Value through simple solutions - Fractalfractalsys.com/wp-content/uploads/2016/08/Jetshear... · Heavy oil occurs in most hydrocarbon basins around the globe. Extra-heavy oil fields

Value through simple solutions Understanding the Value Proposition of the JetShearTM Technology Platform Fractal Systems, Inc.

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Industry Background

Overview

Globalprimaryenergydemandgrew0.4%in20141,andfossilfuelscurrentlymeetover85%ofthisdemand.Crudeoilmeetsapproximately33%ofglobaldemand1.Althoughalternativestohydrocarbonswillcaptureagreatermarketshareinthefuture(e.g.currentlyonly2%),thereisnodoubtthathydrocarbondemandwillcontinuetogrowoverthenextseveraldecades2.

Figure1–GlobalEnergyDemand1

Figure2–WorldConsumptionbyFuelType1

However,theoilindustryishavingdifficultyinmeetingthisgrowthwithconventionalhydrocarbons.Thereisanactivedebateacrosstheindustryabout“peakoil”anditsimplications.Globaloilreserves,estimatedat1.6trillionbarrels,continuetogrow,andsomeusethisfacttosuggestthatsupplyisplentiful.However,growthincludeslargeamountsofunconventionaloil.Oftheunconventionalhydrocarbonsavailable,heavyoil,

1“BPStatisticalReview”–June2015

includingextra-heavyandbitumen,isarguablythemostimportant.

Heavyoilsoccurinmostoilbasinsoftheworld.Theseoilsaredenserthanconventionaloils.TheindustryoftenusesameasurefordensitythatisreferredtoasdegreesAPI(e.g.developedbytheAmericanPetroleumInstitute).Thismeasureisinverselyproportionaltodensityandisnon-linear(Figure3).

Figure3–DensityofHydrocarbons

Althoughtherearenouniformdefinitionsforthetermsheavyoil,extra-heavyoilandbitumen,thefollowingarecommonlyused:

• Heavyoil–Petroleumwithagasfreeviscosityofbetween100and10,000centipoise(e.g.centipoise(cP)isaunitofmeasureofviscosity).Intheabsenceofviscosityinformation,heavyoilshaveanAPIgravitybetween10°and22.5°.

• Bitumen–Petroleumwithaviscositygreaterthan10,000cP.• Extra-heavyoil–Petroleumwithaviscositylessthan10,000cP,butwithadensitygreaterthan10°API.

Heavyoil,extra-heavyoilandbitumenarebeingdevelopedatanacceleratedpacethroughouttheworld.TheWorldEnergyCouncilestimatesthatthereareapproximately5.5trillionbarrelsofextra-heavyoilandbitumen“in-place”(i.e.intheground).Thisisapproximatelythesameamountofconventionaloildiscoveredsincethebirthoftheindustry.Ofthediscoveredconventionaloil,lessthan20%orapproximately1trillionbarrelshasalreadybeenproduced.Only24billion

2Oil&GasJournal–December3,2012

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barrelsatyear-end20083oftheextra-heavyoilandbitumenhavebeenproduced.

Ofthe5.5trillionbarrelsofextra-heavyoilandbitumenin-placeglobally,themajorityhasbeenfoundintwocountries:CanadaandVenezuela.Canadacontainsover40%ofthistotal3,andtheCanadianindustryisexpandingproductioncapacityatarapidpace.

Exploitationofthisresourcehashistoricallybeenlimitedduetothehighcosttodevelop,produceandtransportit.Itistechnicallydifficultandeconomicallychallengingtoproduce,ascost-intensiveenhancedoilrecoverymethodsoftenbeingrequired.Onceproduceditiscostlytorefineintomarketableproducts(i.e.mainlytransportationfuels).Inaddition,itisdifficulttotransportfromtheremoteoilfieldstothelarge,centralizedrefiners.Heavyoilsaredifficulttotransportduetotheirhighlyviscousnature.

Theriseinoilpricesbetween2003and2008providedconsiderablefinancialincentivetoacceleratedevelopmentofheavyoilresources.However,thetechnicalandeconomicchallengesofdevelopingheavyoilsandbitumenremainformidable.Theheavyoilmarketrequiresnew,reliable,cost-effectivetechnologiesthataddressthesechallenges.

Canada

Approximately167billionbarrelsor40%oftheknown,globalextra-heavyoilandbitumenthatcanberecoveredislocatedinCanada4.TheoilsandsofCanadaareworld-renownedandarepredominantlylocatedintheprovinceofAlberta.Thisresource,discoveredmanyyearsago,isresponsibleformorethanone-halfofCanada’scurrentoilproduction(e.g.2015oilsandsproductionwas2.37millionbarrelsperday(bpd)4).TheCanadianOilSandsarecomprisedofthethreeareasthatcontainextra-heavyoilandbitumen:Athabasca,PeaceRiver,andColdLake(Figure4).

3“WorldEnergyCouncil–2010SurveyofEnergyResources”

Figure4-CanadianOilSandsRegions4

Thereisanestablishedoilsands“valuechain”consistingofminingandin-situproductionoperations,gatheringsystempipelinesandterminals,mid-streamupgraders,transportationpipelines,diluentinfrastructureandrefineries.Currentlyabouttwo-thirdsofallWesternCanadiancrude,includingconventionaloil,isrefinedintheUnitedStates.AllindustryexpertsforecastalargeincreaseinWesternCanadiancrudeproductionoverthelongtermastheoilsandsarefurtherdeveloped.CurrentdemandforecastsindicatemostofthisincreaseinproductionwillultimatelybetransportedtorefineriesintheUnitedStates.Thiswillrequiremajorexpansionsofthepipelineandrailinfrastructureasthecurrenttransportationinfrastructureisinadequatetomeetthegrowthinvolumes4.Fractal’stechnologiescandeliverreductionsinviscosityanddensity,whichcanprovidegreatercapacitytomanyofthese“valuechain”systems.

