy consultancy recently reported that Australian LNG exports hit 56.8 million t in 2017, rising 26.3% from 2016, on the back of increased demand from China (up 40.5% from 12.4 million t to 17.5 million t). Higher oil prices and increased volumes pushed the country’s LNG export revenue up 44.1% to AUS$25.8 billion last year.

Despite the rosy outlook for the country’s LNG sector in the short-term, a number of uncertainties remain. The Department of Industry, Innovation and Science warns that as competition intensifies in global LNG markets (particularly from the US), the cost competitiveness of Australian LNG projects and the amount of flexibility in its contracts remain cause for concern: “LNG contracts often include clauses which allow buyers to reduce purchases to minimum ‘take-or-pay’ levels. It is possible buyers may utilise these ‘take-or-pay’ provisions in their oil-linked contracts if oil prices are higher than spot prices, or if they become over-contracted for LNG.”

The land down under is certainly going to be a fascinating market to watch in the years ahead. In this issue of Hydrocarbon Engineering, Dr Nancy Yamaguchi provides a detailed overview of the country’s energy sector, as it attempts to strike a balance between the economic security offered by its fossil energy industry and its growing desire to protect the environment and its heritage (p. 12).

1. ‘Resources and Energy Quarterly’, Australian Government Department of Industry, Innovation and Science, (December 2017).

2. ‘Australian LNG industry riding high on China boom’, EnergyQuest, (21 January 2018).

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WORLD NEWS

February 2018HYDROCARBON ENGINEERING

5

Worldwide | Industry confidence doubles

Confidence in growth in the oil and gas industry has risen globally from

32% in 2017 to 63% this year, according to a new report from DNV GL.

The report, entitled ‘Confidence and Control: the outlook for the oil and gas industry in 2018’, forecasts an imminent turnaround in spending on R&D and innovation after three years of cuts and freezes. Of the 813 senior oil and gas sector professionals surveyed, 36% expect to increase spending on R&D and innovation in 2018, with digitalisation (37%) and cyber security (36%) forming the principal areas of R&D investment focus this year.

Investment in innovations was cited as a key barrier to growth this year by 19% of respondents, along with oversupply of oil and gas (19%), operating costs (18%), reduced exploration activity (19%) and competitive pressure (22%).

Meanwhile, 50% of respondents remain steadfast in their efforts to increase cost control measures in 2018, consistent with 2017 (51%), suggesting permanent new discipline in the industry. Close to two-thirds (62%) believe that these are permanent changes, mirroring the results from last year’s survey (63%). This may suggest that the industry is going through a sustainable period of change.

USA | UOP Russell to supply NGL recovery unit to Brazos Midstream

Honeywell’s UOP Russell business will provide a third cryogenic

gas processing plant to Brazos Midstream. The 200 million ft3/d plant, set to be named Comanche III, will extract valuable natural gas liquids (NGLs) from natural gas that is produced in the Southern Delaware Basin, Texas, which is rich in NGLs.

UOP Russell will provide the engineering, fabrication and supply of a modular cryogenic NGL recovery unit.

By combining low capital and operating expenses, and ultra-high NGL recovery rates, the three plants allow Brazos to offer gas producers more favourable processing terms. This positions the company to recover high

levels of ethane and propane as prices of NGLs continue to rise.

Cryogenic gas processing plants cool the gas in a demethaniser column until the more valuable NGLs precipitate into a liquid. The heavier components that are extracted from the natural gas can be used as fuels, fuel blending components and other valuable petrochemicals.

Russia | Biological treatment plant inaugurated

Bashneft-Ufaneftekhim refinery, a Rosneft-affiliated company, has

inaugurated its biological treatment plant.

The facility, located in Ufa, will treat up to 84 million litres of wastewater per day.

SUEZ supplied its ZeeWeed membrane bioreactor (MBR) membranes, electrodialysis reversal (EDR) and reverse osmosis (RO) equipment to the biological treatment plant and will provide services as part of a 15-year

long-term service contract to ensure reliable operation of equipment and an uninterrupted guaranteed replacement of membranes.

As part of the long-term service contract for the wastewater treatment plant, SUEZ is providing advanced asset performance management with its InSight platform, which combines data and analytics to maximise performance, minimise unplanned downtime, lower operating costs and deliver better business outcomes.

USA | Hess Midstream and Targa Resources announce JV

Hess Midstream Partners LP has announced a 50/50 joint venture

(JV) with Targa Resources Corp. to construct a 200 million ft3/d gas processing plant.

The plant, called Little Missouri Four (LM4), will be located at Targa’s existing Little Missouri facility in McKenzie County, North Dakota.

Targa will manage the construction and operation of the plant. Hess Midstream’s 50% interest in the JV will be held through

Hess TGP Operations LP, in which Hess Midstream owns a 20% controlling economic interest, and Hess Infrastructure Partners LP (HIP) owns the remaining 80% interest.

