Refinery shift adds to gas price rise
The high prices Americans have been paying for gasoline are not just because the cost of crude oil spiraled upward for nearly a decade. They have also been paying for a crucial change in the nation's refining industry.
When oil prices shot up 400 percent after the 1973-74 Arab oil embargo, American refiners began the first of a two-phased switch in the type of crude they process into gasoline and other petroleum products. Refiners substituted Arabian heavy crude for Arabian light because heavy was cheaper and, more important, easier to obtain, explains Ralph Ragsdale, process engineering manager at the Houston division of Fluor Engineers & Constructors Inc., which designs and builds refineries.
For the same reasons, plus an abiding goal of reducing American dependence on supplies from the unstable Middle East, heavier crudes from Mexico and Venezuela have been enlarging their share of the American market for the past two years. And the end of 10 years of domestic oil price controls in 1981 spurred exploration here to unprecedented levels. This uncovered more heavy crude, especially in Alaska and California, Mr. Ragsdale notes.
The switch, however, has introduced a costly complication, several experts in metallic corrosion say. The heavier the oil, the likelier it is to contain contaminants that corrode refinery equipment, virtually forcing refiners to fortify their plants so they are corrosion-resistant or shut them down.
Strengthening a plant can cost billions of dollars, but doing without it is a risky alternative. If a simple refinery - one capable of processing only higher-grade crudes - treats heavy oil as if it were light, Mr. Ragsdale says, ''you'll spring leaks in the equipment; you'll experience corrosion. The internals of the vessels simply will start falling apart.'' Fires and explosions are also likely, he says.
Most American refineries were built when light crude was abundant, and heavy often went to waste or was left in the ground. Heavy crude demands, among other things, higher heat and pressure to crack its molecules and recombine them into refined products. That in turn demands thicker and stronger equipment, Mr. Ragsdale says, and the traditional carbon steel and chrome components of refineries are being replaced by those of tougher metals and metal alloys.
A significant part of Fluor's current business is upgrading refineries to process heavy crude. ''Projects are like fingerprints,'' says Jack Hull, also of Fluor. ''No two of them are alike.'' But to recondition a small refinery capable of processing 50,000 barrels a day, ''you are in the hundreds of millions'' of dollars. Refitting a large refinery, one that can process more than 300,000 barrels a day, can cost billions, he adds.
Building a new plant to replace an outmoded refinery is possible, but Mr. Hull believes no one has done that in at least five years.
In an ambitious renovation begun in early 1981 and nearing completion now, Shell Oil Company is retooling two California refineries to process American heavy crude. Fluor is doing the work on one of the plants. To replace 30,000 barrels a day of foreign light crude with domestic heavy, and to upgrade 20,000 barrels a day of low-grade oil into low-sulfur fuel, Shell is spending $750 million.
(Light and heavy oil elude precise definition. But according to the American Petroleum Institute (API), an energy industry group, light is generally paraffin-based, of light color such as yellow or green, and contains a high proportion of hydrogen, the lightest element known. Heavy is usually asphalt-based, often black and thick with a greater proportion of carbon, which is 12 times as heavy as hydrogen, oil's other basic component.
(To refiners, a key distinction is the crude's sulfur content, because it relates directly to corrosive potential. Some peg light crude at 0.25 percent or less sulfur, others at 0.5 percent or less, according to the API. Heavy crude also contains more of other contaminants like salt and organic acids than does light.)
For a major refiner like Shell, retooling is unavoidable. But matters are different for small refiners without Shell's financial wherewithal. The API says 321 refineries were operating in the United States in Janauary 1981. But the drop in oil demand has helped cut that number to 270 refineries, currently operating at an average of 65 percent of capacity.
The casualties have been small refiners, and more are certain to fall with them, says Raymond O'Brien, vice-president of product operations for Shell in Houston. Even without the pressing need to upgrade refineries, refiners are in an economic vise formed by the unwitting alliance of the federal government, suppliers, and consumers, he says.
While the cost of crude escalates, the demand for refined products has been declining, largely because higher product prices ''accelerated conservation on the part of the consumer at a faster rate than anybody expected,'' he adds. Moreover, President Reagan's decontrol order also ended the entitlements program , a regulation under which larger refiners essentially subsidized their smaller and less efficient counterparts to maintain a high level of competition.
The predictable tightening of the vise may put upgrading beyond the means of some of the industry's smaller members, Mr. O'Brien says. That, he adds, would eliminate them, because ''I would think the day of the simple refinery, with the economic situation we see today, is just about over. Either you put in the facilities to improve yield and get more out of a barrel or you're no longer in the refining business.''