VENEZUELA - The Orimulsion Development.

From 1980 to 1984, PDVSA's R&D unit Intevep and BP jointly did the basic research to develop a new method to reduce the high cost of transporting bitumen by pipeline. That resulted in a simple technology to produce Cerro Negro bitumen, known as Orimulsion. In that proprietary process the bitumen was mixed with water and a surfactant chemical to produce a stable emulsion to be transported by pipeline and by ship in a way similar to fuel oil.

Orimulsion was not only easier to transport but was also used directly to fuel power generation in existing thermal electric plants designed for the combustion of fuel oil and/or coal. These plants use conventional equipment with only minor modifications. With an initial pricing structure competing with the price of coal, initial tests for the combustion of Orimulsion were made in 1986 at a plant of Chubu Electric Power Corp. (through Mitsubishi Heavy Industries - MHI) in Japan.

Development of Orimulsion continued through different pilot projects and tests using the existing facilities of Lagoven in Cerro Negro (Blocks J-20 and O-16) and Morichal Camp (oil processing facilities and a residential camp), in order to define the operational parametres required to transform Orimulsion into a commercial fuel. Further work was done to understand and develop the mixing technologies, types and quantities of surfactants, emulsion stability studies, and improved bitumen production methods.

In 1988, PDVSA decided to initiate commercial Orimulsion operations and assigned the responsibility for its development and marketing to a new unit: Bitumenes Orinoco S.A. (BITOR) with the mandate to grow a profitable business. Blocks J-20 and O-16 and their bitumen reserves were transferred to BITOR for the manufacturing of the new fuel.

BITOR started commercial tests in selected power stations in 1988, and developed the technology and dedicated facilities for the manufacturing of Orimulsion at Morichal Camp, which resulted in the completion in 1993 of the first module for the manufacturing and production of Orimulsion (MPE-1).

The capacity was 5.2m tons per year (t/y) of Orimulsion (90,000 b/d), equivalent to 63,000 b/d of bitumen. The capacity was increased to 6m t/y (112,500 b/d of Orimulsion or 80,000 b/d of bitumen) in 1998 to keep up with the demand for the new fuel.

On the bitumen production side, BITOR introduced new methods such as massive use of well clusters, slanted and horizontal wells, cold production, progressive cavity pumps (PCP) and electro-submergible pumps (ESP). These resulted in an important cost reduction in production and acceleration of the learning curve for new technologies to leverage the third wave of the Orinoco developments: integrated upgrading projects in the 1990s through strategic associations (SAs).

Recognising that Venezuela's un-conventional hydrocarbons, whether emulsified or diluted, seemed to have too low a value in the international oil market, either as boiler fuel or as refinery feedstock, the upgrading approach was revisited as a way to increase the commercial worth of extra-heavy oil and bitumen, despite the fact that many economic evaluations of different upgrading projects in the past had showed poor economic returns and they were not bankable.

The main limitation for upgrading was the big capital required for construction of large upgraders to process the bitumen in deep coking/cracking and hydro-treating units, the energy intensive nature of the upgrading process, and the limited availability of world's refining capacity for such extra-heavy crude oils. The steady increase of crude oil prices and consumption from 1990 to 1997, new technologies for production of un-conventional oils, and new fiscal incentives from the Venezuelan state in the form of temporary cut in royalty payments and application of a normal corporate income tax rate instead of the oil rate, the SA approach attractive to IOCs.

Upgrading 7-9[degrees] API crudes to lighter, sweeter grades of 14-30[degrees] API, depending on the degree of upgrading for each individual project, began to look feasible in the early 1990s - as world crude oil prices had risen sharply due to the Gulf crisis following Iraq's invasion of Kuwait in August 1990. In 1991, PDVSA's four operating subsidiaries began negotiations with IOCs form strategic associations (SAs)). These resulted in four integrated E&P/upgrading ventures: Petrozuata led by ConocoPhillips, Cerro Negro led by ExxonMobil, Sincor led by Total, and Hamaca led by Chevron. Now these four SAs are producing 600,000 b/d of sweet synthetic crude oils. These SAs are being expanded, with their capacity to exceed 1m b/d eventually (see Part 2 in omt19VenzFieldsNov7-05).

