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World Petroleum Congress

AN IMPRESSIVE model put on display by the China Petroleum and Chemical Corporation (Sinopec Corp) showed the full upstream and downstream components that make up the industry. Sinopec is the largest integrated energy and chemical company in China.

There has been a lot of hype of late surrounding the price and supply of crude oil. All this is obviously alarming - and more often than not confusing - to the transport operator who is totally dependent on diesel for his company's livelihood. In this article, FleetWatch correspondent Max Braun throws some water onto the fuel fire talk in an attempt to put on the table some form of rational perspective to the whole issue.

For months we have been bombarded with doom and gloom scenarios predicting that the price of oil is going through the proverbial roof. Even worse are the "skrik stories" about crude oil reserves being on the point of drying up leaving us stranded on the highways and bi-ways before we are much older or wiser. Add to this the surfeit of front-page media hype and endless subjective and emotional bright ideas espoused by listeners to phone-in talk radio shows - some of it bordering on loony tunes - and you have all the ingredients for national depression to set in.

Hopefully, by time you read this you will have read my book published by FleetWatch titled "Every Operator's Guide to Fuel Savings and Control" and discovered that I do not subscribe to these way out theories often pitched to support the political agendas of governments, oil producers, big business and other lobby groups with one eye on the oil futures market.

Given this background, I could not resist the opportunity to attend the 18th World Petroleum Congress that was held in Johannesburg in late September to gain firsthand impressions and explanations from the most prominent and knowledgeable stakeholders and role players in the global business of producing petroleum products.

I was not disappointed. It was a superb show with full marks to the conveners, speakers, exhibitors and some 4 000 delegates from across the globe representing a broad spectrum of stakeholders and role players 

In sharing the information overload that emerged from the proceedings, I have focused this thumbnail sketch on the responses to issues frequently raised and discussed by fleet owners, motorists and industry watchers both here and abroad. Here are snippets, some of which you may find interesting, surprising, believable, unbelievable or, hopefully, useful and helpful in your efforts to get to grips with the largest single vehicle operating cost for linehaul truckers and primary distribution operations.
 

	DISPLAYING messages like 'sustaining our future' and the 'ultimate alternative' showed the accent BP is placing on the environment as well as alternative fuels.
IF THERE was one word that dominated conversations at the Congress, it was 'gas'. Africa's huge reserves make it a big player inthis arena.

Upstream - is about exploration, extraction and distribution (including transportation) of crude oil and natural gas

Question: Are there sufficient reserves to meet current and future demand? How long will known reserves last? Will South Africa have ongoing access to enough imported crude oil to meet its needs now and in the future?

Answer: 

• "There is no shortage of petroleum reserves left to be developed and produced." - Ali Al-Naimi, Saudi Arabia's Oil Minister
   

• "There is plenty of oil left. Supply has not yet peaked." - Rex Tillerson, President of ExxonMobil.

Based on known reserves and quoting from US geological surveys, industry leaders along with those quoted above confirm there is more than two trillion barrels of conventional crude still to be recovered. There is more than enough to meet projected demand until 2050. Known, proven reserves have more than doubled since 1970. A few assertions from the proceedings add credibility to these statements:

• Due to advances in upstream technology and the vast areas of the Saudi Arabian oil fields, proven reserves will increase from 264 to 464 billion barrels.

• According to BP's annual statistical review published in July 2005 and confirmed by president Vladimir Putin, Russia has 72 billion barrels of oil and 1 700 trillion cubic feet of gas reserves.

• Canada's proven oil sands offer more than 175 billion barrels making it second only to Saudi Arabia in size.

• Africa, currently with nine per cent of known oil and gas reserves, will increase its share as investment capital is acquired to further exploration and infrastructure. Nigeria will almost double its crude oil production to 4,5 million b/d from 2.4 million b/d. Nigeria's gas reserves stand at 500 trillion cubic feet. Africa has more gas than the US, Brazil and the EU.

