Governance : OIL POLICY – Energy shortage or misplaced priorities

India’s two-faced oil import/export policies and reluctance to adopt new clean technologies is costing not only consumers but playing havoc with the environment


oil-policy-shortageA joke in an old Reader’s Digest issue went like this – An old farmer upon being asked as to the secret of successful agriculture replied, “sell all you can sell, what you can’t sell feed it to the animals and what the animals won’t eat, eat yourself!”

While it may not be the perfect inference to India’s petroleum sector, but it comes close, because in spite of all the chest beating about the burden of oil imports, the truth is that ours is a major petroleum product exporting country and levies from the domestic sales of petroleum products contribute close to a 5th of all taxes collected.
I belong to a generation that was constantly berated about conserving precious petroleum resources as oil imports bleed our country dry. And call it ignorance if you will, but I learned that India is a major exporter of petroleum products only about two years back at a meeting at IOCL’s Import-Export Division in Delhi, where in all naivety I asked if their exports were only to Nepal and Bhutan.

“No Sir, our products are exported all around from Africa to Singapore, including Saudi Arabia and the range includes Petrol, ATF, Diesel, Kerosene and HFO (Furnace Oil)” was the reply. “But isn’t India an oil importing country” I asked, to which the gentlemen replied sheepishly, “we have a large refining capacity and there is always a surplus! “

Well it’s not really a surplus when India actually re-exports over 30 per cent of its crude oil imports as various petroleum products. In 2013-14, 67.9 MMT of petroleum products valued at $69.7 billion were exported comprising 19.3 per cent of India’s gross exports, in 2014-15 business fell a bit and export stood at 63.9 MMT, worth $47.3 billion or 15.2 per cent of her gross exports. So much for “Tel Baachao Desh Baachao” (Save Oil to Save the Country) hypocrisy!

power-plant-oil-policyToday, while news outlets are awash with discussions as to why petrol and diesel rates in India have not reduced at par with the all-time low international crude prices, the government quietly raised excise duty on petroleum products. Already, the domestic fuel consumer has to foot import duties on crude, excise and VAT on the finished products, constituting roughly half the fuel cost, but also bear the considerable conversion cost courtesy the inefficiencies and red-tape of the public sector refiners. Known as GRM (gross refining margin), the cost difference between the purchase price of crude oil and selling price of finished products, the GRM for private refineries like Reliance averages $8.7 per barrel and Essar Oil’s is $9.04, but those of public sector IOCL, BPCL and HPCL is $2.25, $3.38 and $2.04 per barrel, respectively.

The deregulation of petroleum prices and the removal of subsidies has for all practical purposes also proven to be another eyewash as every time global oil prices take a dip, successive governments jack up taxes, justifying their action with nicely padded words about making a reserve for offsetting future price increases. However, anytime the crude prices go uphill, domestic prices of petroleum products invariably follow suit. The perfect example of this opportunistic pricing policy was evident in 2010-11 when furnace oil, which has been deregulated since 1997 and normally costs a fraction to half the price of diesel, became at par with and briefly even surpassed it, as the latter was still regulated at that time.

KNOWN internationally by various names such as heavy fuel oil or bunker oil in the marine sector, Mazut in Russia and CIS countries, it comprises of the residual oils of the petroleum refining process or in simple words, the bottom waste of the distillation process. Yet, because it is cheap, abundantly available and almost at par with diesel in calorific value, furnace oil became the fuel of choice of heavy marine engines and for burning in industrial furnaces and boilers.

