Tag: crude oil

After Oil: Money, Food and Polymers – New Business Activities for the Middle East

I wrote this article for the Al Jarida newspaper and it was published on Saturday 7 February 2015.

This article took a full page as I was developing an argument for Kuwait and other oil rich countries after demand for crude oil declines. It is published here: Al Jarida Article 7 Feb 2015 (Go to page 12)

After Oil: Money, Food and Polymers – New Business Activities for the Middle East

Fourteen years ago the former Minister of Oil for Saudi Arabia, Sheikh Ahmed Zaki Yamani said that by 2030 oil would remain in the ground because people would not want it. One oil rich country, Iran, is discussing their future budgets without oil. I have written previously about how dramatic falls in energy creation from solar radiation is now a direct competitor to burning fossil fuel. So what can economies that are heavily reliant on oil revenues such as Kuwait do in a post oil world? This is what I will discuss in today’s article.

Based on experience, for a change to take place in any market there must be three major forces that come together at the same time. These three forces are: Economic, Social and Technical. If a market or industry sector has these forces in play, then it will change. Let us look at the oil market and see if these forces are present.

Economically? Yes. Falling prices have made many oil reserves uneconomic. Falling prices of other energy sources drives consumers towards them.

Socially? Yes. Climate change issues are affecting the entire world and reducing carbon dioxide production is now a topic of common discussion. The United Nations Framework Convention on Climate Change (UNFCCC) and the Intergovernmental Panel on Climate Change (IPCC) are both very vocal in the need to curb carbon dioxide emissions immediately. Not next year, but now. Today. Yesterday if they could do it.

Technically? Also yes. Energy can be produced as efficiently from the sun and the wind as it can from fossil fuels (coal, oil and gas).

So it seems the forces are aligned. Hence the market will move. Then the question remains, what does this mean for countries that are heavily reliant upon fossil fuels, especially crude oil, for their state revenues? Something needs to change. Business will have to divest and reinvest in order to create new revenue streams.

There is a catch however, a complex economic catch. In countries where oil revenues provide a lot of state revenues, oil production is also very cheap. For example in Russia, oil production cost is around $15 per barrel. It’s about $10 per barrel in Iran and less than $5 per barrel in Saudi Arabia, Iraq and Kuwait. New revenue streams however will come with higher operating costs, high retooling costs (more capital investment) and high human capital retraining costs. Margins will be less. Hence there must be significant increases in revenue by these lower margin activities to cover the revenues lost by a fall in oil demand. It will be difficult.

So with that groundwork laid, I boldly predict that for oil rich states such as Kuwait that once oil demand declines there are three areas that can replace oil revenues. These are:

1. Finance, equity and debt investments, investment yields 2. High value polymer production, taking it beyond low value petrochemicals 3. Aquaculture for high efficiency protein production

These income streams can either occur through private ownership, in which case taxation regimes would be required to provide state revenues. Or the ventures would be state owned and continue to operate much like the oil and gas sector operates now. The later would be a tall order. The economic efficiencies necessary in these new industries will not allow traditional work ethics common with the high margin, easy to produce revenues from crude oil. Therefore state governments will get smaller. The private sector will grow, if it can. Private sector needs three factors in it’s favour to thrive: 1) great infrastructure – transport, communications, access to liquidity; 2) excellent legal systems; 3) low taxes. This is something Dubai has been developing and they appear to be doing well.

Let’s go through each one of these three new revenue options in turn, using Kuwait as an example and the benchmark of $50b – Kuwait’s gross income with crude oil price at $45 per barrel.

1) Finance, Equity and Debt Investments, Investment Yields

Sovereign wealth funds of the Middle East are in an ideal position to expand their operations to replace falling oil revenues. Since 1953, the Kuwait sovereign investment fund has accumulated an estimated $550b in assets. Therefore, quite simply, a 10% yield on investment would replace all present revenues from crude oil.

But can you get such a high yield on so much capital? You can. You can even get more.

Berkshire Hathaway, the very well known investment group established by Warren Buffet in the 1960’s, holds net assets of $484b. Their net revenues have averaged 20% per year for the past 50 years.