LM4 is expected to be completed in 4Q18. Construction costs are anticipated to be approximately US$150 million (gross to the JV).

Hess Midstream and HIP will also invest approximately US$100 million for new pipeline infrastructure to gather volumes to the LM4 plant.

WORLD NEWSIN BRIEF

February 2018 HYDROCARBON ENGINEERING

6

Germany | Hydrogen electrolysis plant to be built

Shell and ITM Power will build the world’s largest hydrogen

electrolysis plant at the Rhineland refinery.

With a peak capacity of 10 MW, the hydrogen will be used for the processing and upgrading of products at the refinery’s Wesseling site, as well as testing the technology and exploring application in other sectors.

The European partner consortium of Shell, ITM Power, SINTEF, thinkstep and Element Energy has now secured €10 million in funding from the European ‘Fuel Cell Hydrogen Joint Undertaking’. The project’s total investment, including integration into the refinery, is approximately €20 million.

Detailed technical planning and the approval process will now begin. The plant, named ‘Refhyne’, is scheduled to be in operation in 2020 and will be the first industrial scale test of the polymer electrolyte membrane technology process.

Currently, the Rhineland refinery, Germany’s largest, requires approximately 180 000 tpy of hydrogen, which is produced by steam reforming from natural gas. The new facility will be able to produce an additional 1300 tpy of hydrogen, which can be fully integrated into the refinery processes, such as for the desulfurisation of conventional fuels.

USA | Utopia Pipeline commences delivery of ethane to petrochemical plants

K inder Morgan Inc. has announced that the Utopia Pipeline has been

placed into service and product delivery of ethane from Harrison County, Ohio, to Windsor, Ontario, Canada, has commenced operation.

The pipeline system extends approximately 270 miles and has an initial capacity of 50 000 bpd, which

can be expanded to more than 75 000 bpd.

The pipeline will connect with an existing Kinder Morgan pipeline and associated facilities in order to transport ethane and ethane-propane mixtures to petrochemical companies operating in Ontario.

saudi arabiaSABIC has acquired a 24.99% stake in Clariant. The acquisition of these stakes, which were previously held by Corvex Management and 40 North, makes SABIC the largest Clariant shareholder. Clariant confirmed that it intends to engage with SABIC over the coming weeks in order to discuss the new situation and explore possible ways to create value.

usaCheniere Energy Inc.’s subsidiary, Cheniere Marketing LLC, has entered into an LNG sale and purchase agreement (SPA) with Trafigura Pte Ltd, under which Trafigura has agreed to purchase approximately 1 million tpy of LNG from Cheniere Marketing on a free on board basis for a term of 15 years, beginning in 2019.

malaysiaAbu Dhabi National Oil Co. (ADNOC) has announced that it has signed a three-year agreement with Lotte Chemical Titan to sell up to 1 million tpy of naphtha.

usaEvoqua Water Technologies’ Environmental Services business has been recognised by Chevron Corp. for ‘Exceptional Site Support Performance’ from Chevron’s Pascagoula, Mississippi facility. The Pascagoula refinery is the company’s largest US refinery. The recognition comprises two parts: zero reported accidents for the year and keeping Chevron-compliant regarding benzene waste operations NESHAPs (BWON). Compliance with BWON rulings blends waste, air and water quality management.

USA | CB&I signs crude development agreement with Saudi Aramco

CB&I has entered into a joint development agreement with

Saudi Aramco for the development, commercialisation and marketing of crude-to-chemical technologies.

The agreement includes Chevron Lummus Global (CLG), CB&I’s joint venture with Chevron U.S.A. Inc. Together, Saudi Aramco, CB&I and CLG will develop a unique integration of advanced technology

processes for the production of high-value petrochemicals from crude oil.

CB&I’s ethylene cracker technology and CLG’s hydroprocessing technologies, combined with Saudi Aramco’s proprietary Thermal Crude to Chemicals (TC2CTM) technology will provide the platform for this joint development.

Compressors Steam Turbines Expanders Machinery Trains Gas Turbines Reactor & Apparatus After Sales

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Compressors Steam Turbines Expanders Machinery Trains Gas Turbines Reactor & Apparatus After Sales

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WORLD NEWSIN BRIEF

February 2018 HYDROCARBON ENGINEERING

8

malaysiaABB’s single lift prefabricated electrical structures (e-houses) for offshore use will be installed on Petronas’ second floating LNG (FLNG) facility, PFLNG 2. PFLNG2 will be moored over the deepwater Rotan gas field, located off the Malaysian coast. The fully engineered electrical system contained within the e-houses will include transformers, switchboards, motor-control centres and ABB’s Process Power Manager that ensures reliable and stable electricity supply to the FLNG facility. The two e-houses are currently en-route to Samsung Heavy Industries yard in Geoje, South Korea, for installation on the vessel.

