Adding value to oil

The trend of integrating refineries and petrochemicals projects has increased across the region, with a particular emphasis in Saudi Arabia. Among the main factors behind this trend are the reliability of feedstock supply with lower transport costs, plus a significant reduction in shared utilities systems, which adds up to a lower variable cost.

“This region wants to invest in refineries because it has a lot of crude oil, and it wants to invest in petrochemicals because of the high availability of gas and liquids gas,” says Dr Philip Leighton, the senior director of studies and industrial research at Abu Dhabi National Chemicals Co. (Chemaweyaat).

The general consensus between experts is that refining and petrochemicals are two entirely separate businesses. “Simply put, the business in the refinery is different from the business of the petrochemicals. Refineries take the oil, refine it, and then transport it onto a ship,” says Mag Fuad, vice president, process technology, Fluor.

“Meanwhile, the petrochemicals sector needs to market its product, so it requires a marketing organisation and a sales team to sell its product,” adds Fuad. “There is also a requirement to keep on the top of the price because the margins in the chemicals and petrochemicals market are extremely low.”

Generally, an oil refinery is a process plant where crude oil is processed and refined into more useful petroleum products, such as gasoline, diesel fuel, asphalt base, heating oil, kerosene and liquefied petroleum gas. “The refinery is typically upstream and acts as a feedstock provider,” observes Dr Leighton. Oil refineries are large sprawling industrial complexes with extensive piping running throughout, carrying streams of fluids between large chemical processing units. The refined products market is a 3 200 million tonnes per annum market with gasoline diesel/gasoil and fuel oil being the largest products by volume. Asia is expected to grow in importance in the world oil markets, with a 34% share of the global refined product demand by 2020.

Meanwhile, the main unit in the petrochemicals plant is the steam cracker, which produces ethylene, the building block for many other petrochemicals products such as polyethylene, mono ethylene glycol and many other derivatives. North America is the largest consumer of ethylene followed by Europe.

The majority of ethylene is for captive use, as most producers are integrated downstream. “Olefins (ethylene and propylene) require onward integration to polyolefins, or other olefin derivatives, as olefins are not readily transportable,” explains Dr Leighton.

In practice, most refineries and petrochemicals operations operate differently and independently.

Integrating the two businesses poses a number of difficulties and challenges. “The first difficulty is trying to develop a culture where the refinery and petrochemicals producer at see themselves as being aligned, so they can share the same objective,” indicates Fuad.

As refineries and petrochemicals plants generally use the same utilities and offsite equipment, including tankage, truck loading facilities, marine and terminal facilities, integrating the two businesses will help owners reduce their operational costs. “How to share common infrastructure and common utilities, and common processes is the main challenge for integrations,” says Dr Leighton.

Besides sharing the same infrastructure, the option to exchange feedstock between the two units exists in both directions. “A refinery can provide naptha and dry gas to a steam cracker, which can in turn provide hydrogen to the refinery,” explains Dr Leighton. “Made-for-purpose hydrogen, which is a feedstock for ammonia, is extremly expensive to create.”

But the relationship isn’t entirely equal. The majoriy of feedstock provided by a steam cracker is, unfortunately, of little use to a refinery. “In contrast, the petrochemicals sector needs a large amount of refinery feedstock,” says Maurice Bannayan, SVP for process and technology at Reliance Industries.

Even by aligning the objectives of the refinery and the petrochemical plant, another major challenge is related to the size of the project. Other potential pitfalls relate to the project management, especially as the amount of work being undertaken increases. “There are many things that people need to take it into consideration, including how to manage the project, and how many engineering contractors are required to help get the job done,” says Fuad.

Furthermore, the complexity of these integrated projects adds an extra burden on the owners. “If two owners don’t have the right staff who are able to execute this project then they will need the right consultant to carry out effective management. In some cases, this can amount to as many as 500 people to carry out this work,” explains Fuad.

In addition, the EPC complexity of these integrated projects also reduces the number of contractors able to construct the project.

Major challenges are also related to the management of technologies used in the integrated complex.

“When you are looking to combine petrochemicals and refinery operations, you are usually dealing with between 20 to 30 products that are being produced,” states Dr Leighton. “This means around 20 to 30 technologies, and it also means an additional 20 to 30 technology licensors that you have to deal with,” he adds.

Managing the project development cycle is another issue that should be taken into consideration, particularly as the work needs to be executed in different phases. “You have to organise the complex development into packages that you can then release it to EPC contractors,” says Fuad. In addition, the basis on which the contract has been awarded is vital, as this is linked to the overall cost of the project. “Your study has to include the basis of the contract award,” he explains.

In this case, companies have three options to choose from when awarding the contracts: whether to go for a lump sum turnkey (LSTK) basis, the reimbursable option or an open-book lump sum. “Every option has a different approach price. Generally speaking, if I have the right people to manage the whole programme, I would go for the free or cost-effective option by asking for open-book conversion or reimbursable cost basis, because I don’t have to pay for the risk that the contractor has taken,” says Fuad. “If I take the LSTK option, there’s still a risk element.”

Even with all these challenges, many companies around the globe have opted for to integrate their refineries. “Reliance in Jamnagar, India, Petro Rabigh in Rabigh and Formosa Plastics in Mai Liao [Taiwan] are recent examples of purpose-designed integrated complexes,” observes Reliance’s Bannayan.

Saudi Arabia is expected to upgrade several other refineries beside the Petro Rabigh plant – including Ras Laffan and Yanbu. This move is an excellent move in terms of diversification and has the extra incentive of adding extra value to their oil output.