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January 2014


Controlling the Design Spiral

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Chemical reactions require catalysts. As the global leader

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At BASF, we create chemistry.


January 2014 Volume 19 Number 01 ISSN 1468-9340

(03) Comment

(30) Keep it lean

(05) World News

Contract awards, project updates, industry latest, news digest,

diary dates, mergers and acquisitions

Simon Bennett, AVEVA, UK, explains how new technology

advances are enabling lean construction processes in plant

(12) Facing headwinds

Luisa Sykes, Euro Petroleum Consultants, discusses the outlook
for the oil and gas sector in Europe

(35) Fully qualified
Sari Aronen, Metso, Finland, discusses the importance of
reliable valves in renewable fuel production


(41) Additional treatment

(20) Flood warning

Matthew Kuhl, Mark Routt and Scott Sayles, KBC Advanced
Technologies, USA, look at the US shale supply flood, focusing
on processing developments and issues

(26) Dieselising Europe: Part 2

Dirk Frame, T.A. Cook Consultants, Germany, discusses the key
problems that affect diesel producers and the importance of
correct maintenance

Berthold Otzisk and Silke Rdel, Kurita Europe, Germany,

discuss the chemical treatment programs that can be applied
to water and wastewater processes in order to remove oil,
solids and other troublesome substances

(45) Knowledge nexus

Kevin Milici, GE Water & Process Technologies, USA, looks at
the evolution of water management




Hydrocarbon Engineering provides an overview of some of

the most advanced catalyst technologies available within the
hydrocarbon processing industry today

(72) 15 questions with....

Ruth Poultney, Fuels Development Technologist, BP, talks
women in engineering, career development, her first pet and
favourite band

This month's

front cover
Join the

AVEVA is a leader in engineering design

and information management solutions
for the plant, power and marine industries.
For more than 45 years it has delivered
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and shipbuilders around the world. AVEVA
employs over 1400 people and has a global
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Energy Global



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Claira Lloyd Editor

hen thinking about 2013, the death of Nelson

Mandela, the US government shutdown and
the birth of the Royal baby (hard to avoid if in
the UK) spring immediately to mind. Yet, when
thinking about the world of oil and gas I think
shale and the turbulent situation that has been faced by the
European refining industry.
The European refining industry is being heavily impacted by
the shale revolution as the US now has an abundance of cheap
fossil fuels and the infrastructure to utilise it, which is leaving
Europe to play catch up. And lets face it the wealth of shale
gas is Americas biggest asset at the moment as gas is inevitably
going to be cheaper than oil, boosting its downstream industry
to incredible heights. The level of liquids demand growth in
Europe is also a problem as it is flagging, as developed markets
are no longer commanding such high levels and the emerging
markets, which still crave liquid fuels, are procuring it from
cheap sources such as the US. The overcapacity of European
gasoline production is another area that is not helping the
European situation, and this is likely to worsen over the next
five years unless changes are made. European refineries need to
adapt to increase the production of middle distillates, which
are currently being demanded at high volumes all over the
continent, as well as in areas overseas.
Sadly, Europe is not only competing with the US. Russia
and the Middle East are also two strong players in the global
refining industry that are giving Europe cause for concern. The
level of subsidisation in the Russian refining industry allows

for expansion and revamps to boost the

countrys distillate production and therefore
allow it access to the global market, which
is craving these fuels. The subsidisation in
the country also ensures that the domestic
refining industry does not suffer even if demand drops off,
something the European refining industry does not benefit
from. When it comes to the Middle East, the explosion of
complex refineries is the biggest threat. These facilities, such as
Jubail, have high levels of efficiency and complexity that dwarf
European counterparts.
While one cannot deny that the shale revolution is
one event negatively impacting Europe, it is having many
positive impacts that will no doubt continue into this year,
and cannot be ignored. The US has now cemented its energy
security of supply, something that economies across the
world strive for on a daily basis. Also, the country is sharing
the benefits with others (so to speak) as due to tight oil,
Latin America and West Africa have gained a secure supply
of gasoline to feed ever increasing demand at a relatively
cheap price. So, yes, unless changes are made to reduce the
complexity of European refineries, it is possible that there
will be tough times ahead this year in the region, however,
there is hope elsewhere as fossil fuel supply continues to be
secure and prices continue to be favourable and competitive
to many.
Happy New Year from all of us on the Hydrocarbon
Engineering team.