usaAfter 10 years as President and CEO of the American Petroleum Institute (API), Jack Gerard has announced that he will step down when his current contract ends in August 2018. Until then, he will continue to direct the association’s work and assist in the search for a new CEO.

russiaA working meeting between Alexey Miller (Chairman of the Gazprom Management Committee) and Seung-Il Cheong (President and CEO of Kogas) has taken place in Moscow. The meeting addressed the status of LNG supplies to South Korea from the Sakhalin II project, as well as the potential for increasing exports. The prospects for further collaboration between the companies were also discussed.

usaSNC-Lavalin has signed a Master Services Agreement, valued in excess of US$100 million, with one of the world’s largest plastics, chemical and refining companies. The scope of work includes provision of all engineering support for the client’s Gulf Coast facilities.

China | KBC signs oil refinery integration agreement

Yokogawa Electric Corp’s subsidiary, KBC Advanced

Technologies, has signed a consultancy agreement with China Energy Engineering North Co. Ltd for the integration of operations at six oil refineries in the Shandong Province.

These refineries are being acquired and will be operated by China State Energy Engineering Corp. Ltd (SINOMEC), a state-owned company, and China Energy

Engineering North Co. Ltd, a SINOMEC group company.

There are many small-scale oil refineries in Shandong Province. To improve efficiency and better meet market needs, SINOMEC has decided to upgrade facilities and integrate operations at these six oil refineries, which are located in Guangrao County. KBC will provide consulting services to assist SINOMEC in meeting these objectives.

USA | Praxair expands hydrogen supply to refinery

Praxair Inc. has expanded its long-term hydrogen supply

agreement with Motiva Enterprises LLC.

Under this new agreement, Praxair will increase the amount of hydrogen it supplies to Motiva’s refinery in Port Arthur, Texas. The refinery has a capacity of approximately 600 000 bpd.

Motiva completed a hydrocracker and diesel hydrotreater capacity expansion

in 2016, and this agreement secures the additional hydrogen required to support that expansion, as well as the ongoing needs of the refinery.

Praxair began delivering hydrogen to the refinery in 1992 as one of the first customers on its gas hydrogen pipeline system. Since then, the company’s system and capabilities have grown significantly and the refinery has undergone several expansions. It is now North America’s largest refinery.

USA | Vitol acquires Noble Americas Corp.

V itol US Holding Co. has announced that it has completed

the acquisition of Noble Americas Corp. (NAC), a subsidiary of Noble Group.

The sale is estimated at approximately US$400 million.

Vitol has paid an initial US$272 million to Noble Group, and also deposited a further US$122 million with an escrow agent; the total to be paid out from the escrow account will be subject to adjustment based on an amount

(which may be positive or negative) to be determined at a future date in accordance with the terms and conditions of the proposed disposal.

The figure of US$400 million is lower than the illustrative cash proceeds of US$575 million determined in October, when the acquisition agreement was originally announced. The decrease is primarily due to NAC’s operating losses in the period between the announcement and the completion of the acquisition.

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WORLD NEWS

February 2018 HYDROCARBON ENGINEERING

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Australia | LNG exports jump

Australian LNG exports hit 56.8 million t in 2017, jumping 26.3%

from 44.9 million t in the year prior.Combined with higher oil prices,

the increase in volumes pushed up Australia’s 2017 LNG export revenue by 44.1% to AUS$25.8 billion, according to the December LNG report from EnergyQuest.

EnergyQuest CEO, Dr Graeme Bethune, described 2017 as a watershed year for Australia’s LNG industry, with growth in demand from China the stand-out success story.

Total Australian LNG exports to China increased by 40.5%, from 12.4 million t to 17.5 million t over the period.

Dr Bethune said: “China is now Australia’s second-largest LNG market and Australia is China’s biggest LNG supplier […] Increased Chinese demand is not only good for Australian LNG producers and our export revenue, but has an emerging positive impact for China’s environment. China is making a massive switch from coal to gas to reduce air pollution in major cities such as Beijing – and now Australian LNG is playing a significant role in achieving this goal.

“LNG jumped from Australia’s fifth largest export in 2016 to third largest export in 2017, overtaking gold and education.”

