Structural Changes in the City Gas Consumption of Energy

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Basic Research Report 19-11

Structural Changes in the City Gas Consumption of Energy- Intensive Industries

Byunguk Kang

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Research Staff

Head Researcher: Byunguk Kang, Research Fellow

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ABSTRACT

1. Background and objectives of the study

Recently, city gas consumption has become more volatile, especially for industrial use. Industrial city gas consumption is lower than buildings, but the volatility is much higher. This is because industrial city gas consumption is sensitive to market conditions such as economic conditions and energy prices, unlike buildings. In particular, recent changes in industrial city gas consumption are closely related to changes in relative energy prices. The recent fluctuations in industrial city gas consumption have tended to be wider than in the past, compared to the relative price fluctuations, and the change in industrial city gas consumption has a profound effect on the overall energy supply and demand. Therefore, it is important to analyze what factors increased the price elasticity of the industrial city gas demand.

To this end, it is necessary to investigate the city gas demand of classified industries rather than city gas demand of the entire industry. This is because industrial city gas has different uses by industries.

Among the industrial sub-sectors, there are three city gas intensive industries: ‘chemical and petrochemical’ (hereafter ‘petrochemical’), ‘iron and steel’ (hereafter ‘steel’), and ‘fabricated metals.’

Therefore, it is necessary to analyze structural changes in the city gas demand of these industries.

The purpose of this study is to analyze the structural changes in the city gas consumption of energy- intensive industries such as petrochemical, steel and fabricated metals industries. As mentioned above, the recent increase in volatility of industrial city gas is closely related to the relative price of energy.

Therefore, we analyze structural changes in city gas consumption, but focus on relative price elasticity.

The main purpose is to analyze what factors have changed the relative price sensitivity of city gas consumption in each industry. It is also an important objective of this study to derive policy implications for energy supply/demand, prices and tax.

2. Main results

2.1. Structural changes in city gas consumption of petrochemical industry

Fuel consumption in the petrochemical production process is concentrated in the atmospheric distillation unit in the petroleum refining process and the pyrolysis furnace in the NCC process. In the petrochemical industry, use of dual-fueled boilers, which make replacement between fuels easy, has been expanded recently. This plays a role in raising the price elasticity of the city gas demand for the petrochemical industry. In the petrochemical industry, city gas is also used as feedstock for hydrogen production. In the past, hydrogen has been produced using naphtha or LPG. However, in recent years, city gas has become more attractive in price, and thus industries choose fuels between petroleum products and city gas by the relative prices.

For these reasons, the price elasticity of city gas demand is expected to increase in the petrochemical industry, and it is confirmed by econometric analysis. The price elasticity of city gas demand in the petrochemical had a value of about 1 in the 2000s, but gradually increased to 3 by the structural change.

We argue that this increase in the elasticity is due to both the expansion of dual-fueled boilers and the commencement of city gas feedstock usage.

2.2. Structural changes in city gas consumption of steel industry

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In the steel industry, city gas is mainly used in the rolling process. In the hot rolling process, the intermediate steel products are heated to improve the processability, and city gas is used as the fuel. In the cold rolling process, city gas is used in annealing furnaces for heating treatment of cold rolled products. In the steel industry, B-C oil and city gas have been used as fuels in the past, but in recent years, the use of B-C oil has sharply decreased due to environmental issues. As a result, it was expected that the price elasticity of city gas demand would be lowered in contrast to the petrochemical industry.

According to our econometric analysis, we found that the price elasticity of city gas demand dropped from 0.3 ~ 0.4 in the 2000s to around 0 recently. This decrease in the elasticity is because B-C oil dropped sharply and city gas was almost used as a sole fuel.

2.3. Structural changes in city gas consumption of fabricated metals industry

In the fabricated metals industry, city gas is mainly used for heating of production facilities, and is also used for various purposes such as manufacturing various parts, drying paints, and incineration of harmful gases. However, since the main use is for heating, the biggest characteristic of city gas consumption in the fabricated metals industry is the distinct seasonality. In addition, the fabricated metals industry includes various sub-industries. Therefore, as the share of city gas consumption among the sub-industries changes, the city gas consumption structure of the whole fabricated metals industry may change.

