Q. What issues are exciting the downstream industry ?

A. In the past all you had to do was find conventional light crude oil, announce the discovery and everyone would line up to buy themselves a share. However, when you make a heavy oil discovery, it invariably includes too much sulphur, too many asphaltenes and heavy metals, vast quantities of water, a high acid number, and a handful of other equally negative factors. Each of these has the potential to make refining both difficult and expensive.

Refineries operate on a certain balance to produce the products that they sell. There are traditional problems with refining heavy oils, which can be overcome, but you have to either invest huge sums of capital to add refining facilities (for example: cracking, coking, or extra hydrogen addition), add specific chemicals or catalysts, or increase the amount of pre-refining upgrading. Although improvements are being made all the time, this can all be done with existing technology.  The problem is that this existing technology is expensive.

 Q. Do you think refineries designed to deal with unaltered heavy oil as the feed-stock, will be built in the future?

A. It is possible, but refineries are expensive to build. There would have to be some sharing of costs between the upstream and the downstream sectors. Traditionally refining has been allocated as a cost to the downstream part of the oil industry. However, if the downstream sector suddenly had to fund the building of a new refinery it would not choose to use heavy oil with its associated high costs, undesirable by-products, low yields and abrasive/disruptive throughputs. But if the downstream sector was "encouraged" to build a refinery capable of taking heavy oil as its feedstock, the refinery managers (and certainly their accountants) would wish to share the capital and running costs with the upstream sector.

 You may well think that such costs all come out of the same head-office project financing, but usually it simply does not work like that. There has always been a wall between upstream and downstream when it comes to accounting and profits.

 In Canada, the Government realized that no one was going to step forward and build a dedicated heavy oil upgrading or refining facility; so they subsidized some of the earlier upgrading technology required to get the country's heavy oil industry started. Indeed, the Government took this a step further by subsidizing not just the technology development but the building of the actual upgraders themselves. Perhaps the best-known example of this is the bi-Provincial upgrader located near the border between Alberta and Saskatchewan. This upgrader was built upon a range of tax-credits, Government incentives, State subsidies and industry investments prior to being built and commissioned. Now that it is operating, it is a successful financial enterprise but the Government (and other institutions) had a hand in helping to get the project off the ground. This type of financial forethought is needed in other locations. Certainly in Venezuela, this is exactly what happened to get the country’s Orinoco Faja production kick-started: the Government initially provided a lot of financial incentives compared to its contract terms for light oil projects.

 When it comes to developing and producing heavy oil fields, non-national independent oil companies have to work contracts that are significantly longer than those associated with lighter crude fields, simply because it takes longer for heavy oil fields to move into profit. In today's climate, many traditional light oil contracts simply do not justify the risk.   As a result, the host country needs to consider all sorts of royalty relief, tax relief, as well as guaranteeing a long-term relationship. As things stand at the moment these are the issues that would need to be considered before I would begin to show an interest.

Q. Apart from the disconnect you mention between the upstream and downstream sectors, is there any disconnect between capacities and the inability to deal with the heavy oil once it has been produced?

A. With heavy oil, you need to visualize the oil stream in its entirety. If you are only looking at that aspect with which you are involved (for example only the reservoir for a reservoir engineer), the project simply will not work on your successful work alone. You may end up with good reservoir recovery, but not end up with sufficiently refined (and saleable) hydrocarbon products at the end of the process, or products at a cost which will not justify the whole formation-to-forecourt exercise.

 If you try and fix something in isolation without considering the ramifications further downstream, you will either become stuck or create more problems downstream than you could ever imagine. For example, as a post-production engineer, you may be looking at a more efficient method to optimize the flow of crude oil. Traditionally the cheapest or easiest way is to use heaters either to heat the crude oil tanker on the high seas or to somehow heat the pipeline to facilitate the flow of heavy oil along it. However, bear in mind that as a pipeline engineer you may feel that by adding chemicals to enhance flow characteristics will, at worst be neutral to the operations at an upgrader, and at best be a significant improvement. If these were your views, they would be very wrong.  The chemicals may significantly upset the refining process and make the project uneconomic.

 Unfortunately, this attitude is not unusual amongst engineers who simply want to solve problems in their sector. Any pretence that there is a joined-up vision that links the upstream and downstream together is, with one or two exceptions, simply not supported by fact. As an industry we have to look both ways.

 Q. Is this the same in conventional oil as well as in the heavy oil sector?

 A. It is the same throughout the whole industry, but unfortunately, heavy oil is less forgiving. If you mess something up when dealing with conventional light crude, it is usually fairly easy to remedy, but this is certainly not the case with heavy oil, which is usually more difficult and costly to correct or overcome. That is why it is more critical.

Q. Has the heavy oil industry been wrong-footed by relying upon a conventional downstream infrastructure?

A. I do not think that the two industries are so different that they warrant an entirely separate infrastructure. Conventional wisdom should lead towards using tried and tested conventional tools, methods, as well as infrastructure. Communication is the first and foremost step in bringing the two sides of the oil industry together.