November 27, 2012 § 3 Comments

We are much more used to the adage “bigger is better” in most things other than carbon footprints and runway models.  And in the case of the latter the operative term is more correctly slimmer as memorialized by the symbolism and actuality of Twiggy.  My enduring memory of arriving in this country in the late sixties is being struck by the fact that everything was large.  Toothpaste came in regular, large and economy sizes.  But marketing and consumer preferences aside, most industrial enterprises have always profited from scale.  “Economies of Scale” is firmly embedded in the engineering lexicon.  Which begs the question: when is this valid and when is it a hindrance?

In some ways it was Henry Ford who most popularized the notion.  An assembly line dropped the cost per unit, in his case for cars.  But it applies as well to any enterprise with high fixed costs, which now get spread over more units.  But for our discussion we will focus on process economics.  The standard power generating plant in the early part of the last century was in the vicinity of 30 MW (megawatts).  By the end of the century it was 1000 MW.  Some of this came about because the processes were designed to take advantage of economies of scale.  In fact, most chemical and metallurgical processes are designed with this as a feature.  Seldom will we find oil refineries smaller than 100,000 barrels per day (bpd).  The plants converting natural gas to transport liquids are even larger.  A counter example in power generation is windmills, which are small by design (3 MW or so).

This reliance on very large production plants has driven the business models.  Oil is lifted out of the ground and sent vast distances to be refined into useful products. When oil used to be light, this transport was not onerous because such oil flowed relatively easily.  However, oil produced today is increasingly heavier, especially the stuff from Canada, Venezuela and Mexico, three of the top four foreign sources for the US.  Heavy oil is very viscous and does not flow without the addition of a light hydrocarbon, known as a diluent.  The diluent is recovered at the refinery and reused.  But all this adds cost.  Ironically the largest pipeline transport distances are those for heavy oil from Canada.  This extreme reliance by Canada on US refineries is what created the political football of the Keystone XL pipeline addition in this last election.  But large refineries are likely here to stay.

Natural gas processing, on the other hand, could be amenable to innovation.  The explosion of shale gas production and the continued ramp up allows one to consider alternatives.  This is because pipeline infrastructure is inadequate and will need to be installed.  If technologies are developed that economically produce derivatives closer to the source of production, then several benefits accrue.  Manufacturing jobs will now be distributed across the country, not just in the Gulf Coast.  Today nearly 80% of ethylene cracking capacity is in Texas and Louisiana.  Ethane from east coast shale gas operations will need to be piped down over 1200 miles to be cracked.

Smaller facilities are quicker to build and easier to finance.  A 100,000 bpd gas to liquids conversion facility will cost about $12 billion.  A 1000 bpd unit will cost $120 million.  While not pocket change, this figure is much easier to raise for investment.  Lest this all sound too much like wishful thinking, several processes are currently in late stage development to produce diesel, jet fuel and methanol from natural gas on the scale mentioned. There is reason to believe that the linear reduction in cost I posted above can be beaten.  In other words, the smaller unit may well produce fluid at a lower fully loaded cost than a large one.  This is completely antithetical to the concept of economies of scale and is driven by breakthrough technologies that challenge design dogma.

Biomass conversion will be the area most advantaged by the sort of advance mentioned.  This is because biomass tends to have very low energy density, thus making transport to distant large processing plants cumbersome and often not economic.  A solution is to bring the plant to the biomass site.  This is strongly facilitated if small footprint technologies are brought to bear.  Interestingly, technology developed for natural gas conversion will apply directly to biomass, although some additional unique steps will be needed.  But here too, technologies currently in development offer promise.

Size matters, except when it does not!

Vikram Rao


§ 3 Responses to SMALLER IS BETTER

  • Sam Yenne says:

    Keep your eyes on Maverick Biofuels! Distributed generation combined with transportable intermediates allow for reduced scale on the front end and economy of scale opportunities when converting the intermediates to petroleum replacing fuels and chemicals.

  • Brian O'Hara says:

    Interesting article, Vik. Two comments:

    1. “A counter example in power generation is windmills, which are small by design (3 MW or so).” This is true of the individual generators (2-7 MW, and growing), however, wind farms do in fact benefit from economies of scale by spreading fixed costs for transmission, substations, etc. And by the way, windmills are for milling grain. Wind turbines generate electricity. (couldn’t resist)

    2. The benefits of smaller processing facilities described here seem to be focused on land-based oil & gas development. If we saw offshore development in a place like North Carolina (or VA or SC for that matter), would you expect the same to be true (requiring a pipeline to shore) or would you expect production to be offloaded to tankers and brought to existing processing facilities in the Gulf of Mexico or elsewhere?

    • rtecrtp says:

      Actually that is a good point regarding economies of scale for associated activities. That could apply to chemicals production as well. I also see cases where a bunch of small footprint units are co-located, much as in the case of windmills. By the way Brian, windmill is a generic term for a device that converts wind energy to rotational energy, for grinding, pumping water or generating power. The name likely came about from the first application for milling grain, but I believe it is now generic.

      As to offshore applications, I do see small footprint conversion of stranded gas, which is often associated with oil production. The produced liquid I expect to be offloaded by vessels because the production may be too small for pipelines. In some cases if the liquid is of the right sort, it may be exported in the same pipeline as the produced oil.
      Vikram Rao

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