contact info
WEB MANAGER Tom Fullerton

EDITOR Claira Lloyd

WEB EDITOR Callum OReilly



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w rld news
CB&I |


B&I has been awarded a contract

valued at approximately
US$1billion by Ingleside Ethylene LLC, a
joint venture between Occidental
Chemical Corporation (OxyChem), a
subsidiary of Occidental Petroleum
Corporation, and Mexichem, S.A.B. de.
C.V. for the engineering, procurement
and construction of an ethane cracker
and associated utilities and offsites to
be located at OxyChem's complex in
Ingleside, Texas. The cracker will have
the capacity to produce approximately
1.2 billion lbs/y of ethylene.
Feedstock for the cracker is
anticipated to be ethane derived from
domestic shale gas. As previously
announced, CB&I provided the
technology license and basic
engineering for the ethylene
technology, five SRT (short residence
time) cracking heaters and the front end
engineering design (FEED) services.
CB&I has also been awarded a
contract by JSC Gazprom Neft for FEED
services for a new oil refining complex
at Gazprom Neft's refinery in Omsk,
Western Siberia, Russia. The existing

Algeria |

refinery is currently the largest

operating refinery in Russia.
CB&I's project scope includes FEED
development for multiple new process
units, including a 2 million tpy
hydrocracker unit licensed by Chevron
Lummus Global, as well as hydrogen,
sulfur and other associated units. CB&I
delivered a similar hydrocracker
complex earlier this year for Gazprom
Next in Pancevo, Serbia.
Finally, CB&I, in a joint venture with
Zachry Industrial, Inc. has been awarded
two contracts, each valued at
approximately US$ 2.5 billion by FLNG
Liquefaction, LLC and FLNG
Liquefaction 2, LLC in order to
construct the first two trains of the
Freeport liquefaction project.
The project scope includes
engineering, procurement and
construction for the conversion of an
existing regasification terminal in
Freeport, Texas to an LNG liquefaction
terminal. The two train LNG
liquefaction facility will have a total
capacity in excess of 8.9 million tpy of
LNG. The initiatial contract discussions
for this project began in 2012.


onatrach, ranked by Forbes as the

world's 12th largest oil company, is
nearing completion of a new paraxylene
crystallisation plant at its integrated
refinery/petrochemical site in Skikda,
Algeria. Start up was scheduled for
December of 2013.
The plant's core units will utilise
CrystPXSM and GT-IsomPXSM, both
licensed from GTC Technology. CrystPX
recovers paraxylene from reformate
feedstock while GT-IsomPX, using
ISOXYL catalysts from Clariant,
isomerises C8 aromatics into additional
paraxylene. This license also includes

naphtha hydrotreating and reforming,

aromatics extraction and other
aromatics operations. Samsung
Engineering Co., Ltd., provided EPC
services for the new facilities.
The paraxylene plant was originally
part of Sonatrach's petrochemical
subsiduary, Naftec, which Sonatrach
absorbed in 2009.
The new units continue Sonatrach's
long term expansion plans for
additional refining and petrochemical
capacity at its facilities in Algeria to
meet with growing local demand for oil


lfa Laval has won an order to supply

Alfa Laval OLMI heat exchangers to
a petrochemical plant in the US. The
order, booked in the process industry
segment has a value of approximately
SEK 60 million. Deliveries are scheduled
for 2014 and 2015.
The Alfa Laval OLMI heat
exchangers will be used to incease the
yield and recover energy in the
production of ethylene, an important
ingredient for the manufacturing of
industrial chemicals and plastics
products. The order is an example of
the reindustrialisation occuring due to
the shale gas revolution in the US.
The shale revolution is thought to
be the major driver behind expansion in
the US petrochemical sector. The
unlocking of the previously inaccessible
reserves has driven down prices of the
essential inputs to petrochemical

Venezuela |

anoir Industries was awarded

catalyst tubes, outlet manifolds
and transfer line assembled by Technip
Claremont for the expansion and
upgrade of PDVSA Puerto La Cruz
refinery, Venezuela.
The furnace components are based
on Manoir's proprietary Manaurite high
alloy technology. They are
manufactured in its leading production
centres in France an the UK under its
'One Manoir International' production
methodology which guarantees
coherent manufacturing and quality
control processes across all plants in
France, UK, India and China.



January 2014

w rld news



South Africa

Denmark |

FourQuest Energy has acquired the assets

of Odyssey Technologies Inc., a custom
chemical solution company based in
Houston, Texas. OTI has been one of the
process industry's leading suppliers of
speciality chemicals. With the acquisition,
FourQuest Energy is now in the position
to deliver one of the most powerful and
complete portfolios of services in the
energy industry.

