Fuel Hedging and Risk Management. Gajjala Vishnu N.

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of crude oil depend on the chemical characteristics of the crude oil. Since crude oil obtained from an oil well will differ slightly in quality from oil drilled from any other well, it is instructive to look at the overarching physical properties and characteristics that determine the value of a particular grade of crude.

      The major properties of crude oil that are referenced in most contracts and specifications are the density, sulfur content, viscosity, pour point, volatility, water content, and sediment and other impurities. Other properties that are applicable to oil products include the flash point, cloud point, stability, dye, etc.

      Density is measured using the American Petroleum Institute (API)s gravity scale, which is a measure of how much heavier or lighter the petroleum liquid is compared with water. A reading of above 10 indicates that the liquid is lighter than water and floats on it. Crude oil with a high API gravity value is referred to as light crude oil and would yield a higher percentage of lighter or less-dense products such as gasoline and kerosene upon refining. Crude oils with a low API gravity value are termed heavy crudes and are more difficult to refine, yielding lesser quantities of the high-value lighter products.

      Sulfur is an undesirable impurity as it is corrosive and foul smelling, and it needs to be removed during the refining process. Crude oils with a sulfur content of less than 0.5 % are referred to as “sweet” crude oils, while those with a sulfur content greater than 0.5 % are termed “sour” crudes.

      Viscosity is a measure of the thickness of the fluid or the resistance that it offers to pouring. It is measured in centistokes or Saybolt universal seconds. The pour point is the lowest temperature at which the crude oil retains its flow characteristics and below which it turns semi-solid. These measures are essential to determine the means of storage and transportation for liquids.

      Volatility of crude oil and other products is measured using the Reid vapor pressure test and is important for handling and treatment considerations. Vapor pressure is especially important for gasoline as it affects starting, warm-up, and vapor locking tendency during use. Water content and sediment content are measured, as they are indicative of the effort needed to remove these impurities.

The main crude oil benchmarks are West Texas Intermediate (WTI) Crude Oil, which is a US crude oil, and Brent Crude Oil (North Sea crude oil). Both of these crudes are light sweet crude oils, where the API gravity is greater than 31.1°. Dubai Crude Oil is a major benchmark in the Asian region and is classified as a medium crude oil (API between 22.3° and 31.1°). Some of the major crude oil streams, along with their properties, are shown in Table 1.1.

TABLE 1.1 Major crude oil streams and their properties

      1.3.2 Oil Products

      Crude oil is too volatile to be used on its own, and hence distillation of crude oil into various fractions of different volatility is needed. The main types of oil products in descending order of volatility are:

      • gases and LPGs

      • gasolines/naphthas

      • kerosenes

      • gasoils/diesels

      • fuel oils

      • lubricating oils, paraffin wax, asphalt, tar, and other residuals.

      Methane and ethane are gases found with petroleum. Methane, which is also referred to as “natural gas,” is used for energy generation while ethane is used as a feedstock for petrochemical production, where it is converted into plastics. LPGs refer to propane, butane, or and a mixture of the two. They are used for cooking and industrial purposes. Gasoline is used mainly for motor transportation. Gasolines or naphthas are also used as feedstock for the petrochemical industry and refineries.

      Kerosenes are mainly used as aviation turbine fuel (ATF). They are also still used for lighting and cooking in some parts of the world. Gasoils are used principally for home heating or as diesel engine fuel. They are also used as petrochemical feedstock. Fuel oils are used in marine transportation (also known as bunker oil) or as a source of fuel at refineries or power stations.

The refining process involves the separation of hydrocarbons by state and size, processing and treating individual products for the purpose of removing impurities and converting, or cracking, heavier hydrocarbons into lighter, more desirable compounds (Figure 1.3). The first stage of refining involves fractional distillation, whereby the crude oil is heated to a high temperature, usually around 350 °C, and pumped into a distillation column where a temperature gradient is maintained between the top and the bottom. Lighter components of the crude oil, which boil at lower temperatures, condense at higher levels of the column while heavier compounds settle at lower levels of the column. Off-take pipes at different heights of the column withdraw fractions of different compounds, with gases and LPG at the top of the tower and fuel oils and residuals at the bottom. This residue from atmospheric distillation can further be subjected to vacuum distillation to remove more volatile components of the residue, leaving behind asphaltenes and other heavy residues.

FIGURE 1.3 Simplified refining process diagram

      Following distillation, the oil products are subjected to hydro-treating or Merox treating, whereby the sulfur present in the products is removed. Hydro-treating involves mixing hydrogen gas with the oil product (usually naphtha or gasoline) and passing the mixture over a catalyst at high temperature and pressure, resulting in the sulfur being removed as hydrogen sulfide gas.

      The next major step in the refining process is the conversion of fractions into lighter, more desirable compounds. Naphthas are subjected to a process of catalytic reforming or platforming, whereby the “octane number,” a measure of performance of motor fuels, is increased using a catalyst like platinum. Heavy residues are subjected to thermal cracking (heating to temperatures in excess of 400 °C) or catalytic cracking, where a finely divided catalyst is mixed with the feedstock and heated, to produce catalytic-cracked gasoline and other light products. Hydro-cracking, another catalytic cracking process that uses hydrogen, can also be used for this purpose.

      The final step in the process is blending, where different products produced at the refinery are mixed in certain proportions to form the finished products, which conform to certain standards. For example, oxygenates are blended with motor gasoline to reduce the lead content and increase the octane number of the fuel.

Prior to refining, a crude oil assay is conducted to get a good idea of the product yield (i.e., the fraction of each product that can be obtained from the particular grade of crude oil). With crude oils of a similar origin, the crude grade with a higher API gravity value is likely to yield higher-end products; however, an assay is the best means of getting a reliable estimate of product yield. Sample product yields from primary distillation of Brent Crude Oil and Dubai Crude Oil are shown in Tables 1.2 and 1.3.

TABLE 1.2 Brent Crude Oil distillation yields by percentage of weight

      TABLE 1.3 Dubai Crude Oil distillation yields by percentage of weight

      A test of the types of hydrocarbons present in the feedstock for the refinery can also be conducted to identify the appropriate feedstock to be used. This is called a PONA (paraffins, olefins, naphthenes,

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