In our statistical analysis, the price elasticity of city gas demand was estimated to be close to zero in the 2000s, but increased to 0.3 ~ 0.5. This is due to the fact that the share of the sub-industries has changed.

3. Conclusion and policy implication

3.1. Conclusion

This study qualitatively investigates how the city gas consumption structure has changed in the energy-intensive industries according to the recent economic and social environment changes, and verified it using quantitative analysis. According to the analysis, the relative price elasticity of city gas demand in the petrochemical industry increased significantly due to the start of city gas feedstock usage and the expansion of dual-fueled boilers. On the other hand, in the steel industry, price elasticity dropped to near zero as the use of B-C oil, which competed with city gas, dropped sharply and city gas was used as a sole fuel. In the case of the fabricated metals industry, the elasticity rose slightly as the proportion of high-elasticity sub-industries increased. It is hoped that the findings and approaches will be a useful reference for researchers analyzing energy supply and demand in the future.

3.2. Policy implication

Based on the results of this study, three policy implications were drawn. The first is the implications for energy supply and demand planning. The government establishes various energy supply and demand plans, such as the energy master plan, the electricity supply and demand basic plan, and the long-term natural gas supply and demand plan. The most basic task in these energy plans is to project energy demand. The energy demand outlook starts with correctly specifying and estimating the energy demand function. This study shows how important it is to consider structural changes in energy demand functions. Therefore, it is important to reflect the structural changes in the demand function when

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forecasting the energy demand included in the energy plans. In addition, given that most energy plans are based on long-term projections of more than 10 years, it is important to choose a model that can take into account structural changes in the projection period.

The second is the implication for energy price policy. In the case of the petrochemical industry, the structural changes in city gas consumption began with the distortion of relative energy prices starting in 2008 by government. If the relative price of energy fluctuates sharply, the risk from uncertainty increases for the industry. Therefore, the government's market intervention to increase volatility in relative energy prices should be avoided in order to reduce uncertainties and risks in the industrial decision making process. In addition, increased volatility in energy consumption due to rapid changes in relative prices threatens the stable supply of energy suppliers. This could further negatively impact the nation's energy security. Therefore, the government needs to maintain consistency in energy price policies.

The third is about environmental and energy tax policy. B-C oil emits more air pollutants than LPG and city gas. In addition to particulate matter, which has recently emerged as a serious social problem, nitrogen oxides (NOx), sulfur oxides (SOx), ammonia (NH3), and the like, B-C emissions are much higher than LPG and city gas. For this reason, the government has consistently reduced consumption of B-C oil. However, it increased again during the period when the price competitiveness of city gas was weak. Currently, the petrochemical industry consumes the most of B-C oil. According to the results of this study, energy consumption of petrochemical industry is very sensitive to relative energy price.

This means that by imposing more aggressive tax on B-C oil and adjusting the relative price of B-C oil and gas, B-C oil can be quickly replaced by city gas. Thanks to petrochemical's flexibility in energy replacement, even small price adjustments can be expected to have a big effect.

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List of Tables

Table 2- 1. Boiling Range of Each Petroleum Product ... 17

Table 2-2. Heating Value and CO2 Emission Coefficient of By-Product Gases from Iron and Steel Production ... 33

Table 2-3. Increase in the Wholesale Rate of City Gas Due to KOGAS’ Collection of the Amount Outstanding ... 43

Table 2-4. Supply of Dual Fuel Boilers Used by Industry ... 45

Table 2-5. Supply of Dual Fuel Boilers by Alternative Fuel ... 46

Table 3-1. Summary of Previous Studies on the Analysis of City Gas Consumption in Korea ... 49

Table 3-2. Unit Root Testing Methods Used in Previous Studies ... 52

Table 4- 1. Unit Root Test Results ... 60

Table 4-2. Estimation Results of the City Gas Demand Function for the Petrochemical Industry ... 62

Table 4-3. Test for Structural Changes in the City Gas Demand Function for the Petrochemical Industry ... 63

Table 4-4. Estimation Results of the City Gas Demand Function for the Petrochemical Industry That Accounts for Structural Changes ... 65

Table 4-5. Correlation Between Relative Price Variables ... 66

Table 4-6. Estimation Results of the City Gas Demand Function for the Petrochemical Industry That Accounts For Structural Changes (excluding the relative price of LPG/gas) ... 67