DIARY DATES11 - 13 March 2018AFPM Annual MeetingNew Orleans, Louisiana, USAwww.afpm.org/conferences

13 - 15 March 2018Asia Turbomachinery & Pump SymposiumSingaporeatps.tamu.edu

20 - 22 March 2018StocExpo EuropeRotterdam, the Netherlandswww.stocexpo.com

27 - 29 March 201820th Annual International Aboveground Storage Tank Conference & Trade ShowOrlando, Florida, USAwww.nistm.org

15 - 18 April 2018GPA Midstream ConventionAustin, Texas, USAwww.gpamidstreamconvention.org

15 - 19 April 2018Corrosion 2018Phoenix, Arizona, USAwww.nacecorrosion.org

23 - 25 April 2018Sulphur World Symposium 2018Philadelphia, USAwww.sulphurinstitute.org

29 April - 3 May 2018SOGATAbu Dhabi, UAEwww.sogat.org

31 May - 1 June 2018Downstream Conference & ExhibitionGalveston, Texas, USAwww.downstreamevent.com

11 - 15 June 2018ACHEMA 2018Frankfurt, Germanywww.achema.de

18 - 20 September 2018Turbomachinery & Pump SymposiaHouston, Texas, USAtps.tamu.edu

Worldwide | Digitalisation key to operational excellence

In the second installment of its ‘Operational Excellence Index’

(OEI), Petrotechnics has revealed that companies in hazardous industries are embracing digital transformation as a means of achieving operational excellence (OE), but the rapid pace of innovation and fear of change could pose barriers to widespread adoption.

Petrotechnics surveyed oil, gas and petrochemical professionals to gauge industry attitudes around OE and digitalisation. Over 73% of the companies surveyed noted that digitalisation is accelerating the ability to deliver sustainable OE.

Respondents praised the benefits that digitalisation is bringing to operations, with early adopters ramping up their use of cutting-edge technologies. Enhanced key performance indicators (KPIs) and metrics (51%) and improved

prioritisation and planning (49%) are the two areas where digital transformation is currently creating the biggest impact. Deriving insight from data is also a key focus, with 65% of respondents either currently deploying or planning to deploy predictive analytics.

However, the rate of digitalisation has some respondents worried about whether the industry can keep pace. Of the respondents, 51% recognise real challenges to embracing digitalisation, including steep learning curves (19%), too much data (18%), and disengaged workforces (14%).

Over 83% of organisations agree that digitalisation enables a single, shared view of operational reality – leading to greater levels of transparency, efficiency, and performance. 81% highlight real-time visibility of asset risk as a significant benefit.

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February 2018 12 HYDROCARBON ENGINEERING

Dr Nancy Yamaguchi, Contributing Editor, considers the future of fossil energy

developments in Australia.

February 201813HYDROCARBON ENGINEERING

A ustralia is walking a winding path between the development and use of its fossil energy resources and protection of its environment and heritage. The future of fossil energy

development and use is at the forefront of the collective Australian mind. Unlike its Organisation for Economic Co-operation and Development (OECD) Pacific neighbours, Australia is large, sparsely populated and rich in natural resources. The country has highly active and experienced petroleum, coal and natural gas industries.

As traditional deposits play out, however, decisions must be made about whether (and where and when) remote or unconventional resources will be developed. Developing deepwater hydrocarbons and shale resources are by nature megaprojects, which require serious commitment from both public and private sectors. Environmental impacts are painstakingly studied. As a wealth of data from the US establishes, for example, using hydraulic fracturing to produce light tight oils and gas from deep shale is water-intensive. Australia’s fresh water supplies are limited, and many inland areas are

extremely dry. Periods of drought and bushfires can quickly give way to localised flooding. Development projects must satisfy stringent environmental review, and some areas have declared moratoria on hydraulic fracturing projects until the impacts are better known.

There is also a fine line to be walked concerning global climate change and the role of fossil energy. The vast majority of the population lives along coastal areas, which could be at risk because of global climate change. The country is working on diversifying energy sources and fostering a domestic biofuels industry. The government is committed to reducing carbon emissions. A carbon tax was launched in 2012, which was expected to cut emissions significantly. But the issue was politically divisive, causing the tax to be repealed. Fossil energy plays such a large role in the economy that policies must find a middle ground between reducing emissions and providing low-cost energy. This article will discuss Australia’s fossil energy resources, the growth of the LNG industry, energy and oil product demand, and the refining sector.

February 2018 HYDROCARBON ENGINEERING

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Fossil energy resources and production

Structure of consumptionAustralia’s energy sector has profited by the development and use of abundant high-quality fossil energy resources. Most of the country’s oil and coal is produced in the Southeast, convenient to centres of population. The largest natural gas deposits are located in the remote Northwest area, including offshore areas in the Timor Sea. Australia’s LNG industry was developed to capitalise on these resources.

Figure 1 shows the long-term trend in Australian primary energy demand. The country’s energy demand growth rates are well above that of most other OECD countries. Between 2005 and 2016, its primary energy use increased from 116.2 million t of oil equivalent (toe) to 138 million toe, an average growth rate of 1.6% per year. In comparison, primary energy use in the US declined by 0.3% per year from 2005 to 2016, UK energy use fell by 1.77% per year, and Japanese primary energy use fell by 1.42% per year.

