METHODOLOGICAL RECOMMENDATIONS FOR THE WORK OF THE BANK OF OIL QUALITY IN RUSSIA ON THE EXAMPLE OF THE CASPIAN PIPELINE CONSORTIUM

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1 International Journal of Civil Engineering and Technology (IJCIET) Volume 9, Issue 9, September 2018, pp , Article ID: IJCIET_09_09_199 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed METHODOLOGICAL RECOMMENDATIONS FOR THE WORK OF THE BANK OF OIL QUALITY IN RUSSIA ON THE EXAMPLE OF THE CASPIAN PIPELINE CONSORTIUM Ibragim Arbievich Khalidov Gubkin Russian State University of Oil and Gas, Russia, , Moscow, Leninsky Prospekt, 65 ABSTRACT Creating an oil quality bank (OQB) in Russia is a very urgent issue. In world practice, as a rule, the mechanism of financial compensation and exemption depending on the quality of oil produced from the selected marker type is used. In the US and Canada, there are other mechanisms: the amendment on API gravity and balancing scales that suggest the calculation of special adjustment coefficients. In the US and Canada pipelines are arranged on a linear basis, i.e. each pipeline has a very limited number of drop-off points. Russian system has a large number of entry and exit points, which greatly complicates the accounting of oil quality. Another problem of the oil quality control is the imperfection of the accounting system in the field, where the quality varies across oil reservoirs. And often to one group metering station (GMS) or oil complex preparation station (OCPS) crude comes from different companies from different oil fields of varying quality. The introduction of OQB in Russia needs to be fully assessed, taking into account all the possible consequences for the industry [1]. Keywords: Oil Quality Bank, naphtha, gasoline, jet fuel, diesel, API gravity, sulfur content, Bulk Property Method, Refining Value Method, Distillation Cut Method. Cite this Article: Ibragim Arbievich Khalidov, Methodological Recommendations for the Work of the Bank of Oil Quality in Russia on the Example of the Caspian Pipeline Consortium, International Journal of Civil Engineering and Technology, 9(9), 2018, pp editor@iaeme.com

2 Methodological Recommendations for the Work of the Bank of Oil Quality in Russia on the Example of the Caspian Pipeline Consortium 1. INTRODUCTION A shipper of crude oil which has a valuable property should receive compensation for loss of that property only to the extent to which that desirable property upgrades the value of the common stream. Likewise, a shipper of crude oil with an undesirable property should not be penalized for that property unless it degrades the value of the common stream. Russian companies have acquired experience with the usage of OQB before its occurrence in their own country. In 2002 a precedent has been created as OQB was introduced on Caspian Pipeline Consortium (CPC) pipeline, which became the first bank of this kind in the former Soviet Union [2]. Figure 1 Exemplary scheme Independent international consultants having significant experience in this area took part in the development of the concept and its practical implementation [presented in Figure 1]. OQB is a mechanism of penalty and compensatory payments by/to crude oil producers depending on the quality of the crude oil they deliver to the oil pipeline system. The trunk oil pipeline accepts crude oil blends from different oil fields and averaging of crude oil quality in the pipeline stream resulting from such mixture hinders adequate accounting of the raw material specific indicators (content of paraffin, highly potential fractions for producing oils and special fuels, etc.). A quality bank allows using in settlements the two most common indicators, API gravity and sulfur content, which are determinative for refining economics and market pricing. Actual data on crude oil batches accepted into the system and lifted off it, as well as its quality indicators, are the basis for calculation of coefficients used in the shippers mutual settlements. Financial settlements between the OQB participants are made through ABN Amro Bank that accumulates financial resources deposited by the shippers as advanced payments for transportation of declared volumes. For any change in the crude oil quality, the participants receive/make payments from/to the bank during the crude oil acceptance into the pipeline system and its delivery at the final point of transportation. Thus, a change in the quality indicators values (improvement or worsening) receives its appreciation in monetary terms [3]. Crude oil transported in the common stream via the CPC pipeline system is called CPC Blend. The model for determining its quality is a basket of editor@iaeme.com