ThereiscurrentlyalargeCanadianmarketrequiringheavyoiltechnologies).Despitethecurrentweakoilpriceenvironment,theCanadianAssociationofPetroleumProducersforecasteoilsandsproductiontogrowoverthenext15yearstoover3.6millionbarrelsperday4.Industryexpertsareforecastingthatthebulkofthisproductiongrowthwillconsistofhigheracidcontentcrudes(e.g.TAN>1.0mgKOH/g).

4“CanadianAssociationofPetroleumProducers-CrudeOilForecast,MarketsandTransportation”,June2016(www.capp.ca)

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OtherCountries

Heavyoiloccursinmosthydrocarbonbasinsaroundtheglobe.Extra-heavyoilfieldshavebeendevelopedextensivelyinSouthAmerica,theU.S.,andIndonesia.Alargeshareoftheworld’sknownextra-heavyoilandbitumenresourceislocatedinashallowheavyoilbeltthatextendsinanarcfromVenezuelathroughColombia,EcuadorandPeru(Figure5).

Figure5–HeavyOilBasinsofSouthAmerica

WhileCanadaandVenezuelacombineforabout85%ofthetotal3thereisnotablegrowthinColombiawithheavyoilscontributingover750,000bpdofproductionin2014.

HeavyOilPricing

Globaloilpricesclimbedtoanewlevelduringtheperiodfrom2003to20081(Figure6).Whilethereisspeculationthatthisincreaseinpriceswasduetoconcernovertheworldrunningoutofoil(e.g.peakoil)thereislittledoubtthatatleastsomeoftheincreaseisadirectresultofgreaterdependenceonnon-conventionaloilssuchasheavyoilandbitumenaswellasconventionaloilsfoundindeepwater.Bothofthesegrowingsourcesofoilaremorecostlytoextractandtransporttomarketthantraditionalsources.

Figure6-HistoricalLightOilPricing(Currentdollarsandmoneyoftheday)1.

HeavyoiltradesatadiscountrelativetocommonlightoilbenchmarkssuchasWestTexasIntermediate(e.g.WTI)orBrent.Additionally,heavyoilpricestendtoberegionalinnaturereflectingdifferencesinqualityorrefiningvalue(i.e.API,viscosity,magnitudeofimpuritiessuchassulfur,metalsandacidcontent)anddistancetorefineryinfrastructure.Forthoseheavyoilswithconsiderablevolumesinthemarketaspecificationandapricebenchmarkisestablishedinordertoprovidethetransparencythatefficientmarketsrequire.ItiscommonalongtheU.S.GulfCoasttoseeaMayabenchmark,whichreflectsthepricepaidforacommonheavyoilfromMexico.CanadahasseveralbenchmarkpricesforheavyoilincludingLloydBlend(e.g.LLB)andmorerecently,WesternCanadianSelect(e.g.WCS).

Thepricediscountobservedbetweenheavycrudes(Figure7)andlightcrudesiscalledaheavy-to-lightdifferentialorjusttheheavydifferential.ThemagnitudeoftheheavydifferentialisakeydriverinFractal’svalueproposition.

Figure7–NorthAmericanHeavyOilPricingRelativetoWTI

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Theheavydifferentialisvolatileandisdrivenbyacomplexrelationshipamonganumberoffactorsincludingheavyoilsupplygrowth,availabledeepconversionrefiningcapacity(i.e.abilityofarefinerytoprocessheavyoil),andtakeawaycapacitytoaccesstherefiningmarkets.WCSisdiscountedrelativetootherNorthAmericanheavycrudessuchasMayaprincipallyduetothecostoftransportingtheCanadianblendfromAlbertatotherefininghubsintheUS.TheMSW(e.g.MixedSweetBlend)toWCSdifferentials,onaCanadiandollarand%basis,arepresentedinFigure8.MSWisaconventionallyproducedlightsweetcrudeforwesternCanada.ItisoftenreferencedoncrudepricereportsasEdmontonParCrude.

Figure8–HistoricalCanadianHeavytoLightOilDifferentials

Thepricereceivedforheavyoilwasdiscountedbetween16%to37%onanaverageannualbasisrelativetoMSWoverthepast10years.

DiluentPricing

ThesecondcommoditypricethatisinfluentialtoFractal’svaluepropositionisthepriceofcondensaterelativetolightoil.Ascondensatepricesincreasethecoststotransporttheheavyoilblendalsoincreases.TherecentpricehistoryofcondensatepricinginCanadaillustratesthetypicalpremiumsproducerspaytosecuretheblendingagentrequiredtotransportrawbitumen.

Figure9–HistoricalCondensatetoWTIdifferential

Overthe10-yearperiod,theaverageannualcondensatepricerangedfromapremiumofC$10.11toadiscountofC$2.12/bbl.Onceagainpriceonbothadollarandpercentagebasisareveryvolatile.Thisvolatilityisdetrimentaltoheavyoildevelopmenteconomicsthatrequireverylargeupfrontinvestmentsandmulti-yearconstructiontimelines.Returnsareveryexposedtocommoditypricesduringthepayoutperiodsonceproductionstarts.

TransportingHeavyOil

Thereasonheavyoilsaredifficulttotransportisduetotheirhighlyviscousnature.Viscosityisameasureoftheoil’sresistancetoflow.Allpipelineshavespecificationsthataproducermustmeetbeforethepipelinewilltransporttheproducer’soil.Dependingontheregionthefollowingspecificationscanbeimportant-density,viscosity,vaporpressureandwaterandolefincontent.