This demonstrates that high yields are achievable.

Employing 330,000 people, Berkshire Hathaway presents a viable model for Kuwait moving forward after oil. Raising the level of investment knowledge therefore is an important skill to develop amongst Kuwaitis. The management of such investment could be achieved by creating 100 investment groups each allocated $5b. Each group would be set the target to achieve 20% or more net annual revenues. It would be survival of the fittest. Consolidation, knowledge transfer and then further expansion would increase the performance of the funds and the skills of the investment management teams.

From first hand experience, investment yields greater than 50% are possible when carefully selected and expertly executed.

So the management of money is a viable solution to entirely replace revenues from falling oil demand.

2) High Value Polymer Production, Taking It Beyond Low Value Petrochemicals

Here is a perspective of the use of crude oil in today’s world:

From Renewable Energy World

The chart shows that 44% of crude oil is consumed as gasoline, 21% as diesel, and 9% as jet fuel. That means that 74% of crude oil is burnt every day, never to return, non-renewable.

Notice that only 2.7% of all production is consumed in the polymer industry – petrochemicals. This is an industry that takes a product with a market value of $0.30 per kg (crude oil), and then, with complex chemical and mechanical processes, produces products that sell for $1, 5, even $17 per kg. This industry is is the petrochemical industry, producing plastics and polymers.

Value adding to crude oil is a straightforward way to increase revenues once you have installed the necessary equipment and have the required numbers of trained personnel.

I have put together the table below to show different polymers with their prices, their world market share and how much of Kuwait’s revenue this would represent.

For example polycarbonate, a transparent, highly impact resistance plastic common in the automotive industry, sells for about $5 per kg.

PTFE, a high tech fluorocarbon polymer sells for about $17.5 per kg.

But the demand for both of these polymers is low compared to crude oil volumes. Even if Kuwait was producing all of the worlds requirements for these two high value polymers, it would not provide any where near the replacement revenue for the State.

Polymer	World Production (million tonnes per year)	Bulk Market Price ($ per kg)	World Market Value ($ billion per year)	% of World Crude Market Value	Profit at 20% Margin	% of Kuwait Income ($45b)
Polyethylene	80	1.7	136	10%	27	60%
Polypropylene	60	1.5	90	7%	18	40%
PVC	43	2.5	108	8%	22	48%
Polyester (PET)	28	2.2	62	5%	12	27%
Polyurethanes	12	2.5	30	2%	6	13%
Acrylonitrile-Butadiene-Styrene (ABS)	7.3	2.5	18	1%	4	8%
Polycarbonate	3.7	5	19	1%	4	8%
PTFE (Teflon)	0.2	17.5	3.5	0.3%	1	2%
Crude Oil (Kuwait)	150	0.30	45	3%
Crude Oil (World)	4,025	0.33	1,328	100%

Prices and quantities are from various years eg 2012, 2013, and 2014 and are indicative only for the purposes of general trends and forecasting for this article. Further details analysis would be necessary to undertake investment level decisions.

When considering what products the petrochemical industry should focus on, the table highlights that advanced polymers are high value but are not high volume. It also highlights the large scale of investment needed to produce a viable revenue source from advanced polymers. Also there is no one single polymer that would replace crude revenues. Instead a mix would be required, determined by market demand, capital expenditure, and feedstock availability.

Let’s consider two countries in the region, Saudi Arabia and Iraq. Saudi Arabia presently produces 75% of all Petrochemicals in the Middle East (and 10% worldwide). In 2013 Saudi petrochemical production was 86.4 million tonnes and the total value was $66.9b. Note that this equates to only $0.77 per kg, so it’s not in high value polymers, but in mid value intermediate polymer feedstock. In Iraq, Shell has just signed a $11b deal with the Iraqi government to build the Basra Nibras complex (operating by 2021). This is a petrochemical facility with a modest 1.8 million tonne per year capacity. Also, it is not making high value polymers, only intermediary polymer feedstock. Further capital investment is required to do higher value adding.