Table 4-7. Estimation Results of the City Gas Demand Function for the Petrochemical Industry That Accounts For Structural Changes (excluding the relative price of Bunker C/gas)... 68

Table 4-8. Changes in the Price Elasticity of City Gas Demand in the Petrochemical Industry ... 68

Table 4-9. Estimation Results of the City Gas Demand Function for the Steel Industry ... 70

Table 4-10. Test for Structural Changes in the City Gas Demand Function for the Steel Industry ... 70

Table 4-11. Estimation Results of the City Gas Demand Function for the Steel Industry That Accounts for Structural Changes... 72

Table 4-12. Estimation Results of the City Gas Demand Function for the Steel Industry That Accounts for Structural Changes (excluding the relative price of LPG/gas) ... 73

Table 4-13. Estimation Results of the City Gas Demand Function for the Steel Industry That Accounts for Structural Changes (excluding the relative price of Bunker C/gas) ... 74

Table 4-14. Changes in the Price Elasticity of City Gas Demand in the Steel Industry ... 75

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Table 4-15. Estimation Results of the City Gas Demand Function for the Fabricated Metal Industry 76 Table 4-16. Test Results of Structural Changes in the City Gas Demand Function for the Fabricated Metal Industry ... 78 Table 4-17. Estimation Results of the City Gas Demand Function for the Fabricated Industry That Accounts for Structural Changes ... 79 Table 4-18. Estimation Results of the City Gas Demand Function for the Fabricated Industry That Accounts for Structural Changes (excluding the relative price of LPG/gas) ... 80 Table 4-19. Estimation Results of the City Gas Demand Function for the Fabricated Industry That Accounts for Structural Changes (excluding the relative price of Bunker C/gas) ... 81 Table 4-20. Changes in the Price Elasticity of City Gas Demand in the Fabricated Metal Industry .... 82 Table 4-21. Estimation Results of the City Gas Demand Function for Sub-Industries of the Fabricated Metal Industry ... 83 Table 5-1. Changes in the Price Elasticity of City Gas Demand in the Petrochemical Industry ... 88 Table 5-2. Air Pollutant Emission Coefficients by Fuel ... 90

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List of Figures

Figure 1- 1. Trend of City Gas Consumption and Growth Rate ... 12

Figure 1- 2. Trend of City Gas Consumption and Growth Rate by Use ... 13

Figure 1- 3. Comparison of Increases in Final Energy Consumption, Electricity, and City Gas Consumption of the Petrochemical Industry in 2018 ... 14

Figure 2- 1. Diagram of the Petroleum Refining Process and Percent Yield of Petroleum Products .... 17

Figure 2- 2. Structure of the Heater Used in the Refining Process ... 19

Figure 2- 3. Role of Hydrogen in the Petroleum Refining Process ... 20

Figure 2- 4. Flow Diagram of the Naphtha Cracking Process ... 23

Figure 2- 5. Carbon Composition of Naphtha and the Names of Saturated Hydrocarbons ... 24

Figure 2- 6. City Gas Consumption and Production Index of the Petrochemical Industry ... 26

Figure 2- 7. Trend of Industrial City Gas and Competitor Fuel Prices ... 27

Figure 2- 8. Structure of a Blast Furnace ... 29

Figure 2- 9. Flow Chart of Blast Furnace Steelmaking ... 31

Figure 2- 10. Diagram of Hot Rolling ... 32

Figure 2-11. Cold Rolled Steel Manufacturing ... 34

Figure 2-12. City Gas Consumption and Production Index of the Steel Industry ... 35

Figure 2-13. Proportion of Fuel Consumption by the Steel Industry ... 35

Figure 2-14. Flow Chart of Automobile Manufacturing ... 37

Figure 2-15. Flow Chart of Wafer Fabrication ... 38

Figure 2-16. Flow Chart of Semiconductor Production ... 39

Figure 2-17. Trend of City Gas Consumption by Sub-industry of the Fabricated Metal Industry ... 41

Figure 2-18. City Gas Consumption and the Automobile Production Index of the Fabricated Metal Industry ... 42

Figure 2-19. Trend of International Oil Price (Dubai Crude) and Industrial City Gas Rate in Korea .. 44