Australia’s dependence on fossil energy is immediately apparent but, in recent years, the mix has begun to change. Australian oil demand increased from 39.5 million toe in 2005 to 47.8 million toe in 2016. Natural gas use grew from 20.3 million toe in 2005 to 37 million toe in 2016. In contrast,

coal use fell from 51.7 million toe in 2005 to 43.8 million toe in 2016. Between 2005 and 2016, oil use grew at 1.8% per year, natural gas use grew at 5.6% per year, and coal use shrank by 1.5% per year. The country has made a concerted effort to reduce coal use, particularly in electric power generation.

Looking more closely at coal, a peak of 54.9 million toe in consumption was seen in 2008, which was a year of exceptionally high oil prices. It declined to 42.6 million toe in 2014 and, in 2012, Australia enacted a carbon tax to be paid by the largest emitters.

This was a highly politicised issue. In 2014, the carbon tax was repealed to remove the financial burden on the industry. The decline in coal use halted, climbing slightly to 44.1 million toe in 2015 and 43.8 million toe in 2016.

Australia has had some success in the adoption of alternative and renewable energy resources. While the use of solar and wind power has jumped over the past decade, the use of hydropower and geothermal energy have been relatively stable. In 2005, the use of these renewables totalled 4.7 million toe. This doubled to 9.4 million toe in 2016. In total, renewable and alternative energy use has expanded at 6.5% per year from 2005 through 2016.

The recent drop in coal use, flattening oil consumption, and a rise in renewable energy use have led to a noteworthy drop in the percentage share of fossil energy in the primary energy mix. This share climbed to nearly 97% in 2008 before being brought down to 93.2% in 2016, according to BP.

Although this is a notable achievement, Australia still consumes a major amount of coal, and its carbon emissions are significant, particularly

when viewed on a per-capita basis. China is the largest consumer of coal globally and a major customer for Australian coal exports. China’s coal consumption was over 43 times as large as Australia’s in 2016, yet the country’s emissions per capita were approximately 2.7 times higher than China’s.

Recent oil price movements and the decline in oil productionThe massive upsurge in oil prices in 2008 was accompanied by increased drilling in many places around the world. In Australia, the Baker Hughes Active Rig Count noted an average of 12 active oil rigs and 10 active natural gas rigs in 2008. The subsequent global economic recession and decline in oil prices then brought a decline in active oil rigs, but a relatively robust presence in natural gas rigs. In 2009, on average, there were seven active oil rigs and seven active natural gas rigs. The oil price war caused prices to sag most noticeably in 2014 – 2016. In Australia, the active oil rig count fell to an average of just three in 2016 and two in January – November 2017. The active gas rig count, in contrast, was four in 2016, which jumped to 12 during the January – November period of 2017.

Figure 2 tracks Australia’s active oil and gas rig count per Baker Hughes. The 2017 average is for the January – November period.

Figure1.Australiaprimaryenergyconsumptionbyfueltype,MTOE

Figure2.AustraliaLNGexportsbydestination,BCM

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Figure 1. Australia's primary energy consumption by fuel type in million tonnes of oil equivalent (souce: BP).

Figure5tracksAustralia’sactiveoilandgasrigcountperBakerHughes.

Figure5.Australiaactiveoilandgasrigs

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Source:Baker Hughes.2017averageisJanuary-NovemberFigure 2. Australia's active oil and gas rigs (source: Baker Hughes).

Latest News

PETRONAS' LNG DELIVERY NOT IMPACTED BY LEAKPetronas has confirmed that its LNG cargo deliveries have not been affected by a gas leak incident at its Sabah-Sarawak Gas Pipeline (SSGP) located in Long Luping, Lawas, Sarawak, Malaysia, in January 2018. As a result of the incident, gas supply from the Sabah Oil and Gas Terminal (SOGT) to the Petronas LNG Complex (PLC) in Bintulu has been stopped to ensure the safety of the incident site. However, gas supply to customers remains unaffected.

AIRLIQUIDEANDKMCIINKLONG-TERMAGREEMENTAir Liquide has signed a new long-term contract with Kumho Mitsui Chemical Inc. (KMCI), under which it will increase its supply of both hydrogen and carbon monoxide at the Yeosu industrial complex. Under the terms of the new agreement, Air Liquide will invest approximately €100 million to build a new, state-of-the-art hydrogen production unit.

AIR PRODUCTS AWARDED CONTRACTS BY SAMSUNG DISPLAYAir Products has been awarded long-term contracts from Samsung Display to supply gaseous nitrogen and oxygen, and liquid argon to Samsung’s organic light emitting diode (OLED) manufacturing complex in Tangjeong, South Korea.

MCDERMOTT AND CB&I COMBINATION PROCEEDINGMcDermott International Inc. and CB&I have announced that the Federal Trade Commission has granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect to their proposed combination. As previously announced in December 2017, McDermott and CB&I have agreed to combine in an all-stock transaction to create a premier fully vertically integrated onshore-offshore company with an enterprise value of approximately US$6 billion.

