Sulphur in numbers
98.5 per cent: Amount of sulphur Saudi Aramco aims to recover from its oil from 2011
$1bn: Value of the sulphur processing plant under construction in Qatar
45 billion cubic metres: UAE gas demand by 2020
Sources: MEED; Booz & Company
US energy major ConocoPhillips announced on 28 April 2010 that it was ending its participation in the estimated $10bn Shah gas field development in Abu Dhabi.
The company signed up to work on the project with state-owned Abu Dhabi National Oil Company (Adnoc) in July 2008. Less than two years later, ConocoPhillips decided the capital costs involved were too much of a burden to continue.
The big question is what to do with the sulphur, and what it does to the costs of production
Back in April, analysts attributed the company’s decision to withdraw from the project to a changed energy market from 2008. Many international oil companies were reeling from the global financial crisis, which saw oil and gas prices crash amid weakened demand.
But, sources with knowledge of the joint venture agreement say ConocoPhillips would only have had access to the sulphur, condensates, and natural gas liquids produced at the Shah field. As such it would only have been able to turn a profit when oil prices were above $80-90 a barrel, says an executive.
One of the key sticking points for the company was the sulphur element of the contract. In July 2008, Adnoc was selling its sulphur at $820 a tonne, but by May 2010, the company’s sales price had fallen to $145 a tonne. The sharp reversal in value and demand for sulphur made the contract unworkable from ConocoPhillips’ perspective.
The US major’s decision highlights a growing problem for the Gulf’s national oil companies (NOCs) – finding a market for increasing amounts of excess sulphur recovered from oil and natural gas fields.
The gas in Abu Dhabi’s Shah field is sour or sulphur-rich, containing up to 30 per cent hydrogen sulphide. Hydrogen sulphide a toxic substance that turns into sulphuric acid on contact with water. Although ConocoPhillips and Adnoc were going to produce 1 billion cubic feet a day of gas from the field, they would only have been able to recover 540 million cubic feet a day of saleable natural gas. The issue is not an isolated one. Across the Gulf, NOCs are being forced to turn to deposits, which have extremely high sulphur content to produce greater volumes of oil and gas to meet rising exports and domestic demand.
In some countries, such as Kuwait and Saudi Arabia, this is not a new problem. Kuwaiti crude contains 2.5-4 per cent sulphur, while Saudi Arabia’s benchmark Arab Light crude contains about 1.9 per cent sulphur.
Oil produced by Iran, Qatar, Oman and Bahrain has a sulphur content of about 1.5 per cent. This compares to the benchmark US and European sweet crude blends, which contain less than 0.5 per cent sulphur. The UAE is alone in the Gulf producing sweet crudes.
Saudi Arabia is in the process of developing its offshore Manifa field, with plans to produce 500,000 b/d of heavy oil from the reservoir from 2015, largely to make up for output declines at other fields. This oil will contain 2.2-4 per cent sulphur.
Kuwait also plans to develop new viscous oil reservoirs. It has signed a memorandum of understanding to work on projects with the US’ ExxonMobil in 2007 as part of a programme to produce 900,000 b/d of heavy, sour oil by 2020. This was later cut to 450,000 b/d. The oil will contain up to 4 per cent sulphur.
Hydrocarbons and refined fuel products sold on international markets are coming under increasingly stringent restrictions, which limit sulphur content. This means states such as Saudi Arabia, the UAE, Qatar and Kuwait have to remove growing volumes of impurities in-country and then dispose of the by-products.
Regulations introduced in Europe and the US cut the permitted sulphur content of gasoline and diesel from about 500 parts a million in 2000 to 10-50 parts a million from 2010. Companies including Saudi Aramco, Kuwait Petroleum Corporation (KPC) and Adnoc are spending billions of dollars upgrading their existing refineries to meet international standards.
Saudi Aramco wants to recover 98.5 per cent of the sulphur in its oil from 2011 onwards, up from 95 per cent in 2009. In March, Saudi Aramco Shell Refining Company, a joint venture of Aramco and UK/Dutch Shell Group opened a new ultra-low sulphur diesel unit at their Jubail refinery.
A joint venture with the US’ ExxonMobil, Saudi Aramco Mobil Refinery Company awarded a $400m deal to build a similar unit at their Yanbu refinery. Aramco and France’s Total are building another refinery at Jubail, which also will produce clean fuels.