Figure 2-20. Trend of City Gas Consumption as a Raw Material by Five Petrochemical Firms ... 47

Figure 3-1. City Gas Consumption Trend in Energy-Intensive Industries ... 53

Figure 3-2. Trends of Stationary Time Series and Non-Stationary Time Series ... 54

Figure 4-1. Structural Breakpoints in the Price Elasticity of the City Gas Demand Function for the Petrochemical Industry ... 64

Figure 4-2. Structural Breakpoints in the Price Elasticity of City Gas Demand in the Steel Industry .. 71

Figure 4-3. Structural Breakpoints in the Price Elasticity of City Gas Demand in the Fabricated Metal Industry ... 78

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Figure 4-4. Trend of Production Capacity Indices of the Automobile, Electronic Components, and Metalworking Industries ... 83 Figure 5-1. Percentage of Fuel Consumption by Industry ... 91 Figure 5-2. Percentage of Bunker C Consumption by Industry in 2018 ... 91

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Chapter 1. Introduction

1. Research Background and Necessity

Since natural gas was first introduced in Korea in 1986, city gas consumption has increased sharply, supported by the rapid expansion of the country’s infrastructure. City gas consumption continued growing rapidly until 2013, except for the slight dip (-1.5 percent) that occurred during the global financial crisis in 2009. However, the consumption of city gas fell dramatically from 2014 to 2015, and then began to rebound in 2016. In this way, city gas consumption, which had increased monotonically in the past, has been fluctuating since 2010, showing a trend of increasing volatility.

Figure 1- 1. Trend of City Gas Consumption and Growth Rate

Source: Yearbook of Energy Statistics.

도시가스 증가율 Growth rate of city gas consumption

Recently, city gas consumption has become more volatile due to industrial consumption. As seen in Figure 1-2 (below), the proportion of city gas consumed by buildings is higher than that consumed by industries. However, the changes in industrial city gas consumption have an impact on the changes in overall city gas consumption. In addition, an examination of the growth rates of city gas consumption by industries and buildings shows that while changes in the growth rate remain within the ±10-percent range for buildings, the growth rate of industrial city gas consumption rose as high as 24.4 percent (2010) and fell as low as -15.5 percent (2015).

06 2011 20

도시가스 증가율

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Figure 1- 2. Trend of City Gas Consumption and Growth Rate by Use

Source: Yearbook of Energy Statistics.

건물용

Buildings

산업용 증가율

Growth rate of industrial city gas consumption

증가율

Growth rate

Industrial city gas consumption is much more volatile than the city gas consumption by buildings because industrial city gas consumption is sensitive to market conditions, such as economic conditions and energy prices, unlike buildings. In particular, the recent changes in industrial city gas consumption are closely related to the changes in relative energy prices.

City gas rates are linked to oil prices due to the material cost linkage system,¹ so even if oil prices change, the relative price of city gas compared to oil does not change significantly. When the international oil price exceeded USD 100 a barrel from 2008 to 2013, the Korean government implemented a grace period by suspending the system in an effort to stabilize the economy and prices, which caused the price competitiveness of city gas to increase. However, in the process of the Korea Gas Corporation (KOGAS) recovering the receivables that had accumulated during the grace period, the price competitiveness of city gas deteriorated. And when KOGAS completed the collection of receivables at the end of 2017 and city gas rates fell, the price competitiveness of city gas exceeded that of oil once again. Throughout this series of price distortions, the demand for industrial city gas fluctuated.

In recent years, however, the range of industrial city gas consumption fluctuations has been showing a tendency to increase compared to the past. For example, the petrochemical industry’s city gas consumption skyrocketed, nearly tripling in 2018 alone (193.7 percent), when the price competitiveness of city gas improved due to KOGAS’ retrieval of receivables outstanding at the end of 2017.

This is a tremendous amount, even in absolute quantities, as shown in Figure 1-3 (below). The final energy consumption in 2018 increased by 4.05 million TOE (1.7 percent) compared to the previous

1 The city gas rate changes with fluctuations in the international oil price and exchange rate, due to the material cost linkage system. Any fluctuation exceeding ±3% in the price of raw materials is reflected in energy prices once every two months in odd months.