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As oil prices and drilling sag, conventional production of crude oil has fallen. According to the Australian Department of the Environment and Energy, in FY 2001 – 2002, Australian crude production was 499 000 bpd, which fell to 155 000 bpd in FY 2016 – 2017, a rate of decline averaging 7.5% per year. Condensate production, buoyed by natural gas production, remained flat at approximately 123 000 bpd. Production of naturally occurring (not produced at refineries) LPG fell from 80 000 bpd in FY 2001 – 2002 to 52 000 bpd in FY 2016 – 2017, a rate of decline averaging 2.8% per year. Total hydrocarbon liquids fell from 702 000 bpd in FY 2001 – 2002 to 330 000 bpd in FY 2016 – 2017.

Australian LNG exportsAlthough oil prices have been relatively low in the past few years, Australia has continued expanding its LNG infrastructure, including recently-completed projects using coalbed methane (CBM) as feedstock. The Queensland Curtis LNG project is the world’s first LNG project of this type. Following Qatar, Australia is now the second-largest exporter of LNG in the world.

According to the Australian Department of the Environment and Energy, national LNG exports in FY 2016 – 2017 totalled 52.15 million t, valued at over

AUS$22.3 billion. In FY 2016 – 2017, Japan was the largest customer, importing 24.79 million t, followed by China, which purchased 14.97 million t, and South Korea, which imported 5.56 million t.

Australia’s LNG exports have grown in volume and are reaching a larger number of customers. Figure 3 shows the growth and diversification of exports from 1997 through 2016. While Japan is, and remains, the single-largest customer, exports to other Asian customers have grown significantly. In the early years, Japan took more than 95% of Australia’s output, with occasional cargoes going to the US or Europe (Spain and the UK). South Korea received its first cargo in 2000 and exports to the country totalled 6.1 billion m3 in

2016. Taiwan and India both started purchasing Australian LNG in 2005. Taiwan imported 0.3 billion m3 in 2016, while India imported 1.2 billion m3. China received its first cargo of Australian LNG in 2006 and has grown into a major consumer. Exports to China grew from 1 billion m3 in 2006 to 15.6 billion m3 in 2016.

Australia’s oil sector Australia’s domestic sales of petroleum products have grown at a sedate average rate of 1.5% per year between FY 2007 – 2008 and FY 2016 – 2017. Demand grew from 878 000 bpd in 2007 – 2008, to approximately 1 million bpd in 2016 – 2017. The demand barrel is high in value, with the percentage share of fuel oil and other products falling from 6.1% in 2007 – 2008 to just 2.9% in 2016 – 2017. Fuel oil demand fell from 27 000 bpd in 2007 – 2008 to 12 400 bpd in 2012 – 2013, but it crept back up to 16.9 million bpd in 2016 – 2017. This may, in part, be explained by declining

price of oil, the introduction of Australia’s carbon tax in in 2012 and its repeal in 2014, as noted above.

Australia’s gasoline demand fell from 331 500 bpd in 2007 – 2008 to 313 800 bpd in 2016 – 2017. The market is orienting towards diesel, demand for which grew from 314 800 bpd in 2007 – 2008 to 457 000 bpd in 2016 – 2017. Gasoline’s share of the demand barrel has fallen from 37.8% in 2007 – 2008 to 31.2% in 2016 – 2017, while diesel’s share has risen from 35.9% in 2007 – 2008 to 45.5% in 2016 – 2017. Jet fuel demand has also grown quickly, from 108 600 bpd in 2007 – 2008 to 155 000 bpd in 2016 – 2017.

Although gasoline demand has been declining, the use of ethanol blends has grown. In 2006, ethanol-blended gasolines of up to 10% ethanol by volume started being phased in. The State of New South Wales was the first to institute a blending mandate, and Queensland is following. But the mandates are limited in scope and area, and biofuels have had to compete with inexpensive oil over the past few years. Sales of ethanol-blended gasoline jumped to 57 900 bpd in FY 2010 – 2011, but fell to 33 500 bpd in 2016 – 2017. An uptick in demand is expected for FY 2017 – 2018, as additional ethanol blended gasoline is required in Queensland, but a steady upward trend would require additional blending mandates and/or more favourable economics.

Figure1.Australiaprimaryenergyconsumptionbyfueltype,MTOE

Figure2.AustraliaLNGexportsbydestination,BCM

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Figure3.Australiarefinerycapacity,‘000bpd

Figure4.Australiarefineryoutput,‘000bpd

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Source: Dept.oftheEnvironmentandEnergy

Figure 3. Australia's LNG exports by destination in billion cubic metres (source: BP).