For an exercise, let’s assumed that the profit margin for a basket of high value polymers is 20% and that that basket sells for $2.5 per kg. This includes all capital investment, operations, maintenance and replacement allowance for the equipment (depreciation). Therefore the net profit will be $0.50 per kg. Thus, with 1,000,000 barrels per day of oil (123 million tonnes per year) converted into a high value polymer would yield $26b in net profits per year, or about half of Kuwait state requirements.

So this is possible, though with considerable capital investment and the time to establish it.

3) Aquaculture for High Efficiency Protein Production

What else can these countries do when oil is no longer wanted for burning? Well, it will still remain a low cost source of energy, and that means that other industries can be supported with it. One such industry is aquaculture, the most efficient form of protein conversion of any animal husbandry practice, as the table below highlights:

Feed Conversion Ratios

Animal	Kilograms of Animal Feed to Produce 1 Kg of Animal Meat
Beef	20
Sheep	4
Chicken	2
Fish	1.4
Shrimp	1.1

This is food for thought for oil rich nations with abundance of sunshine, water, and hence cheap energy. Growing fish and shrimp for hungry expanding world markets is a possible viable investment path, especially as the forecasts of collapsing wild fish and shrimp stocks come more frequently into the news.

One of the fastest growing food industries due to it’s high feed conversion ratio is shrimp farming. Iran has increased shrimp production to 8,000 tonnes per year in only about 15 years, and Saudi Arabia is producing about 25,000 tonnes of shrimp per year over a similar time frame.

There are plans for a 9,000 tonne per annum shrimp farm in Iran which will double production from that country and put it on level with Saudi Arabia.

WorldFishCentre.org

However, growing shrimp is not a replacement for crude oil sales. It’s a supplement.

Here’s why.

The market price for shrimp is around $5 per kg and they cost about $2 per kg to produce. Hence the net margin is $3 per kg.

To produce $1b net profit per year requires 300,000 tonnes of shrimp.

Note that world shrimp production is about 4 million tonnes per year.

About 40,000 Ha is required to produce this much shrimp (if growing white tail vannamei).

The Kuwait land area is 1.782m Ha, so 2.2% of Kuwait’s total area would have to be converted to shrimp ponds.

Incidentally this much land would also produce about 100 GW of electricity if photovoltaic cells where installed. This is the same amount that both China and India are committing to install by the early 2020’s.

So the volume of resources required is large whilst the net return is comparatively low, despite the fact that it is healthy and expanding.

So, there you have it. A stool with three legs provides the greatest stability:

1. Finance 2. Polymers 3. Food

Perhaps fishing and textiles will again be the mainstay for the region in years to come as it was before oil.

Author Deck Mr. Jeremiah Josey is an Australian who has been living in the Middle East for 7 years. Knowledgeable in the energy markets, he is the Chairman and Director of Oil & Gas of Swiss based Meci Group, a business and investment consultancy operating across the Middle East, Central Asia and Russia.

February 8, 2015

The End of Oil? Oil Pricing for 2015 and the Rise of Solar Energy

I wrote this article for the Al Jarida newspaper and it was published on Saturday 24 January 2015.

It’s a further development of my previous blog on how technology is changing the way the energy market operates and how the oil price may never rise again.

It is published here:

Al Jarida Article 24 Jan 2015 (Go to Page 16)

The End of Oil? Oil Pricing for 2015 and the Rise of Solar Energy

For oil prices, it’s a possible flat line in my opinion. Sideways. In fact with recent dramatic changes in the cost of energy we may be witnessing the end of oil. If oil stays low for long enough it may never rise again.

Said in June 2000, by Sheikh Zaki Yamani, former Oil Minister of Saudi Arabia (1962–86), “Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the Oil Age will come to an end not because we have a lack of oil.”

How so? I hear you ask. How have we reached the end of our modern “Stone Age”?

I say yes. Let’s have a look at why.

Economically, world energy has hit and passed a price equilibrium point between two competing mediums: fossil fuels, and solar energy. This means that how we do busy will change. And it will change rapidly now. For instance, mobile phones took out the land line market in a matter of years once mobile phones became cheap and available enough to do so. They were the better option technically and economically.