-30.0 -20.0 -10.0 0.0 10.0 20.0 30.0

1 2012 2013 2014 2015 2016 2017 2018p

%

용 건물용

용 산업용 증가율

용 증가율

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year. Power consumption increased by 1.58 million TOE for the first time since 2011, which is an increase of over three percent, driven by record heat waves. However, the city gas consumption of the petrochemical industry alone increased by 2.09 million TOE, surpassing the increases recorded for all other energy sources.

Figure 1- 3. Comparison of Increases in Final Energy Consumption, Electricity, and City Gas Consumption of the Petrochemical Industry in 2018

Source: Monthly Energy Statistics, August 2019.²

In this way, recent changes in industrial city gas consumption have a profound effect on overall energy supply and demand. Therefore, it is necessary to identify which factors have increased the price elasticity of the demand for industrial city gas. To understand this properly, it is necessary to analyze city gas demand by industry rather than for the entire industrial sector, since the use and consumption characteristics of city gas differ by industry. Among these industries, there are three with high city gas consumption: the chemical and petrochemical industry (hereinafter referred to as “petrochemical industry”), iron and steel industry (or “steel industry”), and fabricated metal industry. These three industries account for about two-thirds of industrial city gas consumption. It is therefore necessary to qualitatively and quantitatively analyze the structural changes in the city gas consumption of these three industries.

2. Research Purpose

The purpose of this study is to analyze the structural changes in the city gas consumption of energy- intensive industries, such as the petrochemical, steel, and fabricated metal industries. As mentioned above, the recent increase in the volatility of industrial city gas consumption is closely related to the relative price of energy. Therefore, I analyze the structural changes in city gas consumption with a focus on relative price elasticity, with the main objective being to analyze which factors have changed the relative price sensitivity of city gas consumption in each industry. For a thorough analysis, it is necessary to perform both qualitative and quantitative analyses.

2 Since the energy balance figures for 2018 have not been confirmed, the provisional values provided in Monthly Energy Statistics were used.

- 500 1 000 1 500 2 000 2 500 3 000 3 500 4 000 4 500

최종소비 전력 석유화학 도시가스

천toe

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In the qualitative analysis, it is necessary to first understand the production processes of each industry, as this provides an understanding of the way in which city gas is consumed throughout each process.

The production processes of each industry and the city gas consumption of each process change depending on the market situation. Since this study focuses on the ways in which the city gas consumption structure has changed, I look at recent changes when examining the production processes and city gas consumption of each industry. The changes in the production facilities of each industry’s production processes, changes in the use of city gas, changes in the composition of energy sources used, and changes in the proportion of sub-industries that make up each industry are all potential factors that can change the relative price elasticity of city gas consumption. The qualitative analysis aims to investigate these factors and analyze the impacts they have had on the structural changes in city gas consumption.

Based on the qualitative analysis, the quantitative analysis establishes the demand function for city gas for each industry and measures the structural changes of each demand function using econometric techniques. The main objective of the quantitative analysis is to ascertain whether the factors identified by the qualitative analysis have changed the relative price elasticity of city gas demand to a statistically significant degree. First, the timing of structural changes in the city gas demand function for each industry is estimated and tested using an econometric technique. Second, based on this, the city gas demand function for each industry, taking into consideration structural changes, is estimated to gain an understanding of the ways in which the relative price elasticity of city gas demand changes. Third, a comparative analysis of the changes in relative price elasticity and structural changes derived from the qualitative analysis is conducted to discuss whether the results of both analyses are valid.

Deriving policy implications through such analysis is another important objective of this study. Since this paper focuses on how and why the impact of the relative energy price on the demand for city gas has changed, the results of this study are expected to be widely applied to the development of energy supply and demand policies, price policies, and tax policies.

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Chapter 2. City Gas Consumption in Energy-Intensive Industries

This chapter explains the current status of city gas consumption by the petrochemical, steel, and fabricated metal industries. First, the production processes of each industry are explained, along with the processes through and purposes for which city gas is mainly consumed. In addition, recent changes in the structure of city gas consumption are qualitatively examined, and the current trend of city gas consumption is analyzed using statistical data based on the energy balance.