Inmanyheavy,extra-heavyandbitumenoilprovinces,itiscommonthattheoilproducedfromthefieldwillbetooviscous

andtoodensetomeetthepipeline’srequirements.Inthesecases,theheavyoilisoftenblendedwithenoughlightoilor

diluentsothatthemixturemeetstheviscosityanddensityspecificationsofthepipeline.Thediluentisoftengascondensate(e.g.liquidsproducedinconjunctionwithnaturalgasalsoknownasheptanesplus,naturalgasolineorC5+)thatisverylightandthereforerequireslessvolumethanheavierblendingagents,suchassyntheticcrude,fortheblendtomeetthepipelinespecification.

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FortheCanadianOilSands,itistypicaltousealmostonebarrelofdiluentforeverytwobarrelsofbitumenproduced.Theproducermustpayapremiumpriceforthisdiluent(i.e.9%premiumtoCanadianparoverthepast10years).

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Inaddition,producerspaypipelineownersatariffortoll(i.e.a$perbarrelcharge)totransporttheirheavyblendtomarket.Inheavyoilareaswherediluentisused,theyalsopayatarifftotransportthediluenttothefield.TransportationtariffstotheUSrefiningcentersareoneofthesignificantoperatingcostsforaproducerofbitumeninCanada.OncetheblendarrivesattherefinerythediluentcontentistypicallydiscountedagainasthediluentisnotindemandinmostNorthAmericanrefinerymarkets.

TheCanadianAssociationofPetroleumProducershasforecastthatanexpansionoftheexistingtransportationinfrastructureisrequiredtoconnectgrowingcrudeoilsupplyfromWesternCanadatonewmarkets.Pipelineshavetraditionallybeentheprimarymodeoftransportationforlong-termmovementsofbitumenbuttheprotractedregulatoryprocessescontinuetopresentanumberofchallenges.Thisisresultinginhigherheavy-to-lightdiscountsduetoexcesssupplyandinsufficienttakeawaycapacity.Delaysinstart-uptimingareprovidingtheimpetusforadditionaltake-awaycapacityfromrailwaystocomplementpipelinetransport.JetShearhasasignificantimpactonpipelinecapacitydebottleneckingbyreducingthevolumeofdiluentrequiredtomovethebitumentomarket.

Fractal’sTechnologyPlatform

FractalSystemsInc.isaprivateCanadiancompanythatisengagedinthebusinessofupgradingheavy-oilandbitumeninthefield,byapplyingsimple,proprietary,patentedtechnology.Thecompanywillbeactiveinmanufacturingandlicensingitstechnologyplatformtooilproducersandmid-streamcompaniesinheavyoilbasinsaroundtheglobe,particularlyinCanadaandSouthAmerica.

FractalSystemsisbuildingaworld-classcompanythatwillprovidesuperiorheavyoiltechnologiestotheheavyoilindustry.Thecompanywillachievethisbydeliveringthefollowing:

• CommercializetheJetShear™technologyplatformandrapidlygrowlicenserevenue.

• Expandrelationshipsgloballytocapitalizeonthevalueofcompanytechnologies.

• Assembleatop-qualityteambysupplementingandgrowingthecompany’stechnicalandcommercialstaff.

• Developnewheavyoiltechnologiesthatarereadyforcommercializationwithinthefive-yearplanninghorizon.

• Continuouslyimprovethevalueoftechnologiesbynurturingcreativitywithintheorganization.

FractalKnow-How

FractalSystemscombinestheinventivemindsofanentrepreneurialCanadianfamily,togetherwiththeexperienceandknowledgeofveteransintheoilindustry.ThestoryofFractalSystembeginswithDr.EstebanChornet,theinventorofJetShear™andco-founderofthecompany.From1970to2007,hewasProfessorofChemicalEngineeringatUniversitédeSherbrooke,whichislocatedinSherbrooke,Québec,Canada.Dr.Chornettaughtandconductedadvancedresearchin

reactionengineeringappliedtoalternateenergyfeedstocksandtoenvironmentaltechnologies.Duringhis37yearsasaprofessor,hedevelopedmanyideasforbuildingbusinessesinprocessrelatedindustries.

Thepotentialforsuccessfullycommercializinghisinnovationsbegantoberealizedin2003withthelaunchofEnerkem.Enerkemhasdevelopedauniquecleangasificationandcatalysistechnologythatconvertssortedmunicipalsolidwasteandbiomassresiduesintocellulosicethanolandothersecond-generationfuels.Enerkemhasbuiltandcommissioneditsfirstcommercialplantin2014withtheCityofEdmonton,whereitconvertsmunicipalwasteintobiofuelsusingproprietarytechnologies.

Dr.Chornetco-foundedFractalSystemsin2006withhisson,MichelChornet.MichelChornetiscurrentlyservingasinterimPresidentandisaBoardmemberforthecompanyinadditiontohavingresponsibilitiesofVice-PresidentofEngineeringandTechnologyDevelopment.Inthoseroles,heoverseesthedevelopmentandcommercializationoftheJetSheartechnologyplatform.HewasresponsiblefortheinstallationandoperationoftheJetShear™pilotandcommercialdemonstrationfacilitieslocatedinAlberta,CanadaanddirectstheactivitiesattheJetShearbenchscalefacilityandlaboratoryinSherbrooke,Quebec.Hecontinuestodevelopnewandinnovativetechnologysolutionsandistheauthoroftwograntedpatentswithnumerousothersinvariousstagesofapproval.

JetShearPoisedforCommercialApplication

FractalSystems’developmentoftheJetSheartechnologyplatformisatthecommercialapplicationstage.Thecompanyhassystematicallydevelopedthetechnologythroughalogical,deliberatetestingandvalidationprogram:

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• Benchscalestudiesusinga1to30barrelsofoilperdaysystemthatsuccessfullydemonstratedthepotentialofthetechnologyonvariouscrudesprovidedbyAlbertaoilproducingcompanies.