Energy from fossil fuels has historically been cheap and this enabled the great economic boom of the past 100 years: a population explosion from 1.7 billion people in 1900 to over 7 billion now, and GDP from $2.7 trillion (adjusted) to over $75 Trillion in roughly the same time period (per capita moving from $1,600 adj. to $10,000). The Green revolution (food production). The Technology revolution (computer development). The Connectivity Revolution (mobile phone & internet) and now the Knowledge revolution (P2P and social networking). All fuelled by cheap energy. And now this low cost energy has engineered it’s own replacement: Solar energy.

Looking closely at Illustration 1 below we see these low fossil energy prices. We also see the rise in crude oil prices to between $10 and $20 per mmbtu that caused the oil shocks of the 1970s. Renewable energy, particularly wind and solar, attempted to rise in this time, but their high technology cost was so great that when oil prices dropped again in the mid 1980’s so did interest in alternative means of keeping us warm, cooking our food and illuminating our homes. Just keep burning fossil fuels was the acceptable, economic solution. That is until now. Solar technology costs have plummeted, especially in the last 6 years, coming from an astronomical $220/mmbtu to now being at the same level as Brent crude and LNG at around $15 per mmbtu. And it’s still falling.

As far as economics go, fossil fuel prices are going the wrong way (up) and solar pricing is going the right way (down).

So what is really happening with the tumbling price of oil? Is Saudi Arabia attempting to displace US supply by shutting down high priced tight oil investments? Are there moves afoot to destabilise the Middle Eastern power base by cutting revenues of Iran for their support of the Syrian regime and other related matters? Are there plans to destroy the asset side of the Russian balance sheet and topple their eastern European hegemony?

Yes, it may be all, or some of these things. For now.

But these are still small compared to the impending impact of economics and the immutable power of the sun. I don’t think that solar prices are having any direct effect on oil demand right now, but I believe that very soon they will. We may find that the price of oil does not rise again, or if it does, not for very long before demand falls for the final time. Remember that more than 40% of crude oil consumption is by passenger vehicles and that’s an important fact when considering the low cost of generating power from the sun.

Led by their wallets, consumers will migrate towards solutions that are supported by lower cost energy and they will seek them out as manufactures support their demands. So it’s just a matter of availability of options. And what is the option for reducing energy costs: locally generated electricity for domestic consumption and electric vehicles or EVs for transport. EVs are 90 percent cheaper to fuel and maintain than gasoline cars (Rocky Mountain Institute).

Those options appear to ready now. Today, EVs can be purchased from many of the major vehicle manufactures from around the world. For instance BMW, Chevrolet, Citroen, Fiat, Ford, General Motors, Honda, Kia, Mahindra, Mercedes Benz, Mitsubishi, Nissan, Renault and Tesla to name a few. In fact BMW are expected to phase out internal combustion engines within 10 years (Baron Funds, September 14, 2014). So that means within the very close and near future, almost half of the demand for crude oil will evaporate. The Sheik’s prediction will come true. And about the image of electric cars, in 2013 the fully electric Tesla Model S won the Car of the Year (Motor Trend) for all car types, not just EVs, and was quoted as being the best car ever tested. Ever!

What continues to drive down the cost of solar energy is mega solar projects and continued large scale PV installations. For example the Indian government has made its intentions clear to have 100 GW of installed generating capacity by 2022 and China are planning 100 GW by 2020. That’s the equivalent of 200 nuclear power stations. And pricing will be around $0.06 per kWh – on a par when levelled with present energy costs (nuclear, coal & LNG).

Is the fall in oil price here to stay. Perhaps not just yet. It depends the uptake of EVs, and that is a matter of their availability. But soon low oil prices will be here to stay.

Our choice in this energy shift is to be leaders or let others lead.

Author Deck

Mr. Jeremiah Josey is an Australian who has been living in the Middle East for 7 years. Knowledgeable in the technology and energy markets, he is the Chairman of Swiss based Meci Group, a business and investment consultancy that operates across the Middle East, Central Asia and Russia.