1. City Gas Consumption in the Petrochemical Industry

In terms of energy balance, the petrochemical industry includes the manufacturing of coke, briquettes, and refined petroleum products, manufacturing of chemicals and chemical products, manufacturing of medical substances and pharmaceutical drugs, and manufacturing of rubber and plastic products.

Among these, the sub-industries with a large share of city gas consumption are the manufacturing of coke, briquettes, and refined petroleum products, which includes the petroleum refining industry, and the manufacturing of chemicals and chemical products, which includes the basic chemical industry.

Therefore, this section aims to explain the main production processes, city gas consumption, and structural changes of the coke, briquette, and refined petroleum product manufacturing industry (hereinafter referred to as the “petroleum refining industry”) and chemical and chemical product manufacturing industry (or “basic chemical industry”).

1.1. City Gas Consumption in Petrochemical Processes 1.1.1. Petroleum Refining Process

Petroleum refining refers to the production of various types of petroleum products, such as LPG, naphtha, kerosene, diesel oil, and Bunker C, which are used in the final consumption stage of the industrial, transportation, and household sectors, from natural crude oil. Crude oil is made up of hydrocarbon compounds, which are combinations of carbon and hydrogen atoms, and contains some impurities, such as sulfur, nitrogen, and heavy metals.

Crude oil contains a mixture of hydrocarbon compounds, ranging from those with three carbon atoms (propane)³ to more than 10 carbon atoms in their molecular structure. In general, the molecules with fewer carbon atoms have lower molecular mass and weaker intermolecular attraction,⁴ and therefore have a lower boiling point. The crude oil refining process uses this difference in hydrocarbon boiling points. When crude oil is heated, vaporization occurs for the substance with the lowest boiling point first and gradually progresses to the substance with the highest boiling point. These substances are then cooled, separated, and stored, resulting in the production of various petroleum products.

3 Hydrocarbon compound with a single carbon atom is methane, and one with two carbon atoms is ethane. These compounds have a considerably low boiling point that they exist in gaseous form and are classified as natural gases.

4 Intermolecular attraction is determined by the law of universal gravitation, according to which the force of attraction between any two particles is directly proportional to the product of their masses and inversely proportional to the square of the distance between them.

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Table 2- 1. Boiling Range of Each Petroleum Product

Product Type Boiling Range

LPG

Propane -42°C

Butane -1°C

Gasoline 35-180°C

Kerosene 170-250°C

Diesel oil 240-350°C

Residue Over 350°C

Source: Korea Petroleum Association (http://www.petroleum.or.kr/ko/industry_new/industry2_2.php, last accessed on December 5, 2019).

Figure 2- 1. Diagram of the Petroleum Refining Process and Percent Yield of Petroleum Products

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Source: Korea Petroleum Association (http://www.petroleum.or.kr/ko/industry_new/industry2_2.php, last accessed on December 5, 2019).

(Yield: percent)

Crude oil Atmospheric

distillation tower

Gas recovery unit Gasoline Kerosene

desulfurization unit

Solvent Diesel

desulfurization unit

Naphtha Vacuum distillation

unit

Kerosene Heavy oil cracking

and desulfurization unit

Aviation fuel Lubricating oil

production unit

Diesel oil Asphalt Other products Heavy oil Lubricating oil

The petroleum refining process is largely divided into the distillation, purification, and blending processes.⁵ Distillation is the process of feeding crude oil that has undergone a pre-treatment process to remove salt and water into a crude distillation unit (CDU)⁶ and separating it into fractions, from light to heavy products, using the difference in boiling points described above. Hydrocarbon compounds separated by boiling point in the distillation process contain impurities such as sulfur, nitrogen, and metal-organic compounds, and the process of removing these impurities using hydrogenation is the purification process. In the blending process, high-purity oil fractions are mixed in according to the specifications of each petroleum product required.

1.1.2. City Gas Consumption in the Petroleum Refining Process

City gas consumption in the petroleum refining process can be divided roughly into fuel and feedstock, which will be examined in order below.

In the refining process, first, room-temperature crude oil is heated to between 340 and 360°C in a heater to purify it. The heated oil is then fed into an atmospheric distillation unit (ADU). The energy consumed in this process accounts for about 80 percent of the total energy consumed in the refining process.

