Why is sulphur a problem, and what is natural gas made of?
In my previous article I discussed some of the differences between different crude oils. But I didn't mention the bit of oil chemistry that is perhaps most important to investors, the sulphur content.
Sulphur is present in all organic matter, among other things sulphur compounds give rotten eggs and cabbage soup their distinctive smells. For this reason oil and gas with more than 1% or 1.5% sulphur are described as "sour", and below 0.5% sulphur they are called "sweet".
Thus Tapis at 46° API and 0.03% sulphur is described as a light, sweet crude.
Sulphur in oil
The sulphur content of oil depends entirely on the chemistry of the original goo and how it has been cooked, but as a rule heavier crudes tend to have more sulphur. In general Asian, North Sea and West African crudes tend to be sweet whereas Russian crude is about 1.3% sulphur, a lot of Middle East oil has more than that, and many new Gulf of Mexico fields are over 2% sulphur.
If sulphur is not removed from oil then it carries through into the refinery products, and burning it in car engines produces sulphur dioxide, a local pollutant and the main source of acid rain.
From an engineering perspective sour oil isn't a particular problem, it can be transported and stored separately from sweet oil, and treated in a hydrodesulphurisation (HDS) plant at the refinery.
Removing sulphur costs money, so refiners will demand a discount of $2/barrel or so for sour crude. Refiners have always tried to use low-sulphur oil for petrol as the catalysts used in refining petrol are particularly susceptible to being "poisoned" by sulphur; recent legislation has forced refiners to produce low-sulphur diesel and similar regulations are increasingly applied to other fuels.
Sulphur in natural gas
Sour gas is less common, but is more of a problem when you have it. Sulphur in gas is mostly in the form of hydrogen sulphide which is bad for two reasons, it's poisonous and it readily forms sulphuric acid which dissolves equipment and pipelines.
This means that major gas pipelines set strict specifications for sulphur content in any gas entering their systems. So whereas sour oil is a problem for the refiner, sour gas is the problem of the producer.
Usually the sulphur in natural gas is removed close to the wellhead using amine units similar to those in the second stage of HDS. It's a well-established technology which also removes carbon dioxide from the gas, but you still need extra safety precautions at the wellhead, and anything in contact with sour gas must be made from special acid-resistant steel. This is more expensive, and can have very long lead times.
Combine that with unhappy locals causing planning problems, and sour gas can easily add a year or more to the development timescale as well as increasing capital and operational costs.
You can get a vivid idea of the frustrations encountered when developing a sour gas field in announcements from Meridian Petroleum, now President Petroleum (LSE: PPC), about its Orion field.
Other hydrocarbons in natural gas
Natural gas is not just methane. Hydrocarbon gases such as ethane have a greater energy content than methane and make each cubic foot of gas more valuable. Heavier molecules such as pentane may be gases at the high temperatures in the well but condense into liquids at the surface. This gas condensate has a similar composition to petrol and its price is based on that of oil.
Condensate can be the most important revenue stream from "gas" wells in places such as Egypt, where gas prices are very low but liquids are sold at world prices. Condensate can also be stripped out and the gas reinjected back into the reservoir as a way of getting early revenue before gas pipelines have been built.
Gas containing hydrocarbon liquids is referred to as "wet gas", it doesn't mean that there's water in it!
Other chemicals in natural gas
It's not just hydrocarbons that may be trapped by the rocks that trap natural gas. Carbon dioxide or nitrogen can dilute the methane, reducing the energy content (and value) of the gas. Most of the world's helium comes from gas wells in the USA, it originates as alpha particles from radioactive rocks deep below the gas reservoirs.
It's never more than about 7% of the gas by volume but at over $100/mcf the helium can be more valuable than the methane, and even below 0.5% of the total gas it can be worth extracting. Iofina (LSE: IOF) are an unusual company extracting iodine from gas wells in North America.
So today's questions for companies are :
1) Does your oil or gas have a sulphur problem? What's the sulphur content?
2) [if sour gas] Have you ordered the long-lead items of pipeline etc? Are there planning problems?
3) What's the composition of your gas? Does it have condensate or other "goodies"?
In the next article I cover the headline-grabbing oil situation in the Falkland Islands.
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