• Thecompanysubsequentlyvalidatedthebenchscalestudiesbyprocessingheavyoilandbitumeninthefieldata300barrelperday“PilotFacility”.Thisfacilitywashostedin2009-2010byasignificantmid-streamcompanyinAlberta,Canada.Thefieldperformanceeffectivelydemonstratedthatthebenchscaleresultscouldbe“scaledup”(e.g.300:1)inafieldfacility.

• Overtheperiodfrom2012-2014thecompanydevelopedarelationshipwithamajoroilsandsproducerandexpandedthecapacityofthe300bpdPilotFacilitytoacommercialscalepilotdemonstrationfacilityat1,000bpdcapacity(Figure10).

• In2015thecompanyannouncedthatithadcompetedtestingofJetShearatthe1,000bpdpilotdemonstrationfacilitywithitspartner.The1,000barrelperdayfacilitycommencedprocessinginApril2014andoperatedforapproximately1yeardemonstratinglong-termreliability.Duringthisperiod,thefacilityprocessedover100,000barrelsofpartiallydilutedbitumenthatwastruckedtothesiteinProvost,AlbertafromSteamAssistedGravityDrainage(SAGD)projectsintheAthabascaregionthatareoperatedbyFractal’spartner.

Figure10–FieldDemonstrationFacilitynearProvost,AB

• Thegoaloftheprojectwastoachieve(1)>40%diluent

displacement,(2)desirednozzlelifeperformance,(3)certainproductqualitytargets(productstability,H2Scontent,acidity,andliquidyield)and(4)facilityoperabilityandthroughputexpectationswithnosafetyorenvironmentalincidents.Allkeytargetsweremetorexceededandthedemonstrationwasdeemedasuccessbythepartnership(Figure11).

Figure11–FieldDemonstrationMilestones

• FractalSystemsannouncedinMarch2015thatSustainableDevelopmentTechnologyCanadahasawarded$3.7milliontothepartnershiptofield-trialthisimprovedversionofJetShear(https://www.sdtc.ca/en/portfolio/projects/bitumen-diluent-reduction-using-jet-nozzle-technology-platform).

• ThepositivefielddemonstrationofJetShearhasledFractalSystemsanditspartnertoanexpansionofthecurrenttechnologyplatformtofurtherincreasediluentdisplacementandtoreduceacidity(e.g.TotalAcidNumberorTAN)viaproprietarytechnologies.ThenewplatformiscalledEnhancedJetShearTMwithARPTM(e.g.AcidReductionProcessTM)andtargetsdiluentdisplacementupto60%,olefincontentlessthan0.5wt%andTANlevelslessthan1mgKOH/gwhilemaintainingminimalyieldlossandallotherpipelinetransportationspecifications.

• ThecommercialdemonstrationfacilitywassubsequentlymodifiedtoallowJetShear™andARP™operations(March-April2016)andwascommissionedinearlyQ32016andwillyieldresultsovertheremainderoftheyear.

• PerformanceobjectiveshavebeenestablishedwithFractal’spartner.

*Reducedtargetduetohydrauliclimitationinperipheralequipment

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TheJetShearProcess

Fractal’sJetShearfacilitiesresembleblendingskidsthatarecurrentlyinuseatheavyoiloperationsinWesternCanada.InCanada,blendingskidsareusedtomakeDilbit,amixtureofbitumenwithenoughdiluenttomeetthepipelinespecificationforviscosityandgravity(i.e.typically,27to35%blendratiodependingonthequalityofthebitumen).MostoftheequipmentusedinFractal’sJetShearfacilitiesarecomprisedof“offtheshelf”oilfieldequipmentsuchasfractionationtowers,heatexchangers,pumps,tanksandheaters.Aproprietary,verysmallfootprint,jet-nozzlepackageisaddedintheJetShearconfigurationtodramaticallyreducetheviscosityand,therefore,theamountofdiluentrequiredtomeetthepipelinespecifications.

Fractal’ssimpleprocessbeginswithtypicalunder-dilutedDilbitcomingoutofCentralProcessingFacilities(CPF)ataSAGDproductionplantorDilbitataterminal.InAlberta,duetothelowgravityofthebitumen,diluentistypicallyaddedtotheproducedbitumen-wateremulsionattheCPFinordertoseparatethebitumenfromtheproducedwater.Thisunder-dilutedDilbitblendissubsequentlysenttoablendingfacilitywheremorediluentisaddedtomeetthepipelinespecificationforDilbit.WithJetShear,theunder-dilutedDilbitisprocessedbyfirstseparatingtheblendusingasimpleatmosphericfractionationstep(Figure12).Thelightends(e.g.thediluentaddedattheCPF)areroutedaroundtheplanttorecyclebacktotheCPForblendedinthefinalJetShearproductsalesblend.Thediluent–freebitumenisthenroutedtothecoreJetShearmodulewhereitisheatedtojustbelowthermalcrackingtemperaturesandpumpedthroughtheproprietaryjet-nozzleassemblywherecavitationandmechanicalshearingtakesplace.TheJetShearproductisthencooledinheatexchangersandsenttothesalestankforfinalblending,ifrequired.By-productgasesarestrippedofanyhydrogensulfide(e.g.H2S)intheH2Sstrippingsectionandareusedintheoperationsasafuelsource.