MAN Diesel & Turbo South Africa (Pty.)

Ltd., local subsidiary of the engineering
enterprise MAN Diesel & Turbo SE
(Augsburg, Germany), has entered into an
agreement to acquire 100% of the share
in the family owned ELCA Engineering
(Pty.) Ltd. near Johannesburg. Closing of
the transaction is subject to approval
of the South African Competition
Commission. The parties agreed not
to disclose any financial details of the


AMETEK, Inc. has acquired Powervar, a

provider of power management systems
and uninterruptible power supply systems
for approximately US$ 128 million.
Headquartered in Waukegan, Illinois, the
privately held company has annual sales
of approximately US$ 70 million.


The sale of Caltex Australia's Sydney

based import bitumen business to
Puma, Energy, a subsidiary of Trafigura
Beheer BV has now been completed. The
details of the sale remain commercial
in confidence. Caltex no longer deems
bitumen to be a core business, hence the

January 2014



rincipal Technology Inc., a provider

of total system solutions for natural
gas, refining, chemical, process and
manufacturing facilities, is supplying
the small capacity sulfur recovery
units(SRU) and tail gas treating unit
(TGTU) for Dakota Prairie Refining, LLC
refinery in southwestern North Dakota.
Designed to address the specific needs
of small capacity refineries, Principal
Technology's SRUs are based on a
modular platform design that reduces


oyal DSM has announced that

together with DONG Energy it has
demonstrated the combined
fermentation of C6 and C5 sugars from
wheat straw on an industrial scale. The
combined fermentation results in a
40% increase in ethanol yield/t of
straw, which can result in significant
cost cuts in the production of
bioethanol from cellulosic feedstock.

Kuwait |

installation time and enables the units

to meet the tight construction
deadlines imposed to complete the
refinery by the end of 2014.
The US$ 300 million refinery will
process 20 000 bpd of oil and produce
7000 bpd of diesel fuel, specifically to
meet the needs of North Dakota. The
remaining petroleum will be shipped to
other refineries for further processing.
The technology was chosen as the
facility is at a small scale.

The demonstration took place in

DONG Energy's Inbicon
demonstration plant in Kalundborg,
Denmark, the longest running
demonstration facility for cellulosic
bioethanol production in the world.
The faciltiy was reconstructed in
2013 in order to be able to conduct
mixed fermentation of C6 and C5


oneywell has been selected by

Kuwait National Petroleum
Company (KNPC) to provide the
integrated control and safety
system(ICSS) for its new 615 000 bpd
Al Zour refinery complex to be built in
southern Kuwait. Honeywell will also
provide the front end engineering
deisgn for the system.
This will be Kuwait's fourth refinery
and the largest refinery in the entire
Middle East. The total capacity of
Kuwait's three current refineries is
930000 bpd. The new refinery is
targeted for startup in 2018.
Honeywell has provided industry
technologies to KNPC's refineries for
approximately 30 years through its
Process Solutions business (HPS) and

has long sustained a presence in

Kuwait. As the main automation
contractor for the new Al Zour
refinery, Honeywell will supply
Experion PKS as the main control
system for the refinery complex, as
well as integrate all process
automation systems throughout the
site. Additionally, having HPS perform
front end engineering and design of
the system will help drive consistent
designs from other contractors
throughout the entire project and help
speed its completion.
The new refinery complex will help
to meet domestic demand and export
of ultra low sulfur products each as
fuel oil, diesel and kerosene, as well as
petrochemical feedstocks.

w rld news


BASF and the Petroleum Institute of

Abu Dhabi intend to develop new
processes for removing aggressive sulfur
compounds from acid gases in a research
collboration. The two parties have
already signed an agreement.


Athalon Solutions has announced the

purchase of a 36 acre chemical plant in
Bayport, Texas from Clear Lake Chemicals.
The company has significantly added
to its existing manufacturing base in
Louisiana with this purchase.


