Alice diesel for less than $1?

INVESTIGATION by ERWIN CHLANDA
 
The latest government hype is that “gas to liquid” could be the next bonanza for the people of the Territory. The benefits they are getting – or not – from Mereenie oil raises doubts about that.
 
“Gas to liquid” means producing diesel from gas that in the NT context is likely to be gained by fracking. The NT Government will spend $500,000 on a feasibility study of the process in the current Budget.
 
The Mereenie oilfield (at right), some 250 km west of Alice Springs, is producing crude that can be used as diesel in conventional cars and stationary engines without any refining.
 
Local identity “Burglar Bill” Ohlmus, now a director of Masterpath, in 2004 was using Mereenie crude in his Mack and Western Diesel road trains.
 
He used to fill up at a small private refinery at Brewer Estate, just south of Alice Springs.
 
For some clients it used a centrifuge to remove traces of sand, but Mr Ohlmus says he used the crude as it came “straight out of the ground, pure Mereenie”.
 
At times it was mixed in with diesel left in the tanks he’d filled up in Port Augusta.
 
Mereenie crude, at today’s world price of US$48 or A$68 a barrel (159 litres), is worth 43 cents a litre at the wellhead.
 
We are paying $1.29 at the bowser – three times the wellhead price. Where does the 86 cents a litre go?
 
Part of the answer is easy – the Feds grab 30c in Petroleum Tax.
 
Some of the rest borders on the absurd: In one of the world’s most sparsely populated regions we are enforcing requirements designed for cities choked with traffic.
 
In 2002 Australia adopted European regulations on the content of sulphur in fuel. Since 2009 the limit is 10 parts per million.
 
The number of oil refineries in Australia has shrunk to four. There used to be at least two in South Australia alone.
 
To reduce the content of sulphur our crude goes to Adelaide, 1500 kms. It then goes by ship to Singapore, where we pay a refinery to turn it into diesel which then comes back over the same route, a 15,000 km round trip.
 
There are two questions which could have been answered a long time ago:
 
• Can the sulphur be reduced in a plant based in Alice Springs?
 
• At what concentration does sulphur dioxide, which is part of the exhaust gases produced by diesel engines, become a harmful pollutant, given the minuscule traffic in the vastness of Central Australia?
 
Could there be a case for having an exclusion zone – similar to a free trade zone – where unrefined Mereenie crude could be sold for local use in, say, a 1000 km radius from Alice Springs?
 
The boost to our self-drive tourism would be enormous, and for the locals it would help put the population back on a growth curve.
 
Question One could be heading towards a fortuitous answer: Southern Oil in Wagga Wagga (at right) has teamed up with the Australian National University in a bid to develop a low-cost process of removing or reducing the content of sulphur from waste oil.
 
That process – hydrotreatment – could in all likelihood be adapted to crude.
 
(An explanation of the hydrotreatment process by Dick Dexter, Research and Development Manager of Southern Oil, is at the bottom of this report.)
 
And as for Question Two:
 
The Federal Department of the Environment sets fuel quality standards. The current Minister is Greg Hunt.
 
“A fuel that does not meet the petrol or diesel standards may be supplied for use in motor vehicles in accordance with an approval granted under the Act,” says the department’s website.
 
“Approvals can be granted by the Minister. An approval can vary a fuel standard that has been made under the Act, but only with respect to specified supplies of fuel and for a specified time.”
 
No problem there. The specified fuels can be Mereenie crude and the specified time can be “as long as you are in Central Australia”. Done deal. Talk to your local members of Federal Parliament, Warren Snowdon and Nigel Scullion.
 
The cozy relationship of the current governments – NT and Federal – with the resource industry invites a hard ongoing look at policies: Are they good for the people? Are they good for the oil barons?
 
The small Alice Springs refinery selling Mereenie crude succumbed to a conflict with the oil giant Santos Limited which was the operating partner of the field at the time, as we reported in 2004.
 
Santos now plays a major role in Territory gas development.
 
Former Santos employee Matthew Doman, now representing the Australian Petroleum Production and Exploration Association, would not comment on our 2004 report, but said the NT Government’s “commitment  to examine the feasibility of converting gas into synthetic diesel was another example of the Territory seeking to benefit from its onshore gas resource”.
 
Richard Cottee, Managing Director and CEO of Central Petroleum, says he isn’t fussed who buys their Mereenie crude.
 
The company, which bought a 50% share of the Mereenie field last year, brings the oil to the surface where other entities take over the functions of transport, refining and marketing.
 
But Mr Cottee says if local refining became economic Central Petroleum would take a look at it, and it would also be open to negotiate sales to interests serving the local market direct.
 
He says the company is expanding its presence in Alice Springs, currently spending $2m a year on supplies. Half its workforce is now local rather than FIFO.
 
Production at Mereenie started in 1984 and it produced over 16 million barrels of oil and condensate until 2013.
 
In 2014, production was 266,600 bbl of oil and condensate. That equates to 42 million litres and is worth $19m at the wellhead, on today’s prices.
 
At a royalty rate of 10% the Territory government gets $1.9m a year from Mereenie oil, just 0.03% of the NT Budget.
 
Currently, the NT imports 630 million litres of diesel per year, which equates to 10,856 barrels per day, according to a media release from Chief Minister Adam Giles.
 
That is 3.9 million barrels a year. The proportionate consumption of Alice Springs – 11% of the NT population – would be 430,000 barrels.
 
On those figures Mereenie could be supplying more than 60% of our diesel requirements at a cost of around 80 cents a litre.
 
Any takers? Some outback servos charge $2/ltre.
 
EXPLANATION:
 
The common methods for removing sulfur from crude distillates are reduction and oxidation:
 
• Reduction (HYDROTREATMENT) uses a catalyst, high pressure and high temperature to force sulfur to react with hydrogen to form hydrogen disulphide: H2S (“rotten egg gas”).
 
The H2S is then removed as it has a much lower boiling point than fuel and lubricant base oil.  This is the standard for sulfur removal in crude oil refining and the only method that will work on diesel and base oil.  Wikipedia has a good description of the process.
 
This would be the process used in Singapore:
 
• Oxidation uses an oxidant (in some cases just blowing air through the oil/gas) to convert sulfur containing oil to a sulfate.  Sulfates are polar and will wash out in water.
 
This method is commonly used for gas and very volatile liquid fuels.  It was originally developed to de-odorise gas and light fuel using the MEROX process but can also be used to remove sulfur.
 
For diesel you would be looking at Hydrotreatment with current technology (my research is still a while off becoming commercial).
 
The CAPEX cost for a hydrotreator just to remove sulfur (a Hydro-desulfuriser unit or HDS) will be a lot less than a whole treatment plant.  The capital cost will depend on size (litres per day processed) and sulfur content.
 
You would also need to factor in hydrogen production if you are not buying this in (very expensive to buy).
 
The operating cost will depend on throughput and sulfur level and also the levels of catalyst poisons (such as phosphorus, chlorine, and silicon) as catalyst is not cheap.
 
Dick Dexter
Research and Development Manager, Southern Oil