Aramco is planning to build a similar plant at Yanbu, while adding ultra-low sulphur technologies at its existing Riyadh and Jeddah facilities by 2012. In Kuwait, KPC is planning an estimated $18bn upgrade of its three existing refineries to international standards. A new $15bn refinery at Al-Zour will also produce low-sulphur fuels.
Elsewhere in the UAE, Adnoc subsidiary Abu Dhabi Oil Refining Company is building a new refinery unit at Ruwais, which will produce products with low sulphur content.
The additional sulphur output from these refineries is just the beginning of the region’s problems. Where things get really difficult is gas production.
The GCC faces an increasing gas shortage due to rapid industrialisation and population growth, fuelling demand for natural gas as a feedstock for power generation.
Demand in the UAE is forecast to grow to 45 billion cubic metres by 2020 from 18 billion cubic metres in 2008, according to US consultancy Booz & Company.
Gulf states have traditionally met their gas needs with associated gas, a by-product of oil production. But as supplies tighten, they are now looking to develop non-associated gas fields, such as the Shah development. These fields have a much higher sulphur content making the gas more expensive to produce. They also leave the region’s NOCs with even more sulphur on their hands.
This is a problem that Qatar, the only state in the region to have a surplus of gas, has already had to deal with. The associated gas from its giant North Field has a sulphur content of about 2 per cent, but its main export is liquefied natural gas (LNG), which has to be sweet, containing less than 0.5 per cent sulphur.
In April, Qatar’s Energy Minister Abdullah bin Hamad al-Attiyah said the country’s sulphur output would more than double by 2015, rising to 2.5 million tonnes a year (t/y) from about 1.2 million t/y currently. The government is building a $1bn central sulphur processing facility. It will have a capacity to recover 12,000 tonnes a day upon completion in 2012.
In the UAE, Adnoc estimates its oil and gas operations will produce 7.1 million t/y of sulphur by 2013, more than four times the 1.7 million tonnes it produced in 2008.
Aramco said that it recovered 3.21 million tonnes of sulphur in 2009 in its most recent annual review. This was an increase from 3.16 million tonnes produced in 2008, despite a cut to overall oil output and refinery rates.
Sulphur output is expected to rise even further given that the kingdom has an overall oil production capacity of 12.5 million b/d of oil and is targeting 13 billion cubic feet of gas production by 2020, much of it non-associated. The big questions for the Gulf’s producers is what to do with this sulphur, and what it does to the costs of production. In the case of the Shah gas field, essential gas supplies will be produced, but at a cost of about $5-6 a million BTUs, close to current market prices.
Companies such as Adnoc would want to sell sulphur locally and on international markets to recoup some of the costs, in particular targeting the fertiliser industry in the Brazil, Russia, India and China.
But the world sulphur market is currently oversupplied. Global production of sulphur is forecast to reach 102.2 million tonnes by 2016, compared with demand of about 91.1 million tonnes, according to The Sulphur Institute based in the US. Production in West Asia, which includes the Gulf states, is expected to hit 20.5 million tonnes by 2016 compared with consumption of 5.7 million tonnes, leaving a 14.8 million tonne surplus.
By 2014, the Middle East is expected to account for 20 per cent of global production, up from 15 per cent today.
“Sulphur production in the next few years is going to grow and outpace consumption,” says Donald Messick, vice-president of agricultural programmes at The Sulphur Institute. “Once these projects all get going, beyond the 2014 time frame, that spread will grow even greater.”
However, Gulf producers will be in a good position to capture a healthy market share, Messick says.
“One thing that people forget is that sulphur is a logistics-driven business. Right now Canada is the major exporter of sulphur,” he says. “But they have to move it from Vancouver and then into the water. The Middle East is in a good position to move its sulphur [faster]. That is going to become more important in terms of world trade.”
Another option for the region’s oil and gas producers is to find new uses for sulphur and to generate domestic demand, says Joyce Ober, assistant section chief for mineral commodities at the US Geographical Survey.
In Qatar, Shell is building a $20bn gas-to-liquids plant to produce sulphur-free fuels and is already studying innovative applications for sulphur.
Shell has set up a research centre in Doha to develop its existing technologies for converting sulphur into concrete, asphalt and paving slabs, with the possibility of setting up a production unit in the country at a later date.
The only other option is to store the sulphur, something that sources close to Adnoc and the Qatari government say neither would like to consider.
But as they move to develop more sour oil and gas, the Gulf countries will have to find a home for the sulphur. “The by-product depends on the demand for oil and gas,” she says. “They will have to find a way of disposing of it some way.”