In the past, the main fuels for the heater were Bunker C and LPG, which are by-products of the crude oil refining process. Since the burners for Bunker C and LPG are designed differently and require

5 Most petroleum refining processes today include cracking and reforming, which involves the rearrangement of the molecular structures of certain hydrocarbons to change their properties, between the distillation process and blending process. However, these stages were excluded in this paper to allow for a more intuitive understanding of the basic petroleum refining process.

6 In general, the use of “CDU” in relation to the petroleum refining process refers to the atmospheric distillation unit (ADU), and the two are often used interchangeably. Another type of CDU used in the petroleum refining process is the vacuum distillation unit (VDU), which processes the atmospheric residue from an ADU.

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different amounts of injected air and steam supply, the two different types of burners were both installed in one heater, and the number of burners in the heater differed depending on the blending ratio of the two oils. The blending ratio of Bunker C and LPG was determined by the market selling price. As a result, more Bunker C was used in the winter season, due to the high demand for LPG for heating in the home and commercial sectors, while the proportion of LPG tended to increase in the summer.

Figure 2- 2. Structure of the Heater Used in the Refining Process

Source: Yokogawa website (https://www.yokogawa.com/kr/library/resources/applicat ion- notes/achieve-optimal-combustion- of-fired-heater-using-tdls-to-reduce-environmental-impacts-and-increase-manufacturing-efficiency/, last accessed on December 5, 2019).

However, while Bunker C has a high calorific value, it also generates soot (smoke and coke). To remove it, an electrostatic precipitator must be operated while the heater is running, and the heater needs to be cleaned periodically, incurring additional costs. Additionally, environmental regulations regarding SOx, NOx, and particulate matter, which are generated when combusting Bunker C, have been strengthened. For these reasons, the use of Bunker C in the refining process has been decreasing rapidly.

City gas filled the gap created by the reduction in Bunker C. City gas has a lower calorific value than Bunker C, but it can be burned almost completely, allowing continuous operation of the heater without any additional cleaning. Moreover, it emits much less air pollution compared to Bunker C, so its usage is rapidly increasing. Yet, since city gas is still in competition with LPG, the blending ratio has been fluctuating due to changes in its price relative to LPG. In addition, city gas’ relatively lower calorific value means that the use of city gas alone in refinery heaters may lead to a decrease in the volume of processed crude oil. Therefore, city gas is currently used as a blending fuel that partially replaces Bunker C or LPG.

Next, let’s look at the consumption of city gas as a feedstock. The consumption of city gas as a feedstock in the refining process is mainly related to the hydrogen production process. In the oil refining process, sulfur, nitrogen, and heavy metals are removed through hydrogenation during the purification

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process. The hydrogen used in this process is created using various hydrocarbon compounds, one of which is city gas.

Figure 2- 3. Role of Hydrogen in the Petroleum Refining Process

Source: “Advanced Purification Process,” Petrochemical Process Technique Assessment Manual (Korea Occupational Safety and Health Agency, 2009).

원유 Crude oil

상압증류시설(CDU) Crude distillation unit 감압증류시설(VDU) Vacuum distillation unit 가스회수/메록스 공정 Gas recovery/Merox process 나프타수첨탈황공정 Naphtha hydrodesulfurization 등유수첨탈황공정 Kerosene hydrodesulfurization 경유수첨탈황공정 Diesel hydrodesulfurization

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중질유수첨분해공정 Heavy oil hydrocracking 열분해공정 Thermal cracking

잔사유 수첨탈황공정 Residue hydrodesulfurization 유동층 접촉분해공정 Fluid catalytic cracking 수소제조공정 Hydrogen production 나프타개질공정 Naphtha reforming

프로판 Propane

부탄 Butane

가솔린 Gasoline

나프타 Naphtha

등유 Kerosene

경유 Diesel oil

아스팔트 Asphalt

벙커유(A/B/C) Bunker fuel (A, B, and C)

The processes of removing sulfur and nitrogen, which are major impurities found in crude oil, by hydrogenation are expressed using the following chemical formulae:

- Hydrodesulfurization

R-S-R + H2 → R-H + H2S R-S-R’ + H2 → R-R’ + H2S R-S-R” + H2 → R-R” + H2S

- Hydrodenitrogenation

R-NH-R’ + H2 → R-R’ + NH3

As seen above, impurities such as sulfur and nitrogen in the hydrocarbon react with hydrogen to form hydrogen sulfide (H2S) or ammonia (NH3).