Indian oil companies justified the hike pointing at the cost of crude, as it reached $130 per barrel. In reality however, the excuse was groundless, as not a single barrel of crude oil is imported for manufacturing furnace oil as it is an inevitable and unavoidable by-product generated in copious quantities. The perfect analogy for this situation would have been a juice seller who jacks up the prices of both the juices as well as the waste pulp, because of the high cost of fruits.

oil-pipeline-indiaThe predictable outcome of this opportunistic pricing was that virtually all the industrial consumers of furnace oil started hunting for cheaper fuels. Boilers were converted to fire diesel, steel plants turned back the clock by 50 years and returned to coal, installing PCC (Pulverized Coal Combustion) units or coal gasifiers. Sugar mills followed suit installing biomass boilers and gasifiers to utilise their own waste bagasse. Concurrently, extremely polluting and stinky tyre pyrolysis plants sprung up all around the country for producing tyre oil, a noxious combustible blend packed with solvents and carcinogenic chemicals with a thermal output comparable to LDO. Consequently, over a short period, the oil companies lost almost half of their furnace oil clientele and in 2013-14 India produced 12,953 thousand MT of furnace oil and consumed only 6,236 thousand MT, the rest was exported or stockpiled.

THE astronomical crude prices of that period also got everyone suddenly interested in CTL or Coal to Liquid technology. Again touted as a way to reduce petroleum imports, Oil India first announced a pilot project as early in 1998 and subsequently in 2006, they along with Coal India Ltd., released several press statements promising a (yet to be constructed) $2.5 billion CTL plant in Assam. SETSL, a joint collaboration between the Tata Group and South African Petrochemical giant Sasol grabbed a few headlines with their plan of building a $10 billion CTL plant in Odisha with a capacity of 80,000 barrels of oil per day. Jindal Steel too, had proposed setting up a CTL project of equal capacity and both the plants were expected to come up by 2016. But the last anyone heard about CTL, was the government axing the Tata-Sasol venture in 2014 and cancelling their assigned coal block. Maybe the entire bid was about securing coal blocks and nothing more.

The deregulation of petroleum prices and the removal of subsidies has proven to be another eyewash as every time global oil prices take a dip, successive governments jack up taxes. However, anytime the crude prices go uphill, domestic prices of petroleum products invariably follow suit

Closely following the CTL fiasco, the bubble burst of the “soon-to-be-available” cheap domestic natural gas as it didn’t materialise in promised volumes in the gas wells of both the PSUs and the private companies. However, unlike CTL which existed solely on paper, promises of cheap natural gas was a mantra many believed in enough to invest millions of dollars setting up gas turbine based combined cycle power plants for generating thousands of megawatts of electricity. Consequently, last year about 8000MW of this capacity was lying idle, with some plants not even commissioned due to unavailability of domestic natural gas and non-viability of running them on Naphtha or imported LNG. The central government was finally forced to provide the operators with some amount of subsidised imported LNG, enough for them to run the plants in order to service bank loans. Nonetheless, as everyone is aware, government subsidies are underwritten by taxpayer’s money and power-plants running on subsidised fuel in order to supply cheap electricity to power distribution companies is nothing but dressing up of losses, both for the country as well as the end consumer who is also the tax-payer. Besides, LNG would always be significantly more expensive than piped natural gas as transportation, re-gasification and distribution adds considerably to the cost, plus we have the government owned monopolistic importer, Petronet, who has been purchasing gas at higher than international market rates due to faulty contracting.

Thus, in any attempt to understand the various murky issues concerning India’s energy needs or more specifically industrial and power generation fuels, it becomes clear that the government treats petroleum exports and taxes collected from its domestic sales as a cash cow and has no plans of relinquishing the income. So even at times of very low international crude prices, the reduction of the cost of petroleum distillates had been at best cosmetic, except for furnace oil whose price had surprisingly more than halved in a year’s time. But again, it is a reduction that has more to do overflowing stockpiles and lack of international buyers due to the slump in the global economy, especially the shipping sector and not concern for the gasping domestic industry.

All of this just belies the fact remains is there is no real shortage of cheap petroleum based energy sources in the country, just opportunism and misplaced priorities of the government and the oil companies as well as their reluctance to adopt relevant technologies.