• The US and EU are large importers of gas. By 2015 there will be an oversupply of gas. This especially so if all liquid natural gas projects planned for the Atlantic come on stream. Qatar, Russia, Malaysia, Iran, Australia and Nigeria will be among the major players. Production will need to be balanced to avoid an oversupply in the Atlantic and an under supply in the Pacific. According to Total Oil, competition is the key to price stability. "Customers always have access to alternatives," says Total's Jean Privey.

Downstream - is about refining, producing and distributing (includes transport) to retailers and end-users

Question: If there is no shortage of oil feedstock, where then is the problem and what drives the price?

Answer: "It is not an availability problem. It is a deliverability problem." - Ali Al-Naimi, Saudi Arabia's Oil Minister

 

	THE Chinese presence was massive at the Congress. This is Sinopec's stand.
EXXOMOBIL placed strong emphasis on its activities in African countries like Nigeria and Angola.

Most of the deliverability difficulties are laid at the door of the downstream sector for its failure to upgrade refining capacity worldwide and not keep pace with the growth in demand for high quality, environment friendly transport fuels. Supply chain bottlenecks such as regulations, marginal returns on investment and refining are factors that inhibit deliverability.

"There is enough refining infrastructure capacity," says Shell International's Mark Gainsborough. However, it is not always utilised to capacity or optimally.

The industry is seen as "hands-off" and not customer driven making it ill-equipped to respond or add to the profits it loses. Gainsborough believes the supply chain can be better managed if the industry's strategy was more "demand driven" instead of the traditional "supply push" mindset. It seems the industry needs a better database to understand what customers need as well as what they want. To change its "silo" mindset, the downstream experts would like to see more deregulation, rationalisation, globalisation and newcomers as well as innovative solutions and better business plans. Such steps could go a long way to removing some of the stress current demand is imposing on the global downstream sector.

Better data collection and immediate access to demand forecasts and better-planned primary distribution will make decision taking more intelligent. In simple terms, the supply chain needs to be updated across the board from crude production to supplying consumers with high quality petroleum products. The cost of shipping crude oil versus pipeline transmission is also under consideration.

A stable price is required to balance production and overcome the bottlenecks. High prices are not enough to secure the ongoing investment that is needed. To achieve price stability, demand must be predictable. More dialogue between producers and consumers is needed.
 

	A warm welcome was extended to all delegates as they arrived at the Sandton Convention Centre in Johannesburg
GAS-TO-LIQUID is creating great excitement. Watch out for Sasol when it comes to the commercialisation of this process on the international stage.

Predicting demand
This is not as easy as we laymen may think so here are a few points to ponder.

During the past two decades, demand for crude oil was, on one occasion, over-estimated by more than one million barrels a day (b/d). This reversed only recently when demand was under-estimated by more than a million barrels a day.

There are many reasons for such fluctuations, some of which are not predictable no matter how sophisticated global communications and monitoring systems may be. The Katrina and Rita hurricanes along with the Asian Tsunami and the massive earthquake in Pakistan are examples. The run-away growth in demand flowing from China and India could, perhaps, have been more accurately anticipated. The problem, of course, is that large errors in forecasting consumption have the potential to wipe out any number of refineries.

There are still factors that continue to surprise refiners of petroleum products. A good example comes from Shell International which said that during 2004 they were called upon to refine 228 different crude oils of which 71 were new to them and 18 were new to the global industry. You cannot make quality fuels from just any crude.

There are widespread feelings that the downstream stakeholders and role players have performed poorly for at least three decades. Playing catch-up is inhibited by the rising demand to produce high-grade fuels for the transport industry. Such processes require costly production facilities to operate at full capacity. The increased demand for light crude (best suited for transport fuels) pushes the price up and currently runs ahead of production capacity. We should be clear that when crude prices are high, investment capital flows into the industry. When crude prices are low, funds are withdrawn and investment capital dries up.

For an indication of industry action to overcome these problems, we can look at Saudi Arabia's commitment as the world's largest supplier of crude oil - and the role it sees for the Kingdom:

• Take steps to create a more stable, reliable and predictable market.

• Mount a proactive attack on deliverability by identifying bottlenecks and removing constraints.

• Expand its production to 12.5 million b/d by 2009 and sustain it.