3 Ibragim Arbievich Khalidov reference crude oils comprised of specified crude oil grades. Every two weeks CPC assesses the value of certain quality crude oil delivered by shippers into the CPC system and the crude oil lifted off the system. Thus, the OQB enables the shippers to receive fair value for the crude oil delivered into the CPC system [4]. CPC OQB methodology is based on using linear regression to establish a monthly formula that predicts crude prices as a function of API and sulfur. Crude prices are on a CIF Augusta basis (the composition of the crude basket and the crude qualities as used for the calculations). Pre-requisites for the inclusion of reference crude oils in the basket are that they should be marketed in the Mediterranean in sufficient quantities and influenced by Mediterranean pricing. An API and sulfur quality bank is premised on the fact that higher API gravity crudes enable the production of a higher volume of light products such as naphtha, gasoline, jet fuel and diesel, which can all be produced by treating light distillates. By contrast, lower API gravity crudes tend to have more atmospheric residue, which forces refiners to produce more fuel oil. The other premise is that light products have a higher value than fuel oil. Hence, the breakdown into light distillates and atmospheric residue, reflected in the API gravity, is a very important driver of crude values. As sweet crudes (i.e. crudes with a low content of sulfur) tend also to be lighter than sour crudes (i.e. crudes with a high content of sulfur), API gravity and sulfur are not completely independent parameters. With a degree of accuracy that varies for different crudes, the regression can either use a high API coefficient or a high sulfur coefficient to track widening light-heavy crude price differentials About crude quality monitoring At present, there are no sources from which timely and reliable information concerning the quality of each crude in the basket of OQB could be obtained. However, there are several information sources that can be used to maintain the representation of crude oil qualities as accurate as possible. These include the following sources: Energy Institute: The Marine Crude Oil Transport Analysis published by the Energy Institute (EI) shows the API gravity of the crudes in the survey, but not the sulfur content. The EI data are one year behind the Italian statistics but are based on much larger volumes of crude tested and so are the most representative. Italian Statistics: The Italian crude import statistics published by the Ministry of Economic Development report the API gravity of all the crudes imported into Italy, but not the sulfur content. The statistics are published quarterly. Nearly every crude currently included in the basket or considered for inclusion has featured in the Italian crude slate so that it has been possible to maintain a good and current representation of the API gravities. As noted before, the Italian statistics occasionally show some questionable data points. When a data point is missing in a chart, it indicates that no import was recorded in that month for the crude in question. US Energy Information Administration (EIA). The EIA statistics provide cargoby-cargo data with the country of origin, API gravity and sulfur. The database does not name individual crude oils, but in some cases, it is possible to isolate with a reasonable degree of confidence a sample that is representative of a specific crude oil. The reporting of sulfur content in the US import statistics occasionally editor@iaeme.com

4 Methodological Recommendations for the Work of the Bank of Oil Quality in Russia on the Example of the Caspian Pipeline Consortium appears questionable, as exactly the same value appears to be reported by specific companies for different cargoes over a period of time. The following additional sources of information can be used to estimate crude production or export by grade and to assess whether a sufficient quantity is sold in the Mediterranean: The IEA provides crude import and export statistics by country of origin and by country of destination; Arab Oil & Gas Directory published by the Arab Petroleum Research Center; The OPEC Annual Statistical Bulletin; Statistics published by the Italian Ministry of Productive Activities showing crude imports into Italy by grade; Data published by The Energy Institute (EI) showing marine transportation statistics for a number of crudes. These data include volumes shipped by grade About possible changes to the crude basket To test exclusion or inclusion (Test) of a crude oil from the Basket, the following steps are performed: Tests for exclusion are performed for the worst performing crude oils; Tests for inclusion are performed for the crude oils currently suspended from the Basket or other crude oils which meet other inclusion criteria such as the volume of trade in the Mediterranean. In the Tests the new crude oil qualities are used; The analysis is performed by simulating how OQB would have performed when the crude oil considered for inclusion/exclusion is included in (or excluded from) the Basket. For a crude oil already in the Basket, the prediction interval test is based on removing it from the basket, recalculating the OQB coefficients, using them to predict the price of the crude removed and compare the prediction with the actual price; If suspended crude failed the inclusion test for more than 12 months, the recommendation for its exclusion from the potential crude oils, which can be used in the basket, is made. The effect of inclusion or exclusion of any particular crude oil on the results of the regression, given other conditions being equal, is reduced with more crude oils in the basket. With fewer crude oils this effect is more pronounced. Some crude oils occasionally have a larger impact on the results of the regression than others. Therefore, it is always better to have as many crude oils as possible in the Basket in addition to the fact that the higher number of crude oils provides a broader representation of market prices, assuming these crudes are relevant to the Mediterranean market. 2. METHODS 2.1. Reasons for revising the current OQB methodology Until recent years, the OQB systems based on bulk property methods, such as API gravity and sulfur content, generally provided a reasonable mechanism to assign the value of individual streams contribution to the value of a crude blend in a crude oil pipeline system editor@iaeme.com

