News Column

How quality of crude oil affects its economics

February 4, 2014

George Wachira -1

The subject of crude oil quality will become of much interest as Kenya moves into the next stage of commercialisation of its oil discoveries. The quality of crude oil has significant technical and economic implications. Crude oils are as different as there are sources. Crudes from the same country will vary in quality depending on the wells and basins they come from. Many branded crude oils in the global markets are actually blends from various wells or even basins. However, crude oils from various global geographical regions ( Middle East , West Africa , North Sea , Gulf of Mexico , Eastern Africa Rift Valley ) will generally and broadly have shared quality similarities. It is the quality of crude oil that mostly determines the price it fetches in the global markets. Quality-based price differentials (premiums and discounts) fix individual crude oil prices relative to standard global marker crude oils like Brent crude or the West Texas Intermediate (WTI) crude. That is why global oil prices trends are mostly quoted on basis of Brent and/or WTI, from which other crude oil prices can be derived using quality price differentials. However, other market factors and supply/demand fundamentals may also influence individual crude oil prices. Crude oils have different physical and chemical properties. They are mixtures of varying proportions of hydrocarbon molecules of different sizes and chemical compositions. Arising from this, crude oils are light, medium or heavy depending on their densities which are designated as API ( American Petroleum Institute ) densities. API densities have an inverse relationship with the specific gravities. The higher the API the lighter the crude oil, and the lower the API the heavier the crude. Crude oils with APIs in the 30-40 degrees range are considered light, while those with APIs in the 20s are deemed heavy. The API density is the main quality factor that determines the price of crude oil. The lighter (higher API) crude oils fetch higher prices because they contain more of the valuable lighter products (petrol, kerosene and diesel). Heavier (lower API) crude oils contain more of the lower value heavy fuel oils and, therefore, fetch lower prices. To get the more valuable lighter products from heavy crude oil, expensive refining processes called cracking have to be used and this is why heavy crude oils are price discounted. Crude oils also contain undesirable impurities which consist mainly of sulphur, nitrogen, metals and salts and these have negative implications on the refining and pricing. Of these, sulphur content has the highest impact on crude oil pricing, next only to API density. Sulphur in petroleum products has significant negative health and environmental impacts due to formation of harmful sulphur dioxide when products are burned. Crude oils with low sulphur content are referred to as "sweet" and these fetch higher prices. High sulphur crudes are called "sour" and their prices are discounted. Another important crude quality is its wax content. Waxy crudes have a high "pour point", which means they flow at temperatures higher than normal ambient temperatures. To make them flow, waxy crudes need heating or injection of chemicals (pour point depressants) making handling, refining technically and operationally expensive as heating and chemicals are needed along the crude supply/export infrastructure. Waxy crude oils will, therefore, yield lower final export netback prices. From the information publicly available, crude oils in Eastern Africa ( Uganda , Kenya ) range from light to heavy and are very sweet, with negligible amounts of sulphur. However, they are relatively high on wax content and thus difficult and expensive to handle and transport. The high wax content shall potentially result in reduced export netback prices. The Atlantic side of Africa ( Nigeria , Angola ) has among the best crude oils in the world. They are light and sweet, giving them high price premiums in the global markets. Middle East crude oils are generally sour with high sulphur content, and vary from light to heavy. The Mombasa refinery has no processing units for removing excessive sulphur from diesel, making the product fail to pass the Kenya Bureau of Standards sulphur limits. This is made worse by the fact that the crude oils processed at the Mombasa refinery are high sulphur Middle East crude oils. Secondly, the refinery has no value-adding facilities for "cracking" the high yields of heavy fuel oil and converting them to higher value lighter products (petrol, kerosene and diesel). The sulphur problem, coupled with the heavy fuel, mostly defined the need for the refinery upgrade investments. Without these, the Mombasa refinery cannot add much value to any crude oil refining, including crude oil from Turkana. Modern refineries are designed with complex facilities with flexibility to process many varieties (qualities) of crude oils to optimise on market opportunities availed by ever-changing crude oil and product markets, while simultaneously meeting stringent environmental standards for products. Mr Wachira is the director Petroleum Focus Consultants .


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Source: Business Daily (Kenya)


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