• Have 2,5 million b/d spare capacity.

• Expand refining capacity by updating existing facilities and creating new additional capacity.

• Emphasise the notion that all producers have a critical role to play.

ExxonMobil takes the view that there is a need for more consensus and support for a single set of universal market-related standards that will avoid duplication and effort and build long-term mutually beneficial relationships. 

How high is the price of petrol and diesel?
Perhaps in a more light-hearted vein, a simple point raised by Shell's Mark Gainsborough: "If you deduct the taxes from the cost of a litre of diesel, it costs less than a litre of Coca-Cola!"

Just think what goes into producing a litre of petroleum product compared with a soft drink that is mainly water, a little flavouring and some gas. Right now in South Africa, a litre of 3% sulphur diesel at the pump up in Gauteng is around R5.35. Less government tax it comes down to R3.80. A litre of Coke at Pick 'n Pay, excluding VAT, is R4.36. Makes you think doesn't it?

Environment/Emissions
Current surveys of worldwide annual kilometres travelled by vehicles (excluding ships, airplanes, two and three-wheelers), is estimated to be about 45 trillion kilometres a year. Based on an average annual increase of 2,4% a year, it will rise to around 75 trillion kilometres a year in 2050. This gives real meaning to why solutions to reduce global post-tailpipe pollution should be seen as a priority.

In South Africa, the contributors to conventional CO2 pollution looks like this:
 

However, the average age of vehicles is 12 years. In the medium term, only 12% of vehicles are likely to be Euro 2 compliant. South Africa has no emission controls. We should be mindful that clean fuel not a dirty vehicle makes clean. We urgently need "clean" directives and real commitment to getting more of the benefits from current and emerging technology.
  

	THE attention to detail in these display models - both part of the bigger one shown on the top part of this article - is amazing giving visitors a good grasp of the many components of the industry from upstream to downstream. The oil drills worked and the chimneys smoked. Chinese ingenuity at its best.

Public Perceptions
Post tailpipe CO2 is the second largest emissions culprit. The current cost of carbon capture, transmitting and burying it at sea or underground, is anything between US$40 and US$60 a ton. Public awareness is still limited and the public need to know a lot more about the concept; especially when it comes to climate change, the level of local opinion, and if any guarantees are in place in respective of leakages.

There is talk about international laws and regional regulations being on the table. Unless governments adopt climate change policies and put a cost on CO2 emissions, there will be no incentive to use the technology, say the experts. The process requires energy and will no doubt increase the use of oil- based fuels.

Every country in the world needs to be assured they have access to energy. The World Energy Council says the global concentration of greenhouse gases is mainly the result of human activity. What is society's role that can be attributed to climate change?

• The effective use of energy.

• The main contributors are transport, housing and town planning.

• A different approach is needed to decarbonise national and regional economies.

• Clean products and clean consumption are key issues with consumption of energy being the big challenge.

If the seeds to climate change lie with technology and the business sector, emissions should be linked to population, economic activity, energy consumption and energy resources and the level of technological development. With this brief background, how do the experts interpret public perceptions?

• Many people feel they are not affected by climate change.

• Some blame the oil industry.

• Then there are those that blame politicians.

• Others say there is no solution. Some say there is no problem.

• A few think the answer resides in using energy from renewable sources.

• Another lot say the problem is too big for individuals to make a difference, so why bother?

• Then there are those who say "nobody is doing anything about it except those that whinge continuously".

What about alternatives?
Hydrogen (H) is good on emissions and is renewable. This leads to optimistic expectations that it may be the long-awaited alternative to petroleum-based fuels. Currently about 15 million tons is produced annually. The US, Japan and EU support its use. However, according to the experts at the 18th World Petroleum Congress, if it did get off the ground, it would be a new industry taking anything up to 10 years before we could expect an affordable H vehicle. The production timeline is suggested to be around 2015 to 2025.

While H can be derived from many diverse sources for use in industry, residential and transport, there are several negatives. These include:

• A very large investment in R&D to make it affordable.

• Presently there is no production or distribution infrastructure - there are approximately 100 refuelling positions serving about 100 vehicles each in the EU.