See www.JeremiahJosey.com and www.Meci-Group.com for more.

January 25, 2015
2015: The Year For the Downside of Solar Energy and the Upside of Banking

Photographer: Chris Sattlberger/Getty Images

Downside of Solar? Yes, downside. The side where you slide down and things get easier and more efficient, and lower priced, and better, and people want more of it. That’s what is happening with solar power. Look at this slope for US energy pricing:

Source: EIA, CIA, World Bank, Bernstein analysis

(Henry Hug, is natural gas, Brent is crude oil, LNG is liquefied natural gas)

This solar slope is definitely a diamond double black run. (Yes I love skiing).

Notice how the other energy sources are climbing. That’s cross country skiing and really, a lot of work. The scenery is great though.

So what’s been happening in solar that is different in the other energy sectors: technical advances are improving output, reducing costs. As more people want it, they leave established alternatives and make it main stream.

I’m saying that that is what has happened to solar recently. I’m just choosing the start of 2015, since, well, its the start of 2015. I’m also suggesting that oil prices may not return to previous highs. Has the down side been seen yet, no I don’t think so, but it is getting close.

Oil prices may rise again, but not for very long.

Demand for electric vehicles is expected to rise rapidly from 2017.

Nafeez Ahmed and Tony Seba explain why here How Solar Power Could Slay the Fossil Fuel Empire by 2030.

Said in June 2000, by Sheikh Zaki Yamani, former Oil Minister of Saudi Arabia (1962–86), “Thirty years from now there will be a huge amount of oil—and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the Oil Age will come to an end not because we have a lack of oil.”

Are we are getting to about that time the Sheikh mentioned?

See that 44.1% blue pie piece below? That’s all burnt in passenger cars.

From Renewable Energy World.

The falling solar prices will lead to distributed energy generation and this will break the hegemony of centralized energy production and reticulation. This the heart of the world financial system presently. A good example is Africa. It cannot be tamed primarily because it doesn’t have centralized energy infrastructure. This may appear a little complicated, but stay with me.

This is what I mean by the upside of banking.

The financial system is having it’s own problems and seems on the brink of collapse, as James Quiin, Executive Business Editor of the Telegraph elegantly put it two days ago.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11321497/Why-2015-could-spell-the-end-for-the-hegemony-of-the-big-banks.html

He covers it well, though I would add that fractional reserve banking is the core of profit generation for the modern banking system, coupled with excessive derivative trading. These two systems are under heavy strain presently.

Changing direction a little further to discuss the upside of banking, I see that the people of China and Russia have a great deal of contiguous history, both recent and ancient: Russia, 1,000 years and China, 5,000 years. This means lots of lessons learnt from the mistakes of their ancestors. For instance in the early 1,000’s and for 500 years China tried and failed with paper money systems 5 times before the people ignored the government and switched to silver for their medium of exchange. Each successive Chinese government had tried to print their way out of debt. China also has recent living memory failures, similar to Russia. So I see that they are acting as a group of interested people, as a collective, rather then the haves and havenots system of a monarchical, plutocratic system common in the west presently. For instance, China has a history of executing bankers caught defrauding customers and investors and Vladimir Putin has an approval rating of almost 90%. So, ostensibly Russia and China are for working for their people and will adopt technologies and social systems that benefit everyone. So I foresee solar and new financial systems quickly being adopted in these countries.

Moving on…

2015 is also good year to start on the down slope of oil demand, so a new currency won’t be petrodollars. It will be remain commodity based, however more likely onto gold and silver. Meanwhile, Russia, Iran and China are active in forging closer ties. It’s not about competing with the USA business model. These alliances form natural blocks for US companies accessing resources. For instance Afghanistan has over $1T in gold and lithium deposits… This is part of the reason why Russia was interested back in the 80’s.

http://sputniknews.com/columnists/20141231/1016436434.html,

http://www.livescience.com/47682-rare-earth-minerals-found-under-afghanistan.html

Tom Randle over at Bloomberg made this interesting article about 8 weeks ago:

Every time fossil fuels get cheaper, people lose interest in solar deployment. That may be about to change.