Figure12-JetShearTechnologyPlatform

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TheEnhancedJetShearProcess

TheEnhancedJetShearProcessissimilartotheJetShearprocessbutaddsanadditionalprocessingsteptoremoveolefinsfromtheJetShearproducts.InFigure13theolefinreductiontakesplacebyseparatingthenaphthastreamfromtherestofthelightendsdownstreamoftheJetShearnozzles.Thenaphthacutcontainsthebulkoftheolefinsthataregeneratedduetoheatingthebitumenupstreamofthejet-nozzlepackage.ThenaphthastreamisthenprocessedinalowpressurecatalytichydrogenpolishingunitbeforebeingcooledandrecombinedwiththeJetShearproductorotherwiseroutedbacktotheCPF.Byincorporatingthislowcapitalintensityprocessingstep,higherdiluentdisplacementcanbeachievedasthegenerationofolefinsinthenaphthacutisnolongerlimitingtheaggressivenessofthetreatmentconditionsthroughthebaseJetShearconfiguration(e.g.nozzlesandheater).

Figure13–EnhancedJetShearPFD

TheAcidReductionProcess(ARP)

ManyheavyoilsinCanadaandaroundtheworldhavehighacidcontent.TotalAcidNumberorTAN5,isanindicatoroftheaciditypresentintheheavyoils.ToovercomechallengesinrefininghighTANcrudesrefinersdiscountthepricetheyarewillingtopayasafunctionofthemagnitudeoftheTANnumber.TheacidiccomponentsthatinfluencethemagnitudeoftheTANnumberaremainlyalkylatednaphtenesandaretypicallyconcentratedintheabove260oCcut(e.g.500oF)withthehighestconcentrationsbeingreportedin316-427oCboilingrange(e.g.600–800oF).Theseacidsareproblematicinrefineriesduetoincreasedcorrosionofspecificmaterialsincertaintemperatureranges.TocombattheincreasedcorrosionfromhighTANcrudesrefinerswillutilizethreemitigationtechniques:1)corrosionresistantmetallurgy,2)chemicaltreatmentwithcorrosioninhibitorsand3)dilutionwithlowTANcrudes.

RefinersapplyapricediscountthatisafunctionoftheTANnumber.Althoughthemagnitudeofthisdiscountisnotreadilytransparentandisinfluencedbymarketconditions(e.g.supply/demandbalanceandhighTANprocessingcapacity),inabalanced

5TANisdefinedasmilligrams(mg)ofpotassiumhydroxide(KOH)neededtoneutralizetheacidinonegramofcrude.“HighTAN”crudesaredefinedashavingTAN>1.0mgKOH/g.

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marketindustryexpertswilltypicallyassignfrom$1.00to$4.00discountforeachTANincrementbetween1.0(e.g.maximumallowableforWCS).

Inaddition,ashighTANcrudesareintroducedrefinerswillalsoapplyanintroductorydiscounttomitigatetheriskofprocessingthenewhighTANcrudestreamsintheirrefineries.InCanada,ashigherTANstreamswereintroduced(e.g.periodfrom2005-2014)theintroductorydiscountshaverangedfrom$1.00-$15.00/bbl.Althoughtheseintroductorydiscountsseemtodiminishasrefinersgetcomfortablewiththeprocessingrisk,thetimingofthediscountsearlyintheproductivelifeofhighcapitalintensityoilsandsprojectschallengestheprojectreturns.ThemagnitudeofthesediscountsrepresentsasignificantopportunityforproducerstomitigatethenegativeeconomicimpactofhighTANdiscountsvianewtechnologysolutions.

TheARPprocessisasimple,fielddeployed,technologysolutionthatcanbedesignedintoaJetShearfacility.TheARPmoduleconsistsofasimpleconfigurationofpre-fractionationandasoakerdrum(Figure14).Thesoakerdrumprovidestheresidencetimewherethenaphthenicacidsarethermallydestroyedattemperaturesbelowonsetofcracking.IncombinationwithEnhancedJetShear’shydropolishingstep,anyadditionalolefinsgeneratedwithARPprocessingcanbeeffectivelyaddressedtomeetpipelinespecifications.

Figure14–AcidReductionProcesswithEnhancedJetShearPFD

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TheScienceofJetShear

TheobjectiveofJetShearistochangeormodifythestructureofbitumenandheavyoilstoreduceviscosityandimproveitsvalue.Itaccomplishesthisbytargetingmodificationsoftheasphaltenemicrostructures,whichcomprisestheheaviestfractionofheavyoils.Maltenessurroundtheseextremelycomplexmicrostructuresandthearrangementofthesemoleculesinthemaltenesresultintheobservedhighviscositiesofheavyoilandbitumen.

JetShearusesalowseverityhybridapproachrelyingonhydrodynamiccavitationandtheapplicationofheattostructurallymodifytheasphaltenemolecules.Thermaldisorder,belowincipientcrackingtemperatures,isfirstintroducedfollowedbycavitationthroughanozzle.Duetotherapidchangeinpressure,microbubblesformaroundnucleationsites.Nucleationsitescanbesuspendedsubmicronparticulatematter,colloidalmicelles,orpre-existingmicrobubbles.Theforcesthatholdtheliquidtogetherneedtoadjusttotheserapidchangesinpressure.Theresultingkineticenergyfromcavitationisliberatedintosufficientchemicalenergytomodifythemicrostructureandthestateofaggregationoftheinitialheavyoilcomponents.

TheprocessingofheavyoilwithJetShearresultsinade-structuringoftheasphaltenemicrostructures,leadingtonewandbeneficialproperties(i.e.decreaseinviscosityandlowerbulkdensity)withessentiallynochangeinthechemicalcompositionandnegligiblevolumetricyieldloss.

ApplyingJetShear

Fractal’sJetSheartechnologyisbestappliedinthefieldwhereheavyoilorbitumenisblendedwithdiluentfortransportationviapipelineorrail.JetShearcandramaticallyreducetheamountofdiluentthatisotherwiserequiredtotransporttheheavyoiltomarket.

TestsruninFractal’slaboratoryinSherbrooke,QuebecandvalidatedincommercialscalefieldpilotfacilitiesindicatethatJetShear™canreducethediluentrequiredformeetingapipeline’sviscosityspecifications.Laboratorytestsindicateupto60%ofdiluentcanbeeliminatedforatypicalCanadianbitumen(i.e.6.5-8.0API).