• A large reduction in technical costs needs to be found before it could become viable.

• H is not a prime energy source akin to petroleum alternatives such as ethanol or methanol.

• Some countries have only a single distribution channel.

Long-term, post petroleum energy sources could be solar, coal mixed with H provided you put the CO2 back in the ground or sea. However, the cost would have to be around three to four cents a kW to be competitive. While renewable sources of energy such as bio and wind are abundant, they cost twice as much as fossil fuels to produce.

H is clean and bulk power can be stored. However, there is a severe challenge around safety, production, distribution and storage. H is twice as expensive as fossil fuel and much more for wind or nuclear. Achieving an extensive distribution channel is unrealistic. Hydrogen fuel cells may prove to be a better bet.

HIGH profile was the order of the day. Here our Minister of Minerals and Energy Lindiwe Hendriks shares the podium with Eivald Roren, president of the World Petroleum Council, to answer questions posed by the world's media.

The good news
Based on the Fischer-Tropsch coal-to-liquid (CTL) process that was successfully commercialised by Sasol in 1955, GTL (gas-to-liquid), based on the same technology, has captured the attention of the energy industry's movers and shakers. Commitments by ConocoPhillips, ExxonMobil, Shell and Sasol to build GTL plants in Qatar, has triggered the commercialisation of GTL. This development presents a major challenge for gas rich nations.

GTL offers opportunities to strengthen security of energy supplies and lower future output of crude-based emissions. Using a Sasol process, Qatar will produce 34 000 barrels a day of mainly high quality diesel in the first third-party endorsed facility to demonstrate the technology can deliver high quality products to a viable market. Production is set to commence in 2006 with the possibility of expanding output to 150 000 b/d in time.

There is a widespread view that GTL production will not be confined to just a couple of companies. Qatar will lead the way to how big GTL can become relative to oil refining capacity. GTL is becoming increasingly competitive with oil refining as refining cleaner fuels drive costs up.

GTL produced in Malaysia is being extensively tested in California, Japan, Thailand and London. As EU sulphur-free fuel by 2009 draws nearer - and with the US, Japan and Australia set to follow soon after - significant investment in refining capability is now needed. GTL is well placed to respond with both quality and quantity. It yields much more than fossil fuel (70% versus 40%), has a high cetane rating at 70 and exceeds the clean fuel specs of tomorrow. It blends well with existing fuels, can be used neat and allows refiners to increase production volumes.

According to the Price WaterhouseCooper funded lifecycle assessment, GTL offers significant clean air benefits when compared with oil and it does so without incurring the greenhouse gas penalties.

What can we expect?

• Fossil fuel accounts for 95% of transport fuel. No viable alternative is envisaged before another 50 years.

• Liquid fuels account for just 9% of South Africa's energy requirements.

• Synfuel (Ethanol and Methanol) and bio (maize and soya are examples) resources are not panaceas. They will play a part but will not be cheaper in the near future or maybe ever.

• GTL (gas-to-liquid) fuel for use neat or as a blend with existing fuels is the most likely alternative to emerge.

• Sasol will be a major role player locally and internationally.

• Engine manufacturers will drive the global harmonisation of octane structure and develop combustion systems based on the viability of alternative fuel and blends to lower emissions, improve air quality without compromising performance or economic component life. Design criteria will be around an engine life of 300 000 km on petrol engines.

What should South Africa do to soften the blow?

• Use liquid fuel (petroleum products) more efficiently - better management and control of resources and consumption.

• Reduce speed - through commonsense and self-discipline, not speed limits. Why are we in such a hurry?

• Encourage investment in exploration (especially gas), refining technology and capacity.

• Government, oil industry, vehicle and engine manufacturers should co-ordinate steps to employ current and emerging technology sooner rather than later.

• Put a cost on pollution and emissions.

• Establish and implement a clean air policy.

Last words
This is a thumbnail sketch of the comprehensive proceedings discussed and debated at the 18th World Petroleum Congress in Johannesburg. If you would like more information on any of the topics and issues discussed there, consult the website www.18wpc.com or obtain the CD.