After years of struggling against cheap natural gas prices and variable subsidies, solar electricity is on track to be as cheap or cheaper than average electricity-bill prices in 47 U.S. states — in 2016, according to a Deutsche Bank report published this week. That’s assuming the U.S. maintains its 30 percent tax credit on system costs, which is set to expire that same year.

Even if the tax credit drops to 10 percent, solar will soon reach price parity with conventional electricity in well over half the nation: 36 states. Gone are the days when solar panels were an exotic plaything of Earth-loving rich people. Solar is becoming mainstream, and prices will continue to drop as the technology improves and financing becomes more affordable, according to the report.

The chart below shows how far solar will come out ahead in each state in 2016, assuming a worst-case scenario of lower tax credits. The blue bars show the anticipated cost of solar energy (assuming a conservative 20-year lifespan for the panels) minus average electricity prices. Positive numbers indicate the savings for every kilowatt hour of electricity.

Grid Parity to Reach 36 States in 2016

Source: Deutsche Bank, EIA. Graph shows LCOE minus average electricity price

Solar has already reached grid parity in 10 states that are responsible for 90 percent of U.S. solar electricity production. In those states alone, installed capacity growth will increase as much as sixfold over the next three to four years, Deutsche Bank analyst Vishal Shah wrote in the Oct. 26 report.

The reason solar-power generation will increasingly dominate: it’s a technology, not a fuel. As such, efficiency increases and prices fall as time goes on. The price of Earth’s limited fossil fuels tends to go the other direction. Michael Park, an analyst at Sanford Bernstein, has a term for the staggering price relationship between solar and fossil fuels: the Terrordome. I’m not sure exactly what that means, but it doesn’t sound very forgiving.

The price of solar will soon undercut even the cheapest fossil fuels in many regions of the planet, including poorer nations where billion-dollar coal plants aren’t always practical.

Solar will be the world’s biggest single source of electricity by 2050, according to a recent estimate by the International Energy Agency. Currently, it’s responsible for just a fraction of one percent.

Because of solar’s small market share today, no matter how quickly capacity expands, it won’t have much immediate impact on the price of other forms of energy. But soon, for the first time, the reverse may also be true: Gas and coal prices will lose their sway over the solar industry.

http://www.bloomberg.com/news/2014-10-29/while-you-were-getting-worked-up-over-oil-prices-this-just-happened-to-solar.html

So, there you have a few changes on the world stage, conveniently coming together at about the same time: the fall of oil, the rise of solar, and the shakeup of the financial system. A good time to plan new investment and business strategies for yourself and your family.

Jeremiah Josey

Meci-Group

January 4, 2015
Leveraging Resources – Saving the Whales, and Dugongs
At the same time as I building my butane sphere I was also “Saving the Whales” or rather the dugongs.

You see, the BP refinery was sitting at the mouth of the Brisbane River on a small peninsular of reclaimed land from the 1960’s. Every 6 to 36 hours a huge crude oil ship would turn up to disgorge about 100,000 barrels of oil so this 80,000 barrel per day refinery could continue to operate.

Where the river enters the ocean is called the Moreton Bay Marine Park. The park is the only place in the world where significant populations of dugongs (and sea turtles) can still be found close to a major metropolitan centre. A failure and leak of the crude oil delivery pipeline would be devastating.

And guess what… The crude oil delivery pipeline had cracks in it. Yes, it was going to leak. Soon.

Bulwer Island Refinery

Snaking over the Brisbane River and supported on marine pylons about 5 meters above the water, this 20″ pipeline installed in 1965 was designed in the day for ambient temperature crude oils. Light, clean crude oils running at the temperature of the water it was suspended above. The allowance for thermal expansion (steel expands at about 11 x 10^(-6) meters per degree Celsius) was a series of direction changes placed in the pipeline’s length.

Steel gets longer when it gets hotter. It’s go to go somewhere. It breaks things – and itself if you try and stop it from moving.

There where 4, simple butt mitred welds holding the pipe together. The quality of the welds where also terrible and not helping matters. The welds where like a seagull had had a dose of bad sardines. I am a welding inspector also.