Intertek has opened a new petroleum

testing laboratory in Kirikkale, Turkey,
close to the capital city Ankara. The
laboratory supports both local and
regional customers with fuel quality
testing for diesel and gasoline, and is
adding a full range of tests to analyse


BASF and Gazprom have signed a final

agreement to swap assets of equivalent
value. Through the swap, the BASF
subsidiary Wintershall will further expand
its production of oil and gas and exit
the gas trading and storage business.
The completion of the transaction is
expected to take place mid 2014 and will
be economically effictive retroactively
to April 1st 2013. Sales and earnings of
BASF's Natural Gas Trading business
will continue to be reported in the
oil and gas segment until completion.
The transaction was approved by the
European Commission at the beginning of
December 2013.

January 2014



Belgium |


NEOS Oxide, part of the INEOS Group

of companies and a leading producer
of ethylene oxide and ethylene oxide
derivaties, propylene oxide and
propylene oxide derivatives, plus a
range of solvents and chemical
specialties, has purchased CADWorx
Plant Professional and CADWorx P&ID
Professional to increase plant efficiency
for its site in Belgium.
With strategic locations in both
Europe and the US, INEOS focuses on

Canada |


ASF and Pacific NorthWest LNG have

concluded a license agreement on
the use of BASF's OASE technology for
the removal of carbon dioxide and sulfur
containing components from natural gas
for all trains of Pacific NorthWest LNG's
proposed LNG facility in the district of
Port Edward, near Prince Rupert, British
Columbia, Canada. The facility
anticipates shipping first gas to
customers by the end of 2018. The use of
BASF's OASE technology for gas treating
is essential for the production of LNG.
OASE technology removes
contaminants contained in the gas to

Oman |

continually improving cost structures,

technologies and safety, health and
environment initiatives while combining
plant scalability and reliability. After a
benchmark analysis, the CADWorx Plant
Design Suite was adopted to
standardise and automate work
processes, minimise the amount of
transportation errors and enable
integration between CADWorx Plant
Professional and CADWorx P&ID

enable its liquefaction at temperatures

of approximately -160C. The
technology has a proven track record
in LNG facilities around the world and
its robustness and flexibility to meet
stringent removal requirements is well
recognised in the industry.
Front end engineering and design
(FEED) for the LNG faciltiy is currently
ongoing with three international
engineering contractors. The FEED is
expected to be complete and in time
for a financial investment decision by
the end of 2014.


ir Products and Takamul Investment

Company, a subsidiary of the Oman
Oil Company, have signed a joint
venture agreement to establish an
integrated industrial gases venture,
which will become a one stop provider
for a full range of industrial gases such
as hydrogen, nitrogen and oxygen for
all customers in the Special Economic
Zone at Duqm (SEZAD), Oman.
The joint venture will support the
economic development of the SEZAD
and enhance its competitiveness to
attract further industrial investments. It
will also aim to deliver the highest

operational excellence by leveraging

Air Products' world class capabilities in
large industrial gas plant design,
pipeline infrastructure development
and operational know how, as well as
Takamul's strong multi utilitiy
infrastructure position in Duqm, via its
Centralised Utility Company.
Strategically located along the Gulf
of Oman, Duqm has been targeted for
development as a major maritime
gateway for trade in crude oil from the
Gulf, and as an important industrial and
commerical hub. Duem will be the
largest SEZ in the Middle East.

Dynamic testing to
ISO/IEC 17025 ensures


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meter manufactured through the paces, giving you confidence that the
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Copyright FMC Technologies, Inc. All Rights Reserved.

w rld news
ws d


18 - 19 February
Madinat Jumeirah
Dubai, UAE
Tel: +44 (0) 20 7357 8394

23 - 26 February
Laurence Reid Gas Conditioning
University of Oklahoma
Norman, Oklahoma, USA
Tel: +1 4-5 325 3891

18 - 20 March
StocExpo 2014
Ahoy Rotterdam
Rotterdam, The Netherlands
Tel: +44 (0)20 8843 8820

23 - 25 March
AFPM Annual Meeting
Hyatt Regency Orlando
Florida, USA
Email: meetings

24 - 27 March
Gastech Conference & Exhibition
Tel: + 44 (0) 203 615 2847

31 March - 2 April
Global Refining Summit 2014
Hesperia Tower
Barcelona, Spain
Tel: +44 (0)20 7202 7690

January 2014 10



Worldwide |


rotecting smart grids from cyber

attack is a popular conversation in
information security circles. But the
threats are far worse than generally
believed. Lila Kee, chief product officer
at GlobalSign, has commented;
'Of all CNI sectors, the energy
industry is the recipient of a
disproportional number of cyber
related attacks, as hackers prey on
systems in desperate need of
modernisation and if penetrated could
lead to devastating consequences.
Smart grid equipment and software
manufacturers, as well as operators are
urged to step up efforts to upgrade