The Orinoco Tar Belt has been re-divided into many new blocks for a bigger number of SAs. However, under the Hydrocarbons Law of late 2001, PDVSA will not longer accept a minority stake in such SAs (see Gas Market Trends No. 18)

Orimulsion is an emulsion of about 70% natural Cerro Negro bitumen 8.5[degrees] API suspended in 30% fresh water by means of mechanical energy and the addition of less than 1% alcohol-based surfactants (emulsifiers) which allow the bitumen droplets to remain suspended in a stable mode. This product can be easily handled at room temperature and with standard equipment. The presence of water improves the combustion characteristics of the natural bitumen.

Orimulsion as a low-cost fuel for power in existing or new oil- or coal-fired plants has many attractive characteristics. It can be used in power plants designed to run on coal or heavy fuel oil with small modifications. Its price is competitive with internationally traded coal. The known reserves of bitumen are very large. It is easy to ignite and has good combustion performance. Emissions are easily controllable with existing commercial air pollution-control technology complying with environmental regulations worldwide. Use of combustion controls, such as low NOx burners (LNB) and re-burn, and post-combustion control technology, such as selective catalytic reduction (SCR), have been demonstrated as viable control techniques for Orimulsion.

Emissions from power plants using Orimulsion are very similar to, or lower than, those for the most modern coal-fired power plants which have applied "best available control technology" (BACT) and are much lower than uncontrolled oil-fired plants. The uncontrolled NOx emissions from Orimulsion are low even when compared to natural gas. The CO2 emissions from Orimulsion are 20% lower when compared to coal. Since Orimulsion is a liquid fuel, there are no emissions associated with fuel handling, unlike coal. There are considerably lower amounts of ash (50 times less) using Orimulsion than using coal.

Orimulsion has been used as a commercial boiler fuel in power plants in the UK, Canada, Denmark, Japan, Italy, Lithuania, China and Barbados, since the commercial combustion trials initiated in 1986. There have been negotiations power utilities in Brazil, Costa Rica, Denmark, Finland, Germany, Guatemala, Northern Ireland, the Philippines, Singapore, South Korea, Taiwan, Thailand and Turkey.

As Orimulsion production from the existing facility MPE-1 were completely sold, in December 2001, the National Assembly approved a JV between BITOR and China National Petroleum Corporation (CNPC) named Orifuels Sinoven S.A. (Sinovensa) to develop a new module for production of 6.5m t/y of Orimulsion to supply the Chinese market. Sinovensa is investing US$330m and plans to start production by end-2005. On Nov. 26, 2003, CNPC began building the first of China's two 600 MW Orimulsion-fired power plants located in Zhanjiang city in southern province of Guandong. The second 600 MW plant will be operational in mid-2006.

In addition to fuelling conventional power plants' steam turbines, Orimulsion can be used in diesel engines for power generation, in cement plants, as a feedstock for Integrated Gasification Combined Cycle and as a "re-burning" fuel (a method of reducing NOx by staging combustion in the boiler).

The Market For Orimulsion: The evolution of the power markets in the last 30 years has been affected by serious concerns about the security of supply and how to improve power systems to cope with fuel supply disruptions such as the Arab oil embargo in 1973-74. The key OECD states have introduced competition into their power systems and are increasingly allowing market forces to play a role in search of greater economic efficiency. The goal of these changes is to reduce power prices to consumers by cutting costs.

Changes in OECD energy policy to lower the exposure of the power sector to imported oil since 1974 have resulted in a big rise in the share of gas-fired capacity at the expense of oil-fired plants, while nuclear and coal have had a modest increase and hydro capacity has been stable. The change in the generation mix has been significant with gas as the fuel of choice. By 1990, the market identified for Orimulsion was 55m t/y (950,000 b/d), equivalent to 670,000 b/d of bitumen, focused on the main OECD countries.

This demand was impressive for a new fuel, but minor compared to world power generation. However, at the local level the new fuel disrupted interests within existing shareholders of national power firms and their reaction affected the commercial penetration of Orimulsion in some markets, particularly in the UK and US.

Use of Orimulsion during its commercial introduction was targeted to ageing oil- or coal-fired plants which were unused or in peak service. But with a competitive price, Orimulsion can generate power at low cost and the producer is able to compete in base load against the generating pool. After more than 18 years of successful experience in the use of Orimulsion by blue chip firms, and the continuous technological improvement to maintain compliance with the newest environmental rules, the conclusion of supply deals for new capacity to be built in China, Singapore, South Korea and central America, competing against fuel oil, gas and coal, signalled consolidation and new expansion for the Orimulsion market.