There’s nothing wrong with a design like the pipeline had. Until that is, you start to run hotter crude oil through it. By the time I had arrived the refinery in 1994 – my first gig after leaving uni – the refineries’ inspection department was dutifully monitoring and reporting on the growing cracks in these mitred joints. The crude oil the refinery was processing was heavier and waxier and needed to be pumped at temperatures around 60 degrees. That’s enough for a bad skin burn. The pipe was flexing and moving so much it was pushing other service pipes off the shared pipe support.

And the main pipeline feeding the refinery was cracking.

I was tasked to fix it.

Quotes and estimates from “consultants” where coming in above AUD 10, even 25 million to make the repairs. And I did it for less than AUD 250,000/-.

This is what I did.

First I put aside the excitement of such a large project – I had only been at the refinery for 6 months, and had already saved several million dollars by the time this task was given to me (that’s another story). Then I walked the pipe. Up and down the 1300 or so meters above the river, breaking every HSE rule there was. And the 1,000 meters or so on dry land. I was looking at the way the pipe was moving. The cracks were clearly visible, made even more so by the white die being used for the mag- particle inspection. I’m also an NDT inspector.

The next thing I did was create a stress analysis model of the pipeline using AutoPIPE – a cool and pretty straight forward tool. I created the model from scratch using old refinery blue prints and verification on site. The model showed that the cyclic stresses where growing the cracks but they would never go critical and rupture. That was good news. But a leak is a leak and it had to be fixed.

By the way, if you don’t know much about metals, steel has a “critical crack length” which means that when a crack gets to a certain length in a piece of steel (or any metal or material too), the piling up of lattice dislocations locks up and the metal experiences a brittle, sudden failure. The 1 inch thick steel of the pipeline walls was below the critical crack length at the stresses it was experiencing so the metal would continue to tear and never rupture. It would leak into the river. Not explode into the river.

The next thing I did was walk the pipeline again and I noticed something interesting. The consultants were telling me that the only thing to do was put an expansion loop out over the water section of the pipeline. New marine pylons would be required and that is where the expense was coming from. I can still see the consultant rubbing his hands together now. [Protip: never ask a hairdresser “do I need a haircut?”]

But something didn’t feel right. There must be an easier way.

The Mother of all Expansion Loops

When looking closer at how the pipe was moving I dived into the pipe design code ASME B31.3** and studied the appendices. And there it was: a beautiful mathematical formulae showing stress as a function of bend pressure AND bend radius. The larger the bend radius the lower the pipe stress. I could dial in a crack free stress by adjusting the bend radius of the pipe.

In the refinery piping game there are either Long Radius bends or Short Radius bends. This is what ASME B31.3 covers and people rarely go into the detail to use anything else. But there wasn’t enough space for either of the standard bends using the existing marine pylons. They just didn’t work. So, jumping back into my AutoPIPE model I set a temperature limit of 85 degrees (way above any crude oil that the refinery was capable of processing) and worked out what the acceptable radii needed to be for each change in direction for the pipeline. There were 4 changes in direction out over the water that needed special attention.

Then, armed with my trusty tape measure I went back out onto the pipeline (thanks HSE) and checked if there was enough space for movement at my high temperature design with special long radius bends. There was.

Eureka!

The next step was to triple validate my calculations. I re-did them manually. I talked to everyone I could about my design. Even the refinery’s main advisory consultant – a former employee and friend of the refinery manager that found an office outside the fence paid more than one inside. He could find nothing wrong with my approach but he refused to validate my work in writing. I think I know why today. So I finally sent off a CYA letter to ASME in the USA, copy to the refinery manager, explaining that everything I was doing was within code and to come back to me if there was a problem.

The Main Special Radius Bend

They never did, and I wasn’t waiting for them to answer. I knew what I was doing.

The work would be hot, meaning there could be explosions if things went wrong, and that meant lots of precautions. The refinery manager had also made it clear to me: not a single drop of oil could reach the river. Of course. Was I stupid? Dugongs don’t like oily food. They eat sea grass.