For starters one just needs to takes into consideration the two following facts:

  • That India has a huge refining capacity of 230 MTPA (million tonnes per annum) producing copious amounts of low-grade residual products like furnace oil and pet coke along with other by products and wastes.
  • There are proven technologies for upgrading such residual or waste products into cheap clean burning fuels such as Fuel Oil Gasification, Fuel Emulsification and Carbon-Water Slurry Fuel.

ALL it takes to ensure a stable supply of cheap industrial fuels is that both the government and the PSUs should put an end to opportunistic pricing on low-grade petroleum by products and identify and adopt the relevant technology for specific sectors.

For example, adopting Fuel Oil Gasification, a technology that has been extensively developed for over 50 years, can put an end to the impasse surrounding the gas-based power stations. It converts all hydrocarbons from flare gas, to fuel oil, vacuum residue, cracked residue, asphalt, liquid waste, sludge and even emulsions into a combustible Synthetic Natural Gas and liquid Naphtha. Shell’s Pernis plant in Netherlands is the world’s first plant to use Heavy Fuel Oil (Furnace Oil) and residue gasification, and produces about 115 MW electric power from waste heat and 285TPD of pure hydrogen. In India only IOCL’s new refinery at Paradip and RIL have adopted this technology. And though these come at a considerable price tag, such gasifiers can produce a competitively priced Syngas (Synthetic natural Gas) that can replace imported LNG as well as offset the cost of building the prohibitively expensive LNG unloading and re-gasifying terminals.

There are technologies aplenty for utilising virtually every part of crude oil in an effective manner from the gases to the bottom sludge in an
effective and eco-friendly manner. What is needed for their adoption and utilisation is for the oil companies to look beyond just skimming the cream and earning profits with opportunistic pricing

A significantly cheaper process for upgrading low-cost residual oils and tars is the Fuel-Water emulsion technology which comes in two forms; Water-in-Oil or Oil-in-Water emulsions. The process of emulsification entails blending two immiscible liquids like oil and water, where one is reduced into microscopic droplets and dispersed within the other in a way that they don’t separate into separate phases. In a Water-in-Oil emulsion, microscopic water droplets are uniformly dispersed in a liquid fuel like Furnace Oil by special emulsifying equipment and additives. When a burner or injector atomises such emulsified fuel, the tiny water droplets flash into steam in a continuous series of tiny micro-explosions, further reducing the oil droplet sizes and also slightly hydrogenating them. The resulting flame burns cleaner, producing more energy, with significant reduction of pollutants. Furthermore, these emulsions can be used as a cheap replacement fuel in older generation Gas Turbines like GE’s B & E class and many of the Siemens turbines with little or no modifications.

Government subsidies are underwritten by taxpayer’s money and power-plants running on subsidised fuel in order to supply cheap electricity to power distribution companies is nothing but dressing up of losses, both for the country as well as the end consumer who is also the tax-payer

Oil-in-Water fuel emulsions were popularised by British Petroleum and PDVSA of Venezuela when they converted Orinoco sand tar into a cheap emulsified fuel called Orimulsion.

As this tar is a thick bituminous hydrocarbon, difficult to handle, transport and distil, the scientists converted it into an emulsion with microscopic tar droplets suspended in water, but unlike the water-in-oil emulsions, here water is primarily used as a transporting phase to make it free-flowing.

Orimulsion was marketed as a cheaper alternative to Heavy Fuel Oil to thermal power stations worldwide, but the upward trend of crude oil prices in the mid 2000s made Venezuela stop its production, but now is seriously considering about launching it again. In the meantime, a few members of the BP development team formed Quadrise Fuels in the UK, adapting the technology for using refinery bottom residues calling the resulting emulsified fuel as MSAR. Unlike Orimulsion, which was primarily used in power stations, MSAR is aimed more at the marine engine market as a cheaper replacement of Bunker fuel and has already been approved by the shipping line Maersk and marine engine manufacturers MAN and Wartsila.