5 Ibragim Arbievich Khalidov This has changed since the mid-2000s and this trend will continue. It is desirable to have an OQB procedure that provides a robust representation of crude streams contribution to the value of a crude blend in the OQB systems. As a rule, the linear regression specified by corporate procedures provides a mathematical representation of crude oil prices, which could be taken as statistically accurate once the regression parameters are within certain limits. In reality, however, the price of any crude oil is determined by the complex market dynamics and reflects, among other factors, the market value of the refined products that could be obtained by refining the crude oil in question (i.e. the refining value) since that is how refineries realise value from the crude oil that they process. API and sulfur are parameters that are typically used to correlate well with refining values and, consequently, have the potential to produce a good mathematical representation of crude oil value as a function of quality. API and sulfur quality bank rely on two premises: Light distillation fractions such as naphtha, kerosene and gasoil have higher API gravity than the atmospheric residue. Therefore, API gravity is an indication of the high content of light distillates. These light distillation fractions are usually worth more than atmospheric residue because they can be upgraded to finished gasoline, jet fuel or diesel at relatively low cost. By contrast, the atmospheric residue is either blended to lower value fuel oil or cracked to higher value light products at relatively high cost. Recent market developments have brought these fundamental premises into question. Since 2011 it became evident the negative API coefficients and from 2014 they have become consistently negative [5]. Although the sign of API coefficient may be not specified in the description of this parameter in corporate procedures, it is a concern because one of the basic premises of an API and sulfur regression is that lower density (higher API) products are more valuable than higher density (lower API) products and, hence, API gravity can be used as a proxy of distillation yield value. A negative API coefficient means that API has a negative impact on the crude s value Review of current market situation There are currently two key factors that may impact crude oil valuations, and in particular in the Mediterranean region: Refined Product Pricing; And Availability of lighter crude oils and condensates Refined product pricing The current relatively low naphtha prices result in low prices for high naphtha content crude oil relative to other crude oils in the market. Gasoil is now the most valuable product of crude distillation, but it does not have the highest API gravity. Naphtha has a higher API gravity than gasoil, but a much lower price. This trend was noted several years ago in respect to its impact on OQB results, resulting in occasional negative API coefficients. Now we see API coefficients consistently negative Availability of lighter crude oils and condensates The other likely future development that may have an impact on price relationships is the growth of supply of very light crude oils and condensates. Supply of very light crudes (rich in naphtha) will grow strongly in the Mediterranean, especially as a result of potentially editor@iaeme.com