A milestone in the development of Orimulsion was reached in 2001 when the efforts of PDVSA and BITOR to bring the benefits of advanced technology and low cost of Orimulsion to the Venezuelan people resulted in the inclusion of this fuel in the local Electricity Plan to supply an important part of the forecast rise in power demand at low cost. The Electricity Plan contemplates not only conversion to Orimulsion of existing oil- and gas-fired plants but also construction of new capacity designed for this fuel.

Orimulsion has strong economic incentives for Venezuela and Latin America, now that Caracas is spearheading energy integration with fellow Latin American nations. About 80,000 b/d of fuel oil previously burned for power generation in Venezuela will be exported to capture a significant differential in price between Venezuela's internal fuel market and world prices. And 140 MCF/d of natural gas will be used as industrial feedstock for more value-added products rather than power generation at subsidised prices. More or less the same should apply to other Latin American markets.

Construction of a large power generating complex in the Orinoco Belt, on top of a bitumen reservoir, brings an appreciable reduction in costs as the Orimulsion will be produced just in time next to the point of use, with simpler logistics and requiring smaller safety stock of fuel than fuels from distant sources.

Venezuelan demand forecasts for Orimulsion are strong. PDVSA's previous plans for Orimulsion envisaged development of at least three new production modules (MPE-2/3/4) to increase total Orimulsion output to 25m t/y (320,000 b/d of bitumen) from a potential demand for Orimulsion of more than 35m t/y. Just in Venezuela the potential opportunities identified call for consumption of about 12m t/y of Orimulsion in the medium term.

For a module to produce 6m t/y of Orimulsion for 30 years, the investment is US$630m, of which 55% accounts for spending in an emulsifying plant, production facilities and wells. The rest will be distributed evenly during the life of the project - to drill new wells as required to maintain constant the bitumen output level and compensate for reservoir depletion. Financial values obtained from the economic appraisal of a Orimulsion module are very attractive and compare favourably to values from an integrated upgrade venture (SA) as both developments have a similar 12-15% internal rate of return.

As the pricing structure for Orimulsion migrated from the initial near-parity with coal prices which characterised its introductory phase to world markets towards a much higher price fully reflecting inter-fuel competition at the user's end, the new sales contracts signed recently made a significant improvement in the economics of Orimulsion. There is an appreciable upside for Orimulsion in power generation as the profit margin obtained from the sale of electricity is much higher than the margin from the sale of fuel. There is considerable room to capture some of this value for the fuel seller if vertical integration with the power generator occurs, taking equity participation in the generating assets as consideration for the economic benefits which the reduction in costs brings to the plant owner.

The additional income from the opportunity to participate in the sale of power, as opposed to just selling the fuel, brings additional risk exposure which has to be managed. From Venezuela's point of view, income from the local sale of Orimulsion during the next 30 years will have a positive effect on the economic development of the country. More than US$25 bn can be generated by Orimulsion sales, and more than 80% of these will re-invested within the country to stimulate the growth of the economy. From the outset PDVSA recognised that the only way to ensure maximum value for Venezuela from the Orinoco reserves was the use of portfolio optimisation techniques, to balance development of the reserves within the technological choices available at different times, and arrive at the mix which maximises the efficiency and value of the reserves and minimises its risks under different conditions of constraint and changing business conditions.

The historic development of the Orinoco Belt has been affected by different constraints such as: which technological solution requires higher investments per unit of production, as PDVSA has a limited amount of capital to invest in new developments because of pressure to deliver increasing cash flows to the state; the interest of IOCs to associate with PDVSA and invest in the belt; the process attributes and the related potential for cost cuts as the technologies evolve; the OPEC quota; the attributes of the targeted market and its potential changes in the future; and resistance to energy supply changes as they often require significant investment by energy producers and consumers.

Other constraints: the limited availability of refining outlets for blended and upgraded crude oils, as refiners need to invest in special modifications to process them; the subsidies by different governments (energy producers and consumers) to give competitive advantage of some technologies against others; the potential for improved energy efficiency in the different energy markets, such as the implications of introducing the hybrid car for the consumption of oil in transportation; and environmental legislation, i.e. the Kyoto Protocol.