Figure 4. Australia's refinery capacity in ‘000 bpd (source: BP).

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Australia’s refining sectorFor a time, Australian refining companies and potential new entrants hoped to become competitive export refiners in the Asia-Pacific market. There were a number of proposals made to build large, grassroots refineries in the Northern Territory and Western Australia, the goal being to develop remote resources and create new hubs of economic activity closer to Asia. But these proposals could not gain traction since so many Asian countries were expanding their own refining industries. Australia’s existing refineries were smaller and less competitive than many new refineries that were built in Asia during the ‘Asian Boom’ years. Australian grassroots refinery proposals were postponed, with most being cancelled. Subsequently, some Australian downstream companies closed their refineries entirely. As a result, Australia not only failed to become a major export refining hub in the region, but its refining industry began to shrink. Prospects for growth in the domestic market were limited. Demand for gasoline was forecast to shrink. Moreover, crude oil production was waning in the long-established oilfields near most of the existing refineries. Refiners were facing a future of higher feedstock costs, a potentially shrinking domestic market, and stringent environmental regulations.

Figure 4 traces how Australia’s crude refining capacity peaked at 829 000 bpd in 2002, dropped below 700 000 bpd in 2006, and collapsed to 452 000 bpd in 2016. Caltex closed its Kurnell refinery at the end of 2014, BP closed its Bulwer Island refinery in 2015, and Shell began to divest itself of refinery assets in many parts of the globe, including Australia. Shell announced that it planned to convert its Clyde refinery to a product

terminal in 2013, and Shell sold its Geelong refinery to Vitol in 2014. Today, only four refineries remain in operation. Australia depends on imports for most of its needs. Diesel sales in FY 2016 – 2017, for example, were 457 000 bpd. Refinery production was only 149 000 bpd.

Australian crude production dropped from 499 000 bpd in FY 2001 – 2002 to 155 000 bpd in FY 2016 – 2017. Refinery crude runs of both domestic and imported feedstock fell. According to the Department of the Environment and Energy, in FY 2010 – 2011, refinery input averaged 688 000 bpd, which fell to 453 000 bpd in FY 2016 – 2017. Of this, only 17.6% was indigenous feedstock.

As capacity and throughput fell, domestic fuel production also fell. Figure 5 shows the downward trend in production of refined petroleum products. Between FY 2007 – 2008 and FY 2016 – 2017, refinery output

dropped by 252 000 bpd. Of this, gasoline output fell by 103 000 bpd, diesel output fell by 62 000 bpd, and jet fuel production fell by 30 000 bpd.

Figure 6 displays the current pattern of refinery output by product. Approximately 44% of the output was gasoline (190 000 bpd), diesel output was 149 000 bpd (34.8% of the output), followed by aviation fuels output at 62 000 bpd (14.4% of the output). The remaining 6.5% was refinery LPG, fuel oil and other products.

Australia has an active, two-way trade in crude and refinery feedstocks. It is a large country, and condensates from the Northwest Shelf, for example, are closer to Asian refineries than to Australian refineries. Australian crudes may also capture a quality premium vs some foreign crudes, though conventional crude production is in a period of decline. Some of the replacement crudes are light and sweet, coming from Malaysia, Vietnam, Papua New Guinea and West Africa. Refinery closures have reduced import requirements and allowed some exports to remain. Both imports and exports have been declining.

Refined product exports dwindle as imports growGiven the reduction in refinery capacity, coupled with gently increasing demand, Australia’s refined product exports have fallen, while imports have risen. As Figure 7 illustrates, Australian refiners have a dwindling supply of exportable fuels. In 2001 – 2002, product exports were 114 000 bpd. This fell to 62.5 million bpd in 2009 – 2010, and product exports have been below 59 000 bpd ever since. This excludes international bunkering, which is significant in the case of aviation fuel. The Department of the Environment and Energy estimates jet fuel bunkering at approximately 34 000 bpd.

Most of Australia’s product exports are LPG. In FY 2016 – 2017, LPG accounted for 66% of the 58 300 bpd exported. Most of this is shipped to Asia-Pacific destinations such as Japan, South Korea, Indonesia and Singapore, but occasional cargoes may travel as far as Africa.

Gasoline and diesel exports are now quite small: in FY 2016 – 2017, gasoline exports were 3800 bpd while diesel exports were 1800 bpd.

Although Australian refined product exports have dwindled, the country is a key supplier of fuel to some of the smaller markets in the Pacific, including the Solomon Islands, New Caledonia, Papua New Guinea, Vanuatu, Fiji,

Figure5.Australianrefineryoutput,‘000bpd,FY2016-2017

Figure6.Australiarefinedproductexports,‘000bpd

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Source: Dept.oftheEnvironmentandEnergy

Figure 6. Australian refinery output in ‘000 bpd for FY 2016 – 2017.