technology, especially around the area

of replacing weak passwords with
stronger authentication measures. As
in any cyber security planning, IT and
security professionals should
incorporate the level of security
necessary for the associated risk of a
breach, in the case of smart grids,
potentially catastrophic. As
participants in North American Energy
Standard's Board (NAESB), GlobalSign
encourages energy participants to
incorporate cyber security standards
developed by NAESB and NERC, that if
adopted will lead to a safer smart grid


verwhelming numbers of US voters

of all political persuasions agree
that increased development of the
nation's energy infrastructure is in the
country's best interests according to a
poll conducted for the American
Petroleum Institute (API) by Harris
Interactive. API Downstream
Operations Senior Manager, Refining
and Oilsands, Cindy Schild commented
on the results of the poll.
'The American people understand
the value of investing in our energy
transportation network in order to get
energy to consumers efficiently, and to
businesses that are thriving and
creating jobs due to the abundance of
affordable oil and natural gas. 93% of
respondents agree that increased
development of energy infrastructure

would help create jobs, while 89%

agree infrastructure investment would
strengthen America's energy security.
One obvious infrastructure project
with significant economic and energy
security benefits is the Keystone XL
pipeline, and voters remain supportive
of moving forward with the project.
72% agree it is in the US's national
interest to approve the Keystone XL
Pipeline so that it can transport North
American oil to US refineries, while 63%
would like to see America import more
of the oil it needs from Canada, rather
than other foreign countries.'
The telephone poll of more than
1000 registered voters also found that
88% said that increased development
of energy infrastructure is good for
American consumers.

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January 2014 12 HYDROCARBON


Luisa Sykes,
Euro Petroleum
discusses the outlook
for the oil and gas
sector in Europe.

uropean oil and gas demand was still affected by the economic
downturn during 2013. Is 2014 going to be the turning point towards
a more positive outlook for oil and gas demand or just a mirror of
2013? Estimates from the International Energy Agency (IEA) appear
to indicate the recovery in oil and gas demand is going to be slow and initially
restricted to a small number of European countries. According to the IEA,
European oil demand is estimated to decline by 0.7% in 2014 relative to
2013 numbers. This is an improvement compared to the expected drop of
1.4% in 2013. Gas consumption is estimated to decline by 3% in 2014, the same
rate of decline expected for 2013, following drops of 3.5% in 2012 and 11% in
2011. Despite the fall in oil and gas demand, European imports of gas and
middle distillate products increased during 2013. This was caused by falls in
European gas production and the shutdown of European refineries during 2012
and 2013.
Europe is still the world's largest energy importer, importing
approximately 55% of its overall energy needs, the imports represent
approximately 84% of oil consumption and 64% of natural gas
consumption. In contrast with the US, which is fast becoming self
sufficient in energy, Europe is becoming increasingly more
dependent on imports of oil and gas. Consequently, concerns are
being raised over energy costs and security of supply. Both the
oil and the gas industry are navigating a sea of change
that will affect the future outlook of both industries.
European refiners have been experiencing a sharp
decline in domestic oil demand and
tougher competition abroad.
While the gas industry is under
pressure to change its
business model and adapt to



January 2014

more flexible business practices. Gas markets are likely to

be affected by price volatility as conflicting interests from
LNG, renewables and carbon markets interplay. In contrast
with the US, natural gas consumption in Europe has been
declining in the last three years and market share has been
lost to both coal and renewable energy.

