-- Robert Campbell is a Reuters market analyst. The views
expressed are his own. --
By Robert Campbell
NEW YORK Nov 15 U.S. natural gas producers can
only dream of achieving the crude oil-linked prices companies
elsewhere get for their output but a quiet beneficiary from the
shale gas revolution is the U.S. refining sector.
For gas producers, the holy grail is GTL --gas-to-liquids--
either through enormously expensive plants that turn natural
gas into ultra-clean diesel fuel or by gaining access to other
gas markets where crude oil sets prices.
For now gas producers have to wait. But the gap between
crude oil and natural gas prices in North America is
encouraging petroleum refiners to back out oil from their
systems wherever possible and substitute natural gas.
Although the volumes involved are tiny the trend is likely
to continue, particularly as it offers a partial solution to
the diesel problem --the need to boost diesel yields and cut
Independent refiner Valero has been the most
forthcoming about its plans.
The company is building new plants at two refineries that
will use natural gas instead of crude oil to generate hydrogen,
which all refineries need to remove impurities like sulfur from
Traditionally hydrogen has been sourced from naphtha
reformers that produce high-octane gasoline components but this
is increasingly costly way of making hydrogen given the high
price of crude oil.
Producing hydrogen with a steam reformer, a plant that uses
water vapor to convert methane to hydrogen gas and carbon
dioxide, cuts hydrogen costs by some two-thirds.
More importantly, though, is that by cutting the reliance
on gasoline output to produce hydrogen the refinery gets a bit
of flexibility to tackle the diesel problem.
THE DIESEL PROBLEM
The diesel problem, in short, is that demand for middle
distillates is growing faster than demand for other oil
products but refineries are unable to shift output to reflect
this changed pattern.
To get more diesel refineries have to produce more
gasoline, that is increasingly hard to sell at a profit. This
in turn crimps diesel output until the cost of the fuel gets
high enough to offset losses from additional gasoline sales.
Given that Atlantic basin refineries are generally set up
to produce twice as much gasoline as they do diesel, the extent
of the problem becomes clear.
By breaking the link between hydrogen output -- a critical
component of diesel production -- and gasoline components, a
refiner gains a bit of flexibility to boost diesel yields
without making more gasoline.
This helps explain the rapid growth of third-party hydrogen
supply systems, particularly on the Gulf Coast, where
industrial gas producers like Air Products and Praxair operate networks of hydrogen plants linked by pipelines
But backing crude oil out of the hydrogen production
process will only help diesel output at the margin. Large
changes in refinery yields will require huge investments.
Again, the case of Valero is instructive. At a cost of $3
billion, the company is building two hydrocrackers at Gulf
Coast plants that will mainly produce diesel fuel.
By processing low-value fuels under great pressure in the
presence of hydrogen gas, hydrocrackers yield excellent diesel
They also meet refiners highest ambition: volume expansion,
a massive boost to profitability in an industry where
feedstocks are priced by volume.
For instance, the units Valero is installing will yield up
to 1.3 barrels of high value fuel for every barrel of feedstock
Hydrocrackers, or other plants that shift refinery yields
away from gasoline and towards diesel, are what will be needed
to tackle the diesel problem.
But the high cost of these units is a major hurdle.
After all many refiners are still licking their wounds
after the last bout of expansions in 2007-08 ended abruptly
with huge financial losses.
But refiners may face little choice but to invest or die.
The plants that are closing today are those most exposed to the
diesel problem and least able to do anything about it.