Monday, October 29, 2007

Heavy Oil and Nukes (Revisited)

A couple of years ago, I laid out a reasonable story for the Iranians wanting to go down the nuclear power path and independent fuel cycle, and two things stood out to me today that wanted me to revisit this story. There are two parts to the story; the first is a distrust of pure market mechanisms where energy is concerned. The second is an implicit concession to the Export Land quandry where an oil exporting nation with a growing population sees its exports fall precipitously over time.

First, the Oil Drum passed along this interesting little note about Kuwaiti plans to expand their daily production from roughly 2.6 million barrels per day to roughly 4.0 million barrels equivilant per day in 2020. The vast majority of the incremental increase would be from heavy oil production. Currently Kuwait effectively produces no heavy oil; instead it produces and exports almost exclusively light and non-sour crude which the refineries love.

As estimates of heavy oil reserves worldwide are up to six times greater than those of light oils, according to industry reports, an increased consumption depletes light crude reserves, making heavy crude increasingly sought-after.
Demand for oil will continue to grow. The question is do we have enough resources? Yes, we have. We have plenty of heavy oil," said Al-Sumaidi last week. "The conventional oil will decline even with the new technology, I don't think there is an escape from using heavy oil," he added.....

There are several differences between light and heavy crude. In simple terms, the gravity of light crude begins from 25 API and higher. Light crude is cheaper and easier to process and to transport, though it is more expensive in price. Light crude is also easier to refine because of its low viscosity, meaning that it needs less energy to extract sulfur and other impurities from it. Kuwait's heavy oil, on the other hand, varies from 11 to 17 API.

In general heavy crude doesn't flow easily making it more environmentally damaging than light crude. The high gravity and viscosity of heavy crude also makes its production more difficult, as the techniques to extract light crude will not work for heavy oil.

The second thing that piqued my interest was Cernig's catch that most of the Middle East is interested in building nuclear reactors for domestic electical consumption. Egypt wants to use the power from its yet to be built nuclear plants as a substitute and supplement for power from burning hydro-carbons. Egypt does not have massive oil or natural gas reserves so being able to substitute for these resources should allow the country's hard currency position to improve over the long term.

Two years ago, I was making the same argument with Iran, the combination of a shift in production from light sweet crude to heavier and more sour crude, as well as growing energy demand from a growing population makes a nuclear substitution effect economically practical:

The story would go that Iran sees a world that is running out of easily available light sweet crude oil and that the overwhelming majority of Iran's reserves are at least a little bit heavier, and much more sour than West Texas Intermediate or Brent Light crude oil. Heavy and sour oil is more expensive to refine, and thus sells at a significant discount. If Iran believes that they are in a future where there is little new supply capacity, then they want to capture as much of the profits and work spent refining their lower quality crude oil into higher quality quasi-processed oil before shipping it overseas.

However, the process of changing heavy sour to sweet light is energy intensive. The plan would be, to quote Stirling Newberry of BopNews to "use nuclear power to augment and enrich heavy oil.. In essence, nuclear power will be amplified by pumping steam into... oil, generating hydrogen to enrich that heavy oil, and then sending this to the packaging stage."

Nuclear power plants are an extraordinarily good producers of waste heat that can be used to generate steam. If Iran believes that oil will remain expensive, and that natural gas as a nearer substitute and feedstock of petroleum production will continue to become more expensive in the future, the opportunity cost of nuclear power goes down rapidly, especially if these assumptions hold true AND Iran continues to be an overwhelming mono-exporter; it would not make a lot of sense to eat into the primary hard currency stream for domestic consumption.

Additionally Iran's leaders could make the argument that if they are to go into the value added production of low quality crude into high quality crude, they would not want to leave their entire economy or at least a significant segment of it vulnerable to economic blockade or spare part restrictions. That would be the argument against relying on a First World supplier of nuclear fuel --- strategic independence is a very valuable commodity especially as Iran has seen many of its neighbors and near neighbors experience painful adjustments to critical nodes of their economies and states once certain supplies had been cut off. Paens to free trade's magic can only go so far before geo-political mercantilism and strategic flexiblity overwhelm economic efficiency.

This is story for Iran is pretty much the combined Kuwaiti-Egyptian stories highlighted this week --- a need for energy to accomodate the downshift in crude quality as well as to compensate for growing domestic energy demand.

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