Figure15–Viscosityasafunctionof%diluentinblendfortypicalbitumenblendandJetShearProduct

Thecompanyhasconfirmedthebenchscaleresultsat300and1,000barrelperdayfielddemonstrationpilotfacilitiesinAlberta,Canada.Theseresultsprovideanoperatortheconfidencethattheyhavetheabilitytomateriallyreducecostsandenvironmentalimpactassociatedwithtransportingtheheavyoiltomarketwhileatthesametimehavinganegligibleimpactonvolumetricyield.Inaddition,thestableJetShearproductshaveotherqualityimprovementsincludingreduceddensity,sulfur,TANandolefinscontentbelowpipelinespecification(Figure16).Tariffcosts(e.g.costspipelineschargetotransporttheoiltomarket)andenvironmentalimpactsarereducedduetoreducedvolumesbeinghandled.

Figure16–TypicalProductProperties

ConventionalBlendingNetbackwithJetShear

Forthepurposeofillustratinghowthereductionofdiluentcontributestoareductionintransportationcosts,anexampleusingAthabascabitumenandDilbitfollowsbelow.

Fromahighlevel,therearethreecomponentsthatcontributetothenetvalueadditionattributedtodiluentavoidance.Thereisthereduceddiluentrequiredtomeetpipelineviscosityanddensityspecifications,thereducedtariffattributedtotransportinglessvolume,andareductioninvalueduetotheoperatingexpenseforoperatingtheJetShearfacility.Anillustrationofthereducedtransportationcostsattributedtoa55%reductionofthediluentrequiredtomeettheprevailingpipelinespecificationthroughtheapplicationofEnhancedJetShearisprovidedbelow.

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Example-10bpdbasisand55%reductionofdiluentwithJetShear

TypicalBlendRatio:7bblsofbitumen+3bblsofimporteddiluent=10bblsofDilbit.

WithJetShearand55%diluentavoidance:7bblsofbitumen+1.35bblsofdiluent=8.35bblsofJetShearproduct.

Assumingthefollowingaverage2015calendaryearpricingreportedbyCAPPandinternalcompanyestimates:

• Dilbit(e.g.WCS-C$2.50/bbl)=$42.32/bbl• Diluent(e.g.condensate)=$60.28/bbl• Dilbittariff=$2.00/bbl• Diluenttariff=$1.50/bbl• JetShearoperatingexpense=$0.82/bbl

Diluentsavings=$3.65/bblTariffsavings=$0.82/bblLessJetShearoperatingexpense=$0.82/bblValueaddperbbl=$3.65/bblThereareadditionalvaluedriversthatarenotconsideredinthissimpleanalysisandshowninFigure16.Theimproveddistillationcurve(Figure17)andreducedTANwillcontributetoandfurtherimprovethenetbackstotheheavyoiloperator.Inaddition,significantpipelinedebottleneckingcanbeachievedthroughtheadoptionofJetShear.Thiseffectivelyincreasesthebitumenthroughputcapacityofexistingpipelines.

Figure17–JetShearproductdistillationcurvevs.typicalbitumen

CapitalIntensity

Varioushigherseveritytechniquesrangingfromvisbreaking,coking,hydrocracking,andsolventdeasphaltinghavetraditionallybeenappliedacrosstheheavyoilindustrytomodifythestructureandcompositionofheavyoils.Thesetechnologiesrequireverylargescaleinordertoreducetheircapitalintensityandarethereforealmostexclusivelydeployedinrefineriesorinverylargescale“upgraders”atoilsandsminesitesorclosetoports(i.e.Venezuela).Conversely,duetothesmallfootprintandlowcapitalintensityoftheJetSheartechnologyplatformFractalisabletodeployplantsadjacenttoheavyoilfieldproductionfacilitiesinremoteheavyoilbasins.

FeasibilitystudiesandaClass4+capitalestimatehavebeencompletedwithFluor,amajorEPCfirm.ThetechnologycanbedeployedinJetShearmodulesaslowasafewthousandbpdupto50thousandbpd.ThedesignapproachemployedbyFluorhasincorporatedthelatestadvancementsinmodular,closelycoupledskids.Inaddition,thetechnologycanbeinstalledinlargerfields,astheyaredeveloped,byinstallingmultiplemodularsystemsinparallel.Thisabilityallowsthetechnologytobe“rightsized”withoutanyupperlimitationduetoscale.

TheClass4+capitalestimates,forbothaCanadianoilsands(Figure18)andUSGulfCoastlocations,(Figure19)assumeabrownfieldsiteadjacenttoanoperatingheavyoilproductionfacility.Theestimateshavebeendevelopedforseveralscalesfrom45,000to10,000barrelsperdayfeedofAthabascabitumen(e.g.asofQ22015).

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Figure18–CapitalIntensityforaFortMcMurraylocationasofQ22015(SourceFluor)

Figure19–CapitalIntensityforaUSGClocationasofQ22015(SourceFluor)

TheestimatesweredevelopedforbothJetShearaswellasforEnhancedJetShearwithARP(assumeda10%increaseincapitalforARPusinginternalestimates).

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LifeCycleGreenhouseGasAssessment

TheJetSheartechnologyplatformreducesoverallgreenhousegas(GHG)emissionsonawells-to-refinerybasisby5.4-11%byremovingasignificantvolumeofdiluentfromthesystem(i.e.upto60%)therebyreducingtheGHGimpactsofsourcing,transportingandprocessingthebitumenblendattherefinery(i.e.lessdiluentisbeingtransportedtositeandtotherefinery).

