The comments below are, generally, in the order in which they came up at the meeting. The facilitator will compile an ordered view before the next COQA meeting.

Panelists:

Bill Lywood              Crude Quality Inc. Inc.

Bruce Kennedy        PetroCanada

Larry Kremer            Baker Petrolite

Scott Blumenshine   Flint Hills Resources

Scott Blumenshine runs the assay laboratory for the refinery and noted that while they do track shipped crude and refining gate batches, too much of the information is after the fact. An opportunistic crude, for example, is purchased based on producer supplied assays and then sampled and tested when it reaches the refinery. This does not allow much time, obviously, to react to any differences in the marketed assay versus what was actually received. It would be great if it was standard industry procedure to check things out beforehand; the cost to test a sample is not normally that large, just sometimes logistically difficult. Although he has seen quality indefinitely becoming more of an issue, quality professionals in his position don’t usually deal with the producers, but with their own company traders. Traders may not know, for example, that some of the high TAN crudes currently being marketed have had no in-depth studies on possible long-term effects.

Bill Lywood noted that quality should be viewed as a tool for both refiners and producers. Producers are beginning to understand that the traditional gravity and sulfur are not enough to define any given crude type. Also, the specifications a producer most often sees are the ones outlined in a pipeline tariff, which generally include BS&W and RVP. These parameters, while important, are not usually intrinsic to a refiner’s definition of a crude.

Bruce Kennedy listed some myths and realities that, in his experience, are deep seated throughout the oil industry.

The Myths:

1. all crudes are equal, "crude is crude"
2. assays truly represent crudes
3. pipelines can deliver the assay
4. refiners only value gasoline, "light is better"
5. refineries are all the same
6. refineries are completely flexible, they can all handle anything
7. a little contamination just gets lost
8. the refinery business is stable
9. refinery technology hasn't changed much in the last century
10. crudes from the same area have the same composition forever

The Realities:

1. refineries need and value a range of products, not just gasoline
2. no two refineries are alike
3. a refinery’s flexibility is limited by its supply chain and equipment
4. even minute amount of contamination can cause serious environmental or safety issues
5. the refining business and its technology are very dynamic
6. refining technology has made dramatic progress since its inception
7. each crude market is different as well as each refinery
8. the oil industry is a very complex system encompassing market, production, refining, logistics
9. environmental constraints are becoming ever more restrictive

Larry Kremer indicated that he has also noticed that refineries are getting less and less flexible. Severe operating constraints make it imperative that refiners know what is in the crude. He also noted that producers are starting to ask about possible refining process options before a new crude hits the market. Even major crude streams can change with aging fields and new wells. This leads to variable quality, which should be just as important to the producer considering its impact on a crude’s valuation.

Refineries are no longer overdesigned, but so fine-tuned that one problem can have a domino effect and bring the entire plant down.

Opportunity crudes that are commercially driven can lead to much larger expenses as unknown qualities surface at the refinery gate.

Another myth abounds that once upstream (production) feeds the midstream (supply chain), it has no responsibility to the downstream (refinery). Producers do not realize that problems in the downstream do affect them, by way of lower netbacks.

Producers are willing to spend money to provide "quality" crude but they expect to be reimbursed.

Lack of communication between upstream and downstream is a serious problem, even when both sides are from the same parent company. This is true of the support industries as well. Personnel tend to specialize in upstream or downstream support and they usually don’t talk either.

Quality is not an absolute but a "fuzzy", relative term.

It is difficult to find quality professionals who speak the same language in all areas of the oil industry. There are quality gurus in production, how does a refinery reach them?

Refinery led specifications should be okay with producers, but it must be understood that fields change and specifications must have flexibility to allow for that. Supply chain constraints apply to production, too. Sometimes a new crude is destined for an existing stream simply because of location.

A crude is defined by its hydrocarbon distribution. All other parameters (including sulfur, gravity and environmental considerations) only add to or detract from that valuation.

Certain constraints like acid, H2S, methanol, etc. are of concern to everyone in the downstream business. Can’t we start by joining forces to control those common issues?

Too much variability has to drive the value of crude down. The producers need to realize that they too have an incentive, and the ability, to fix that problem.

There is the conception that only the refiners, not the producers, talk to the middlemen pipelines. Producers talk to traders who generally do not talk to the pipeline either.

Economics drive the equation; the ultimate netback on any quality is to the producer. How can we expand our sphere of quality professionals to include producers who realize that?

We need to keep in mind the differences between a batch operation and a common stream. There are similar issues, but they may need to be handled differently.

Mixing in a pipeline does occur, how much is too much? Both refiners and producers need to know that answer; refiners for processing and producers for how it affects their crudes’ value.

Blending will occur if the market dictates that a profit can be made by it. A quality bank may be able to limit this, dependent on how the bank values the parameters covered.

Refiners say, "tell us what you’ve got" and producers say "tell us what you want". How can we get through this gridlock?

Contractual quality terms are a must to even begin getting what you pay for.

Specifications on pipelines, to go along with contractual obligations, can go a long way toward managing quality. How do we go about getting specifications on more pipelines?

They are already areas where trading companies include pipeline specifications as part of their contract. It isn’t as much of an anomaly as most of the industry seems to think.

We need to begin implementing quality management now; degrees of freedom in the industry are fast disappearing.

Technological advances will help manage quality and define enforceable specifications.

There needs to be refiner feedback to the producer as well as to the pipeline.

Significant changes in a crude stream, such as a large new field, will be market adjusted, but each refiner needs to make individual adjustments to their own valuation.

All crudes are blends.

With modern technology, real time analyzers can be developed for almost any parameter. However, someone has to require (and remunerate) that development, either as a collective specification or an individual justification.

Can the COQA propose contact language for crude oil quality?

Refiners need to define what information is needed, how do you find it out, and what do you do with it.