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Oil and gas’s largest blind spot: product quality

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Oilfield Technology,

On 19 April 2019, an operator of the Belarussian section of the Russian-owned Druzhba pipeline sounded the alarm. They detected an organic chloride concentration 30 times the allowable limit in the crude oil travelling through their pipeline. They immediately notified the other operators of the pipeline in Poland and Ukraine, but by that point it was too late. The contaminated oil had already reached Poland, Ukraine, Germany, and the Baltic port of Ust-Luga.

Oil and gas’s largest blind spot: product quality

As of the writing of this article, European traders and executives have estimated that the contamination reached as many as 36.6 million bbl of crude, and could cost up to US$1 billion to clean up.

While this is an extreme case, it hints at an industry wide problem. The Russian crisis occurred because of a mismanagement of product quality.

Lack of quality visibility causes problems across the supply chain

Product quality refers to more than just contaminants. More commonly known properties of crude like gravity, sulfur, vapour pressure, and water content are also extremely important. These properties dictate what crude is worth and where it can be delivered. Despite their importance, they are extremely difficult to track in real time. This leads to several issues throughout the supply chain.

For producers, off-spec product often needs to be sold at a deep discount or can even lead to shut-in production. Midstream companies need to ensure that they are buying and selling product streams for the right price, that they do not commingle their terminals with off-spec product, and that they are blending optimally. Refineries need to be vigilant of quality to avoid damage to their equipment or production issues stemming from lacking the right feedstocks.

Product quality is notoriously difficult to track accurately and timely

A barrel changes hands on average 11 times on its way from the wellhead to the refiner. During that process, logistical constraints make it difficult to track product quality. Shared transportation infrastructure means that pipelines and supertankers often need to commingle different streams. Blending also needs to occur at many large storage facilities as the industry deals with constrained infrastructure but growing supply. All of this commingling, combined with the fact that production at the wellhead often does not qualify for the major grades, ensures quality is variable throughout the supply chain.

Add to this geographically isolated field sites, extremely busy field personnel, expensive and complicated measurement equipment, and a lack of data-analysis infrastructure, and it becomes easy to see how difficult it is to track product quality accurately.

The industry is now recognising the importance of product quality

The industry has begun to recognise the importance of better quality visibility. This year the CME group increased the number of quality parameters on WTI contacts. This was done in response to many downstream market participants’ sentiments that the five existing parameters did not represent barrel quality accurately enough.

The interest in quality has also spread to the investment community. In the past, the industry had focused on production growth, with a preference for high-value liquids growth. Investors historically rewarded liquids growth without time to focus on the cash flow implications of different types of barrels. As growth slows, and capital becomes more restrained, the quality considerations that drive cash flows are now becoming a focus. This has led investors to increasingly ask questions around the quality of oil and gas. In recent 2Q19 reporting, many companies have begun actively disclosing quality information to address these questions.

In response to the investor and customer focus on quality, the industry is starting to look at tracking product quality in real time, across assets, but it still remains difficult.

Tech innovation is enabling the market to track quality accurately in real time

Emerging technology is transforming the oil and gas industry from every angle. Validere, a Calgary-based company, is specifically tackling the complex product quality challenge.

“We believe that IIoT & AI’s advantages of connecting, organising, and analysing vast amounts of data in real time makes this problem solvable for the industry,” said Nouman Ahmad, CEO of Validere. “We also recognise that technological leadership alone is not sufficient - and that a deep and personalised understanding of the industry participant’s challenges around quality are critical to create lasting value” Ahmad added. Validere’s solutions were built by bringing together inter-disciplinary experts to make product quality transparent. Validere’s 360 software (IIoT, AI) helps industry players aggregate and verify all measurement and quality data in real time (pictured). It can be rapidly deployed leveraging existing instruments and infrastructure.

“Through implementation of our solutions, we’ve already seen the levels of cost savings and revenue enhancements - in some cases over US$5/bbl - when organisations are equipped with smart product quality insights. With US$40 trillion of oil and gas traded every year, we think it will be transformative to the industry once applied at scale,” concluded Ahmad.

Author: Adam Weinstein, Validere

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