Another low cost petroleum derived carbon and dry waste upgrading process is that of converting it into a Slurry Fuel comprising of a colloidal suspension of carbon particles in water. First developed for transporting coal in pipelines here the coal particles were first milled into micron-sized particles and blended along with additives into water to form a slurry that can be pumped to the end user. The technology was abandoned as a transfer medium due to the huge water requirement, but was reborn as a method for modifying Carbon feedstock used in gasifiers as well as a fuel for industrial burners.

Over the last two decades, the process has expanded to encompass other forms of carbon, such as Petcoke and Tyre Pyrolysis Carbon for converting them into a thick liquid fuel that can be used as a ready replacement for furnace oil in boilers and furnaces. The modern systems for creating Coal/Carbon Slurry Fuel have done away with the massive crushers, ball mills and blenders used earlier and a single wet milling device usually takes care of most of the process. Likewise, the carbon particles are now reduced to about 20 microns in size so as to remain permanently suspended in water by a phenomenon known in physics as Brownian movement. Carbon Slurry Fuel is much easier to handle than solid carbon fuels and their combustion is also much cleaner than coal and it reduces particulate matter, NOx, SOx and CO emissions into the atmosphere. With India’s endemic problem of pollution caused by coal based power-plants, switching over to a Petcoke and Coal Slurry Fuel would be one of the most cost effective and environmentally friendly changeovers possible.

Refinery sludge treatment for recovery of hydrocarbons is another area, which oil companies have ignored for decades. Refinery sludge comprise of a mixture of oil, water and solids usually held together by various acids and accumulate in crude oil, process and finished products tanks. Today India generates about 28 million tonnes of petroleum sludge per annum. However, except for the most rudimentary sludge recovery and effluent treatment, most refiners here prefer to adopt an “out of sight and out of mind” approach and out-source the burden of processing and disposing the sludge to contractors. Thus every-year we see advertisements calling for tenders for refinery tank cleaning and sludge disposal, but not mentioning the parameters for doing the same. The sludge usually ends up in the hands of fuel adulterators who use it for blending with furnace oil and if is to watery, it just gets dumped in the nullahs and rivers. However, there is an entire field of science and technology devoted to utilisation and recovery of hydrocarbons from petroleum sludge for reprocessing and at the same time cleaning the water in a cost effective manner and is utilised all over Europe by oil refineries or by third parties. Such processes may be as simple as preparing an emulsion out of the sludge and use it as a fuel in the refinery’s furnaces and boilers, to complex multi-stage separation systems that fully recover the hydrocarbons, release clean water and oil-free decontaminated solids that go to landfills.

Even the flared gases, burned off year after year in the refineries, can be put into good use for in new-generation micro-gas turbines for generating electricity which can be used in-house or fed back to the grid instead of polluting the atmosphere, thus nullifying the popular and time jaded argument given by refiners is that gasses have to be flared to prevent an explosion.

Any minimal research into this subject matter reveals that there are technologies aplenty for utilising virtually every part of crude oil in an effective manner from the gases to the bottom sludge in an effective and eco-friendly manner. And what is needed for their adoption and utilisation is for the oil companies to look beyond just skimming the cream and earning profits with opportunistic pricing.

THE government on its part first needs to adopt a policy curbing the export of low grade refinery products like furnace oil and coke as there is no logic in providing a free run to the already inefficient PSU refiners by boosting their exports at the cost of starving the domestic industrial sector of cheap fuel. It may also help if the prices of these were once again regulated in the interest of serving the domestic manufacturing sector and not for the exclusive profitability of the respective oil companies.

Lastly, the government needs to seriously impose upon the refiners the requirement of complete utilisation of crude oil so that all low-grade by products and wastes are treated and upgraded into low-cost fuels in the same manner it pushes car manufacturers to meet tighter emission norms. gfiles end logo

The writer is an energy management adviser and one of the pioneers in introducing Fuel Emulsification concepts in India. (A version of this article featured in the July 2016 issue of Oil Asia Magazine.)
VOL. 11 | ISSUE 6 | SEPTEMBER 2017

GOVERNANCE / policy / petroleum

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