Then in short succession I drew up the designs, had the 4 special bends made in Sydney and shipped the 900 km to the refinery, tendered and awarded the construction work and worked out a plan to undertake the repairs all within a 12 hour working window so there wouldn’t be a refinery shut down or a hold up to the next ship wanting to arrive and deliver oil. I had 8 crews working simultaneously to cold cut, bevel and prepare the pipe and insert the prepared new pipe spools. There would be 20 cold cuts being made at exactly the same time. It was pretty cool to watch, and Hans Walter, owner of the construction company doing the work was amazing. I learnt a lot from Hans and his leading man.

I had earlier negotiated with the operations team to hold a crude delivery ship over longer than necessary (demurrage is an expensive thing) and pump 100,000 barrels of sea water through the pipeline. I had another project on the go: raising the height of a crude oil storage tank by adding an extra strake so secondary seals could be fitted to reduce VOC releases (Tank 104. That’s another story). The tank was ready for hydro-testing, so I needed to fill it up with a lot of water fast. It was a perfect synergy: clean the pipe, fill the tank. The water would be released back into the river using the refineries biological water treatment facility. Oil is a natural material after all and bugs will eat it if given the right conditions. The ops team where more than happy to oblige. By the way, I held the next ship for a few extra hours too, getting it to fill the pipeline with water so we could hydrotest it – an important final task to ensure there where no leaks.

Last Landfall Loop

In preparation for the opening of the pipe I had a survey done of the pipeline level so I could calculate how much water was still laying in the pipe once it was washed out. Then I negotiated with the Port of Brisbane Authority to “borrow” several floating barges and had them fit them with tanks sized according to how much water would come out at each location. Later analysis showed that zero oil remained after the last crude ship had filled my tank with 100,000 barrels of sea water the night before. I couldn’t even make my hands dirty by rubbing the inside of the pipe when it was finally cut open in many places at once.

It all went off without a hitch. There where three notable events:
- During the draining of the remaining water (holes where hand drilled at the two of the main sections to be cut out – that’s what my pipeline remaining water level analysis showed) one of the drain hoses fell out from the tank on the floating water barge. I leapt down from the scaffolding and in a single bound – like superman leaping over a tall building – launched over the tank and sliding down the other side, in a single motion grabbing and re-inserting the itinerant hose back into the tank opening. It happened so fast no-one had even moved from their initial shocked position. The water than escaped stayed on the barge.
- The refinery manager criticised me for leaving “6” flanges over the water”. There are 10 of them. They where needed to pull out the welding balloons used to ensure a gas free safe welding environment. These 6″ nozzles had been attached and hot tapped in preparation for the 12 hour working window, as had most of the work, pipe supports, earth works on land etc. But I wasn’t worried. I had used special spiral wound gaskets with extra sealing capacity far beyond what would have been necessary. And written up a special procedure for closing the nozzles which including torquing the bolts, There’s never been a leak.
- I lost my temper once when at one of the bends, the smallest one, there was a lone worker who didn’t wait for the draining to be completed, and started his cutting too early. Luckily he was at a high point in the pipeline and luckily I arrived to check in on him as the water started to escape. He stopped cutting and held in the leak with his hand once I stopped yelling at him. It took a while before the water drained away from his location and he could continue his work.
The whole project took 5 months to complete. It was mostly a coordination exercise and it worked perfectly. It wouldn’t have happened without the full support of all the team players to carry out the strategy once it had been determine as sound and robust.

Full credit goes to my favourite Russia Alexy Lydov. A veteran at the refinery and in his late 70’s, he was there, direct from Russia, when it was built 1964/1965. I made a point of discussing with him everything I did during my time at the refinery. It was his idea to use welding balloons to enable the special joints to be welded in safely. That made the whole plan workable. His practical and clever Russian style thinking aligned with my get-it-done, can-do approach. He also knew where all the refinery blue prints where, and every design aspect that was relevant to know.

** I wanted a more rigorous design code than what you get from using API pipeline codes. It was a refinery after all

Jeremiah Josey
July 13, 2009