Figure3.Australiarefinerycapacity,‘000bpd

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Source: Dept.oftheEnvironmentandEnergyFigure 5. Australia's refinery output in ‘000 bpd (source: Department of Environment and Energy).

180102_Hydrocarbon Engineering Ad_MSC.indd 1 12/20/2017 9:57:29 AM

February 2018 HYDROCARBON ENGINEERING

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French Polynesia and Samoa. Although the amounts are small, in many cases, Australia is the sole source of supply for these islands, and export avenues therefore have a greater significance than is apparent from the volumes involved.

Australia’s fuel marketers are relying more on imported product. Figure 8 shows the significant growth in refined product imports over the past decade. Looking back, in 2001 – 2002, Australia imported only around 74 000 bpd of refined products. This reached 318 400 bpd in 2009 – 2010 before the wave of refinery closures then brought a steady increase in imports. In FY 2016 – 2017, Australia relied upon product imports for 589 000 bpd of its fuel requirement.

Middle distillate imports have grown swiftly. In FY 2001 – 2002, middle distillate imports were only 26 000 bpd. In FY 2007 – 2008, this jumped to 160 700 bpd. Of this, diesel imports averaged 128 800 bpd and jet fuel imports averaged 31 800 bpd. By 2016 – 2017, diesel imports had expanded to 319 100 bpd, equating to a growth rate of 10.6% per year. Jet fuel imports had grown even more quickly, expanding at 13.7% per year on average. Gasoline imports have also grown, rising from 24 800 bpd in 2001 – 2002 to 119 800 bpd in 2016 – 2017.

In total, Australia’s imports of refined product have grown at rates averaging 8.2% per year between 2007 – 2008 and 2016 – 2017. This has amounted to an increase of nearly 300 000 bpd of refined products.

ConclusionOil, natural gas and coal have contributed enormously to the Australian economy, and reserves are ample. Theoretically, anything is possible in terms of additional energy development, but let us note with particular emphasis the name ‘Department of the Environment and Energy’. This department was formed in 2016, and many key responsibilities were transferred to it. Some might say that it is just a name in a government re-organisation. However, it is significant that the responsibility for Australian energy development now rests largely under a newly-formed department charged with balancing ‘environment’ and ‘energy’. Australia is hugely dependent on fossil energy, but its goal is to reduce this dependence. This is an ambitious undertaking, and one that will be a balancing act between the needs of a long-established fossil energy industry and the long-term needs of society and the environment. In the petroleum sector, conventional crude oil production has been falling. This trend is expected to continue unless the country moves into deepwater exploration and production and/or develops shale oil resources. But these are viewed as problematic and expensive. Development of shale gas is also stymied by opposition to hydraulic fracturing. The government in the Northern Territory, which is estimated to contain roughly 30% of Australia’s shale gas resources, has enacted a moratorium on hydraulic fracturing, citing a need for more research on its impacts on the region and its people, including indigenous communities. Australia’s refining industry has shrunk, and only four refineries remain. Refined product exports have dwindled, while imports have climbed steadily.

The country is working to reduce coal use. The use of alternative and renewable energy sources has grown at rates of 6 – 7% per year over the past decade. Natural gas use has also risen, though much of the developments are far from

population centres and the output is liquefied for LNG export. Australia made headlines by becoming the first country to use CBM as a feedstock for LNG.

Australia remains committed to reducing greenhouse gas emissions. Its 2020 target was to reduce its 2000 emissions levels by 5%. The Department of the Environment and Energy reported that the country will beat this target, and is working on the next phase. In November 2016, Australia ratified the Paris Agreement and the Doha Amendment to the Kyoto Protocol. Under the Paris Agreement, Australia will reduce emissions by 26 – 28% below 2005 levels by 2030. This will cut per-capita emissions by half, with a goal of reducing the national emissions intensity by 65%. Within the developed world, Australia’s per-capita emission reduction goal is among the most ambitious.

Therefore, although Australia is energy-rich, it is in a period of contemplation concerning its energy future. Fossil fuels provide for most domestic energy needs and they have been a major contributor to the country’s export wealth for decades. Reserves of oil, natural gas, and coal remain ample, and unconventional resources (such as oil shale, shale oil and shale gas) could be developed. But development has costs, and Australia is not planning an economic future based on resource extraction alone. There must be value added, which must exceed the environmental and social costs. Australia’s goal is to find a balance that improves economic security and environmental quality for all people across a wide land.

Figure5.Australianrefineryoutput,‘000bpd,FY2016-2017

Figure6.Australiarefinedproductexports,‘000bpd

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Source: Dept.oftheEnvironmentandEnergyFigure 7. Australia's refined product exports in ‘000 bpd (source: Department of the Environment and Energy).

Figure 8. Australia's refined product imports in ‘000 bpd (source: Department of the Environment and Energy).

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