Coal versus gas

The IEA revised down its forecast for European gas
consumption for the period between 2013 and 2018.
According to the IEA, gas consumption will increase by
only 12 billion m 3 from 513 billion m 3 in 2012 to
525billionm 3 in 2018. The new forecast places future
European gas consumption below pre recession levels.
The revision was based on lower estimates for European
GDP growth and more conservative estimates for gas
consumption in the power generation sector. According
to the IEA, the high price of gas relative to coal and the
low price of carbon will negatively affect gas
consumption in the period between 2013 and 2018. The
IEA is forecasting a further drop in European gas
consumption in the next two years because of the
unfavourable relationship between gas, coal and carbon
price before consumption starts to recover after 2015. As
coal produces more carbon per unit of heat than natural
gas, coal is more affected by the carbon price. This
explains why under the current scenario of low price for
carbon, European power generation suppliers are opting
for coal rather than gas whenever possible. Data by the
IEA shows that carbon price of 45/t of CO 2 equivalent
would be required to motivate the switch from a coal
fired plant to a gas fired plant. At present European
Trading Scheme (ETS) allowances are traded at
approximately 4/t of CO 2 equivalent.
Many European electric power producers with the
flexibility to use coal fired generators switched to coal
to take advantage of lower coal prices relative to gas.
The US has become the main supplier of coal to Europe
as low US gas prices turned coal less competitive in the
US market and made exports of coal to Europe more
However, the preference for coal could be short lived
as many European countries will be decommissioning
older, less efficient coal plants in the next five years and
the European environmental agenda takes precedent over
profitability considerations. In 2013 coal consumption
dropped 6% mainly because of the decommissioning of
several coal fired power plants in Europe. Some of these
plants were decommissioned on environmental grounds
rather than profitability assessments. The environmental
agenda will benefit renewable energy that will become the
fastest growing energy for European power generation in
the future. It will also benefit gas exporters in the long
term and limit the scope for expansion of coal fired plants
bypassing price and profitability considerations.

Russia's expanding gas

market share
Russian physical gas deliveries into Europe increased by
10% in the first six months of 2013. This increase in Russian
January 2014 14 HYDROCARBON

gas imports was driven by lower supplies from Norway and

North Africa and lower LNG imports. LNG imports into
Europe have been falling in the last two years and
estimates from Societe Generale suggest a 24% decline in
LNG demand for 2013. This follows a drop of 31% in 2012
relative to 2011. The decline in demand for LNG in Europe
was motivated by weak gas consumption and high LNG
prices. LNG producers and traders have been focusing on
the growing Asia LNG markets and some LNG cargoes
designated for Europe have been reloaded and redirected
to Asia. This trade is emerging as an important additional
supply source for Asia and has the unintended
consequence of benefiting Russian gas exports.
The European economic downturn has had a negative
impact on gas consumption for power generation in the
majority of European countries and particularly in the
Southern European countries. The combined gas
consumption for power generation in Italy, Spain, UK,
France and Belgium declined by 21% in the second quarter
of 2013 relative to the same period in 2012. High price of
gas, low ETS prices and high growth of renewables
replacing gas for electricity generation were some of the
contributory factors explaining the low intake of gas in the
power sector.
In spite of the recent steep decline in LNG imports
into Europe, these trade flows are not doomed. The UK,
which has been experiencing a decline in gas production
from the North Sea and requires higher levels of gas
imports, has recently completed two deals with US
suppliers for the import of LNG into the UK.
A slump in US natural gas prices, caused by increased
shale gas production has created an opportunity for US gas
suppliers to sell LNG into Europe and Asia. US benchmark
natural gas prices have remained below US$ 4/million BTUs
since October 2011, compared to the current benchmark
price of approximately US$ 10/million BTU in the UK. On
the other hand, LNG prices in Japan during 2013 were on
average 55-70% above the UK National Balancing
Point(NBP) and German border prices and four and a half
times higher than US Henry Hub prices. These price
differentials make LNG exports into Europe and Asia very
attractive for US Exporters.
The IEA forecasts considerable tightness in LNG
markets for 2014 with some incremental LNG demand from
Asia surpassing the additional LNG capacity expected to
come on line in 2014. The supply and demand balance may
change from 2015 depending on Australia LNG projects
currently pending approval.

Oil indexation versus hub

price indexation
A great proportion of natural gas price in Europe is still
based on oil prices. It is not possible to get an accurate
view on oil indexation versus hub indexation levels. The
majority of the supply contracts are structural long term
contracts with confidentiality clauses. The European
Commission estimates that approximately 50% of
European natural gas supply is indexed to oil. Moreover,
approximately 80% of Russian natural gas supplies to
OECD Europe are linked to oil.



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The increasing level of hub indexation in European gas