Inthemostrecentinventorydataavailable,Alberta’semissionsof267Mtin2013accountedforapproximately37%ofCanada’stotalemissions,andthisnumberandshareisexpectedtogrow.WhileCanada’semissionsareforecastedtoincreaseby16%from2013levelsby2030,Alberta’semissionsareexpectedtogrowby20%.Iftheseprojectionshold,the53MtofgrowthinAlbertaemissionswillaccountfor60%ofthetotalgrowthinCanadianemissions.6

Topositivelyaffectthesustainabilityoftheoilsandssector,morestringentregulationunderAlberta’srecentlyannouncedClimateLeadershipPlanwillinclude:

• acarbonpriceapplicabletoalltransportationandheatingfuelsstartingatCA$20/tonneonJanuary1,2017,increasingtoCA$30/tonneonJanuary1,2018,andcontinuingtoincreaseinrealtermseachyearafterthat7;

• atransitionfromtheSpecifiedGasEmittersRegulationfacility-specifichistoricalemissions-intensityreductionapproachtoproduct-basedperformancestandardsin2018;

• acommitmenttolegislateanemissionslimitfortheoilsandsof100Mtinanyyear(withadditionalprovisionsforcogenerationandnewupgradingcapacity);and

• areductionofmethaneemissionsby45%fromoilandgasoperationsby2025.

Alegislatedemissionslimitisconsideredanecessarystepandiswidelysupportedbyabroadspectrumofstakeholdersfromindustryandcivilsocietyincluding,CanadianandinternationalleadersinbothAlberta’soilsandindustryandenvironmentalorganizations.SupportersbelievethatthenewpolicywillhelpchangethedebateaboutAlberta’smostimportantexportandtheinfrastructureneededtogetittomarket.

FractalSystemsengagedClimateCHECK8toperformawells-to-refineryGHGassessmenttothehighestCanadianstandardsthatfollowtheSystemofMeasurementandReportingforTechnologies(SMART)developedbySustainableTechnologyDevelopmentCanada(SDTC)andgoodpracticeguidelinesestablishedbyotherleadingagencies,includingISOGuidelinesfortheInternationalStandardforGHGProjectQuantification,MonitoringandReporting.Inthestudy,aBaseCaseofatypicalCanadianSAGDsourceddilbitwascomparedwithaSAGDprojectintegratedwithBaseandEnhancedJetSheartodeterminethewells-to-refineryGHGimpacts.

Forthewells-to-refineryscenarios,ClimateCHECKdeterminedthatFractal’sJetSheartechnologycanreduceGHGemissionsfrom4.9%to11%,dependingonthetechnologyapplication,transportationmodeandrefinerylocation.Itisclearthatinadditiontothecommercialbenefitsassociatedwithdiluentavoidance(i.e.costsavings,infrastructureutilization)thatsignificantreductionsintheGHGfootprintcanalsobeachieved,astherearelargeGHGimpactsassociatedwiththeproduction,processingandtransportationofdiluentinNorthAmerica.

Figure21showsthecomparisonforBaseandEnhancedJetSheartothedilbitBaseCase.Figure22showsthesummaryresultsfordifferentrefiningmarketsandtransportationmodes(e.g.P/PassumespipelinefromABanddiluentreturnviapipe,R/RassumesrailtoandfromAB).

6Source:GovernmentofAlberta,ClimateLeadership(http://www.alberta.ca/climate.cfm)7Source:GovernmentofCanada,EnvironmentandClimateChangeCanada(http://ec.gc.ca/)

8Foundedin2007,ClimateCHECKhasdeliveredawiderangeofservicesto100sofcompaniesacrossnearlyallsectorsincludingglobalemissionsinventories,internationalcapacitybuilding,duediligenceforinnovativecleantechprojects,andsupportingcorporateleadersonclimatechangeandsustainability.

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Figure21–Wells-to-RefineryGHGLifeCycleComparison

Figure22–Wells-to-RefineryGHGLifeCycleSummary

GHGreductionsonabarrelofbitumenproducedareimportantforthesustainablyoftheoilsands.AccordingtoCAPP’soilsandvolumegrowthscenario,the2015and2030forecastedproductionvolumesare1,340,000bpdand2,140,000bpdrespectively.ByemployingEnhancedJetShearGHGscouldbereducedby5.26MtCO2eperyearin2015and9.41MtCO2eqperyearin2030,assumingallvolumesaretransportedviapipelinetoandfromtheUSGulfCoastrefiningcomplex.

NewtechnologiesandapproacheswillberequiredtomanagethesustainablegrowthintheoilsandsforthebenefitofCanada,therestofNorthAmerica,andtheworld.NewlegislationinAlberta,CanadalimitingtheannualGHGlevelsattributedtotheoilsands,mayultimatelylimitthegrowthofthiscriticalenergysourceinthe21stcentury.Fractal’sJetSheartechnologycanplayavitalroleinthecontinuousimprovementintheGHGfootprintassociatedwithoilsandsdevelopment.

P/P R/R P/P R/R190.83 193.63 188.08 190.99

P/P R/R P/P R/R201.66 214.71 201.61 214.71

10.83 21.08 13.53 23.72 5.4% 9.8% 6.7% 11.0%

USGC (kgCO2e/bbl SAGD)

BaseCase Dilbit

Reductions (kg CO2/bbl SAGD)

Enhanced JetShear Basic JetShearP/P R/R P/P R/R186.80 188.55 184.01 185.83

P/P R/R P/P R/R196.41 204.57 196.38 204.57

9.61 16.02 12.36 18.74 4.9% 7.8% 6.3% 9.2%

Chicago (kgCO2e/bbl SAGD)Enhanced JetShear Basic JetShear

BaseCase Dilbit

Reductions (kg CO2/bbl SAGD)

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BeyondJetShear-FutureFractalTechnologies

Fractalcontinuestoinvestinnewideasandconceptsrelatedtotheprocessingandupgradingofheavy-oilandbitumen,byapplyingsimple,proprietarytechnologytofurtherexpandittechnologyplatformandvalueproposition.Thisworkisfocusedinthefollowingareas:

• EnhancedJetShear™andARP™commercialfielddemonstrationin2016• PatentapplicationfiledforEnhancedJetShear™• PatentapplicationfiledforAcidRemovalProcess(ARP™)• ExpandingtheJetShear™technologyplatformtoachievefurtherupgradingandTotalDiluentDisplacement(TDD™)

Thecompanyhasatechnologydevelopmentplanwithmilestonesthatincludenewandcontinuingpatentfilings.Althoughthenatureoftechnologydevelopmentmakespredictingthecommercializationtimelineforinnovationsverydifficult,thecompanyandmanagementteamhasaproventrackrecordindevelopingnewtechnologiesandintellectualproperty.