6 Methodological Recommendations for the Work of the Bank of Oil Quality in Russia on the Example of the Caspian Pipeline Consortium increased exports from Kazakhstan. Supply of condensates is also likely to grow globally as a result of the development of shale gas basins, as well as planned increased natural gas production in Russia. With the growth of availability of feedstock s rich in naphtha on the one side and the stagnant or negative growth in the petrochemical sector expected in Europe, and especially in southern Europe, the demand for light refined products, naphtha and gasoline, is expected to be weak. Therefore, it is not unreasonable to expect that the current oversupply of naphtha could be a continuing structural feature in the Mediterranean market in the future. 3. RESULTS In order to fulfil the purpose of an OQB, other methods may be considered as an alternative to the bulk property method. Bulk Property Method: The bulk property method uses bulk properties and the prices of competitive crude oils to infer differentials in market value due to differences in bulk properties. Bulk properties are those properties that are measured on the whole crude oil without distilling it into fractions. The most common bulk properties are API gravity and sulfur content. This type of method is based entirely on crude oil prices, rather than refined product prices. There are two other types of methods which are typically used for quality banks and which are as follows: Refining Value Method: The refining value method is the most complicated quality bank methodology. The relative prices of crude oils sold in the international trade reflect marginal values to a refinery in the principal competitive market for the crude oils in question since refineries are the consumers of almost all crude oil. A refinery model which calculates the yields of each crude oil from its assay properties can be used to calculate relative values. The refining value method is tied to the products market rather than the crude oil market and as a result, may not entirely reflect the crude oil market due to fluctuations in crude oil refining margins. Distillation Cut Method: The distillation cut method is a simplified version of a refining value method. Rather than performing calculations on the yields and costs of downstream refinery processing units, the individual distillation fractions (cuts) from each crude oil are valued based on the prices of intermediate products such as naphtha and vacuum gas oil or finished products such as diesel and residual fuel oil. These methods do not require the complexity of refinery models but do require distillation assay data for each crude oil. The refining value method captures value differences due to diverse chemical properties and geography. This is important for pipelines which transport mix paraffinic and naphthenic crude oils as well as pipelines transporting crudes from diverse geographical areas. The refining value method can be the most difficult method to apply given the continuous need for detailed crude assays, generation of refinery yields, and a complex agreement on product prices, markets, and price quotations. The use of refinery models is subjective and not transparent which requires that agreement on methods and procedure be established prior to implementation of the quality bank. In addition, the method has complex crude assay requirements which increase the potential for error. While developing an assay is a standard industry laboratory procedure, it is time-consuming, expensive and difficult to obtain consistent results. The refining value method is often used when only a few crude oil streams are blended together and their individual qualities are not expected to change significantly editor@iaeme.com

7 Ibragim Arbievich Khalidov The distillation cut method is somewhat of a compromise methodology which limits the administrative difficulties of the refining value method. The distillation cut method may capture value differences due to diverse chemical properties and geographic location of refiners that consume these crude oils. However, there is somewhat more administration required when compared to bulk properties methods due to the need for continuous assays and the technical interpretation of the assays. Distillation cut methods are widely used in European pipeline systems. 4. CONCLUSION In recent years, the bulk property method based on API and sulfur has stopped providing a physical and meaningful representation of crude oil values in the Mediterranean due to the low prices of light components like naphtha compared to heavier components, such as diesel. As this price trend is expected to continue in the future, it is recommended that other OQB methods are considered as a replacement for the currently used API and sulfur method. The Refining Value method is the most complicated to operate and administer, and there may still be a simpler alternative which is effective. The distillation cut approach is commonly used in the North Sea crude oil pipeline systems. Compared to the bulk property method which is currently used in the CPC OQB, this system requires more extensive testing of the individual crude oil streams on an ongoing basis in order to calculate the required value adjustment. However, it does capture the difference in value between crude oils of different chemical nature more successfully than the bulk property approach and more successfully reflects the value of lighter crude oils. REFERENCES [1] Fursova, I. Oil Quality Bank to be created in Russia [2] Subbotin, M. Rise in the price of Russian barrel [3] Bondarenko, T. G., Ishkinina, G. S., Khalidov, I. A. and Soltakhanov, A. U. Developing methodological approaches to financial and economic planning at oil and gas enterprises. Espacios, 39, 2018, p. 32 [4] Caspian Pipeline Consortium. Oil Quality Bank. [5] IHS. Caspian Pipeline Consortium Oil Quality Bank Annual Review editor@iaeme.com