supply contracts has been one of the main trends marking
the evolution of the gas market over the past few years.
Hub indexation has been gathering momentum as North
West European hub prices have traded below oil indexed
contract levels for the last five years. This has been a key
factor in the development of hub liquidity and
transparency and opened a gap between high cost long
term contracts and short term contract prices.
Gazprom and North Africa producers have been keen
defenders of oil price indexation. However, there are signs
that even Gazprom is beginning to make concessions. The
marketing and trading arm of Gazprom in Germany has
signed a 3 year deal with Centrica for the supply of
2.4billion m3 gas to the UK priced at the NBP hub. Statoil
has been more willing to accept increasing levels of hub
indexation and has recognised that the majority of the
companys gas supply contracts will be hub indexed in the
future. Recently, the company has signed a 10 year
45billion ft3 supply deal with BASF linked to the German
It remains to be seen if the Centrica deal is a turning
point for Gazprom towards accepting hub indexation as
the standard for gas pricing in the future. It is nevertheless
a recognition of the way the gas market is developing and
the difficulty in finding buyers for oil indexed gas deals, for
example in the UK, where hub indexation has become
more widespread. The progress towards hub indexed gas
prices is inevitable. However, oil indexed gas prices are
still going to linger for a long time thanks to the long term
contracts that underpin most of the European pipeline

European oil demand in 2014

European oil markets are slowly coming out of the
doldrums and in 2014 some European countries are
expected to experience increases in oil demand triggered
by more dynamic economic growth. The IMF European
GDP forecast of 1% for 2014 cannot be considered
impressive but it is still an improvement from the 0.6%
GDP decline expected for 2013. The signs of recovery in oil
demand during 2013 were mixed with Germany and UK
showing encouraging increases in diesel demand but Spain
and Italy still exhibiting sharp declines in motor fuel
demand by 4% and 8% respectively in the first six months
of 2013. France recorded a combined decline of diesel and
gasoline demand of 1.8% in the first half of 2013 according
to the industry group Union Francaise of the Industries
Petrolieres (UFIP). The outlook for European oil demand is
expected to be weak in the next two years with the UK
Petroleum Industry Association (UKPIA) forecasting oil
demand growth of 0.1%/y until 2015. Oil demand growth is
expected to increase slightly after 2015, according to the
UKPIA, particularly in the southern European countries that
enjoy greater prospects of economic growth.
The positive signs of economic recovery in the Euro
Zone are improving the outlook for the European refining
industry, but there are very serious risks looming over the
future prospects of the industry. Compliance with
environmental regulation, lack of investment, mismatch
January 2014 16 HYDROCARBON

Figure 1. OECD Europe gasoline exports, gasoil


between product supply and market requirements are just

some of the problems facing the industry. These issues are
not easily resolved but lack of a strategic framework for
the industry in Europe and lack of political engagement to
resolve some of these problems leave the industry
vulnerable and at risk of becoming another casualty of
modern times. While other refining centres prosper,
European refining is perishing. US refiners are on a mission
to expand their product exports to all corners of the
world. The Russian refinery industry is embarking on a
massive modernisation program which will turn Russian
refiners into more competitive players in global refining
markets. Middle East and Asia hold state of the art
refineries and petrochemical complexes and are able to
compete on the basis of economies of scale and lower
production costs. In contrast with such positive
developments from refining centres around the world,
European refining is being left behind struggling to
compete with more innovative and more profitable
refining centres elsewhere.

Increased dependency on oil

The structural imbalance between gasoline churning
European refineries and market requirements for increasing
volumes of diesel places the European industry at a great
disadvantage. The economic downturn, high crude oil
prices and vehicles efficiencies reduced oil demand and
forced refiners to cut runs imposing additional downward
pressure on refinery margins. As a result, 16 European
refineries had to shut down since 2008. Data from BP
shows France suffered the steepest refining capacity loss,
25%, while Germany, UK and Italy lost 11%, 11% and 8%
respectively between 2008 and 2012. Many refineries are
still under threat of closure. Cepsas 88 000 bpd refinery in
Tenerife has been idle for the last four months and
Hellenic Petroleums Thessaloniki refinery in northern
Greece is also idle, both refineries are at risk of permanent
closure. MOLs Mantova refinery in Italy is scheduled to
close down at the start of 2014.
Diesel demand has been growing strongly in the last
10years. The switch from gasoline to diesel has been
driven by a combination of taxation favouring diesel and
efficiencies in diesel engine. In contrast to diesel robust
growth, gasolines demand in Europe has been declining at
a rate of 3%/y for more than a decade. In Central and East

Europe, gasoline has been growing but in countries such as

Poland, Turkey and Ukraine the switch from gasoline to
diesel has been taking place for the last few years. The
overall net effect is an increasing gasoline surplus that will
continue to be exported to the US and West Africa.
The imbalance between refinery production and
market requirements resulted in a growing deficit of
diesel/gasoil and a surplus of gasoline. Total gasoil/diesel
imports grew from 49million tpy in 2008 to over
53milliont in 2012 (Figure 1), with the impact of the
recession on demand being generally offset by temporary
or permanent refinery closures. Gasoline exports exceeded
48 million t from 2008, although there was a small decline
over the period as a result of refinery closures and
reduction in refinery utilisation rates.