Near-termactivitiesremainfocusedonthefielddemonstrationofEnhancedJetShearandtheAcidReductionProcessandprotectinginnovationswithpatents.

Appendix – Patent Summary

1. Patentapplicationtitle: Processfortreatingheavyoils

PatentNumber: 20080217211

ProvisionalApplication: March6,2007

FilingDate: November13,2007

PCTApplication: January8,2008

PublishedDate: September11,2008

NationalFilings: September2009:(Brazil,Colombia,Ecuador,Mexico,Europe,China,Oman)

ProvisionalApplicationNo: 60/905,171

ApplicationNo: US:11/983,842 Canada:2,611,251

PatentNumber: US8,105,480

DateofPatent: January31,2012

Abstract:Aprocessfortreatingaheavyoilwhichcomprisessubjectingaheavyoiltocavitationtoreducetheviscosityoftheheavyoil.Thetreatedheavyoil,whichhasareducedviscosityandspecificgravity,thusismorepumpableandtransportable,whichfacilitatesfurtherprocessing.Thetreatedheavyoilalsocanbefractionatedwithlessseveritythanuntreatedheavyoil.

2. Patentapplicationtitle: Treatedoilshavingreduceddensitiesandviscosities

PatentNumber: 20080314796

ProvisionalApplication: June22,2007

FilingDate: December6,2007

PCTApplication: January11,2008

PublishedDate: December25,2008



PatentNumber: US7,943,035

DateofPatent: May17,2011

Abstract:Atreatedoil,suchasatreatedheavyoil,whichhasaviscositywhichislowerthantheviscosityoftheoilpriortothetreatmentthereof(i.e.,theinitialoil).Thetemperatureatwhich80mass%ofthetreatedoilhas

18

boilediswithin25°Coftemperatureatwhich80mass%oftheoilpriortothetreatmentthereofhasboiled.Thus,thetreatedoilandtheoilpriortothetreatmentthereof,havedistillationcurvesorboilingpointcurveswhicharethesameasorapproximatetoeachother.

3. Patentapplicationtitle: Heavyoilshavingreducedtotalacidnumberandolefincontent

PatentNumber: US2015/0065766A1

ProvisionalApplication: August9,2013

FilingDate: August5,2014

PCTApplication: August8,2014

PublishedDate: March5,2015



PatentNumber: tbd

DateofPatent: tbd

Abstract:Aprocessfortreatingaheavyoilbyheatingafeedstockcomprisingaheavyoilinordertoseparatefromtheheavyoilafirstfraction.Thefirstfractioncontainsnomorethan25%ofthetotalnumberofacidgroupsoftheheavyoil.Asecondfractioncontainsatleast75%ofthetotalnumberofacidgroupsoftheheavyoil.Thesecondfractionthenistreatedunderconditionsthatprovideaheavyoilthathasatotalacidnumber,orTAN,thatdoesnotexceed1.0,orisatleast50%lowerthanthetotalacidnumberpriortotreatment,anolefincontentthatdoesnotexceed1.0wt%,andaP-valueofatleast50%oftheP-valueoftheheavyoilpriortotreatment,oraP-valuethatisatleast1.5.

4. Patentapplicationtitle: TreatmentofHeavyOilstoReduceOlefinContent

PatentNumber: US2015/0060333A1

ProvisionalApplication: August12,2013

FilingDate: August7,2014

PCTApplication: August11,2014

PublishedDate: March5,2015



PatentNumber: tbd

DateofPatent: tbd

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Abstract:Aprocessfortreatingheavyoiltoprovideatreatedheavyoilhavingareduceddensityandviscosity,aswellasanolefincontentthatdoesnotexceed1.0wt%.Theprocesscomprisesseparatingtheinitialheavyoilintoafirstfraction,whichingeneralcontainslower-boilingcomponents,andasecondfraction.ThesecondfractioncomprisesaheavyoilhavingaP-valueofatleast5%greaterthantheP-valueoftheinitialheavyoilpriortoseparatingtheinitialheavyoilintothefirstfractionandthesecondfraction,andthesecondfractionhasanaromaticitythatisnomorethan5%lessthanthearomaticityoftheinitialheavyoilpriortoseparatingtheinitialheavyoilintothefirstfractionandthesecondfraction.Thesecondfractionthenisupgradedtoreducethedensityandviscosityoftheheavyoil.Afterthesecondfractionisupgraded,itisrecombinedwithatleastaportionofthefirstfractiontoprovideatreatedheavyoilhavinganolefincontentthatdoesnotexceed1.0wt%.Theseparationoftheinitialheavyoilintofirstandsecondfractionsenablesonetoachieveimprovedreductionofthedensityandviscosityofthetreatedheavyoilwhilemaintainingtheolefincontentatanacceptablelevel.

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Value through simple solutions - Fractalfractalsys.com/wp-content/uploads/2016/08/Jetshear... · Heavy oil occurs in most hydrocarbon basins around the globe. Extra-heavy oil fields