Threats and challenges facing

the oil sector
The weakness of the European refining sector is being
exacerbated by the drastic reduction of gasoline exports
to the US markets. A combination of lower US
consumption and domestic production replacing imports
has significantly reduced gasoline import requirements by
the US. Refiners in Europe are struggling to find new
markets to replace the volumes of gasoline previously sent
to the US and face tough competition from other refining
centres for markets in West Africa and in the
Mediterranean region.
US refiners benefit from discounts on domestic crude
and can afford to send products to far off markets. During
2013, US refiners have been sending significant volumes of
gasoline to North and West Africa markets, traditionally
consumers of European gasoline. West Africa and North
Africa reportedly increased gasoline imports from the US
in the first half of 2013 by more than 50%. US refiners have
been able to gain market share in Africa and also capture
gasoline market share at home thanks to improved
domestic logistics. The 5500 miles colonial pipeline from
Texas to New York Harbour has recently increased
capacity by 160 000 bpd reducing gasoline imports
requirements from Europe. US gasoline and diesel exports
to Africa are expected to continue well into 2014 and
beyond, seriously undermining European competitive
position within these markets.
The growing European diesel deficit has also created
export opportunities for other world refining centres. US
refiners have been sending increasing volumes of diesel to
Europe. Diesel shipments from the US exceeded 2million t
in September 2013, the highest volume on record.
Additional supply requirements into Europe are met by
imports from Asia and Russia. The Jubail refinery in Saudi
Arabia is ready to start exporting diesel to Europe at the
time when Asia oil demand appears to be weakening.
Indian refiners such as Reliance are also keen to send
diesel and jet fuel to Europe. Exports from Russia into
Europe have increased to 650 000 bpd in 2013 and further
increases are expected in 2014 as more Russian refineries
complete their upgrades.
The upgrade of Russian refineries is also imposing a
serious challenge for the European refining industry.
January 2014 18 HYDROCARBON

European refiners have for many years relied on supply of

untreated Russian gasoil for further processing. The cheap
low quality material enables refiners in Europe to increase
their middle distillate yields and improve their margins.
The prospect of diminishing supplies of gasoil will add
extra pressure on the profitability of European refining

No rosy prospects for the oil

industry in 2014
The continuing switch from gasoline to diesel in Europe
has boosted diesel growth rates in the past 10 years.
However, diesel growth rates in Europe are forecast to be
much reduced in the future compared to past performance
due to improved engine efficiencies and market saturation.
Spain and France, for example, are approaching diesel
market share of 80% of total cars on the road. Therefore,
in the future the European diesel market needs to rely on
real economic growth rather than fuel substitution to
sustain a good level of diesel demand growth. The
prospects for European fuel demand in 2014 are going to
be mixed, Germany and the UK are already showing good
recovery in diesel demand and both countries are expected
to achieve diesel demand growth of approximately 2% in
2014 relative to 2013. On the other hand, Italy, Spain,
Portugal and Greece have been the worst affected by the
economic downturn and oil demand in those countries are
still expected to decline in 2014.
Many refineries in Europe will have to make substantial
investments and switch upgrading capacity from catalytic
cracking to hydrocracking and coking to boost middle
distillate production or face the alternative option of
closing down. These investment decisions are impaired by
current low level refinery profitability which makes the
investment case look unattractive.

European oil and gas industries are undergoing many
changes and facing many challenges. The nature of these
challenges can potentially change the outlook for both the
oil and the gas sectors in Europe. Energy dependency and
security of supply are underlying themes linking the two
industries. European authorities and European consumers
are increasingly concerned with oil and gas supply
reliability and affordable prices. Despite all these fears, the
dependency on oil and gas imports is estimated to increase
in 2014 and beyond. The expansion of European gas hubs is
regarded as a positive development by European
consumers and will help to keep gas prices under control.
Under intense pressure from consumer countries and facing
competitive challenges from other sources of energy, the
gas industry is being forced to renegotiate long term
contracts and accept more flexible price mechanisms.
In the oil sector, European refinery closures will have
very negative implications from the point of view of both
energy security and prices. Europe will become more
dependent on product imports and more vulnerable to
supply disruptions and higher costs as long haul transport
costs and storage have to be added to the price of
imported products.

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