In the petroleum refining process, hydrogen is produced by thermally cracking hydrocarbons to remove carbon, and therefore basically all of the hydrocarbon compounds can be used as feedstock for hydrogen production. The generalized hydrogen production reaction is expressed as follows:

CnHm + nH2O → nCO + (½m + n)CH4

CH4 + H2O → CO + 3H2

CO + H2O → CO2 + H2

As described above, hydrocarbons (CnHm) combine with water at high temperature and pressure, the result of which can then be separated into methane (CH4) and carbon monoxide (CO), which can again be combined with water to produce hydrogen and carbon dioxide.

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Originally, naphtha and LPG were used as feedstocks for hydrogen production, but city gas came to replace them to a considerable degree, with the price competitiveness of city gas having improved significantly since 2010.⁷

In addition to the price of feedstocks, city gas has a molecular structure that is advantageous for hydrogen production compared to those of other hydrocarbon compounds, such as LPG and naphtha.

Methane (CH4), which accounts for the majority of city gas (70 to 90 percent), has a much higher hydrogen-to-carbon ratio than other hydrocarbons, such as propane (C3H8) or butane (C4H10). This means that a relatively low amount of energy is required to obtain hydrogen molecules, and at the same time, the number of carbon dioxide molecules generated during the production of hydrogen molecules is small. Therefore, even if the prices of feedstocks are the same, city gas is advantageous compared to other hydrocarbon compounds in terms of the hydrogen production cost. The molecular formulae of hydrogen and carbon dioxide generated when methane (CH4), propane (C3H8), and butane (C4H10) are used as raw materials and the ratio of carbon dioxide produced per hydrogen molecule are provided below.

CH4 + 2H2O → CO2 + 4H2 (CO2/H2 Ratio: 0.25) C3H8 + 6H2O → 3CO2 + 10H2 (CO2/H2 Ratio: 0.30) C4H10 + 8H2O → 4CO2 + 13H2 (CO2/H2 Ratio: 0.31)

In the hydrogen production process, various feedstocks can be added selectively. Therefore, oil refineries predict the price of each feedstock, based on which they review the economic cost of hydrogen production and set the order of priority of the feedstocks to be used on a monthly basis. In this way, the decision to input feedstocks for hydrogen production in the refining process is made based on a structure that can respond flexibly to price changes in the energy market, and this increases the price sensitivity or price elasticity of the consumption of feedstocks such as city gas or LPG.

1.1.3. Basic Chemical Process

This section aims to explain the basic chemical process with a focus on the naphtha cracking process.⁸ This process involves thermally cracking naphtha (that has been separated and purified in the refining process) to produce ethylene, propylene, mixed C4s, and pyrolysis gasoline.⁹

7 At this time, the international oil price was at a fairly high level, exceeding USD 100 per barrel, but the city gas price was kept low due to the Korean government’s temporary suspension of the material cost linkage system (2008-2013).

8 Information on the naphtha cracking process was gained from the Energy Greenhouse Gas Total Information Platform Service (EG-TIPS) website (http://tips.energy.or.kr) and experts in the petrochemical industry.

9 In Korea, the naphtha cracking process is also called the “NCC (naphtha cracking center) process.” NCCs are also referred to as ethylene plants, because their main product is ethylene.

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Figure 2- 4. Flow Diagram of the Naphtha Cracking Process

Source: Energy Greenhouse Gas Total Information Platform Service (http://tips.energy.or.kr/overconsector/over consector_view_01.do?code_num=MP&ch_code_num=MP01, last accessed on December 5, 2019).

Thermal cracking Feedstock (naphtha, LPG, etc.) Pyrolysis plant

Quenching Oil quenching unit → cracked heavy oil Water cooling tower

Compression Removal of cracked gas ← Cracked gas compressor → Separation of gasoline → Cracked gasoline

Dehydration Dehydration unit Purification Low-temperature cooler

Demethanizer column → Ethylene unit → Ethane/pyrolysis gasoline Depropanizer column → Propylene unit → Propane/propylene Debutanizer column

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The naphtha cracking process can be divided into five stages, as shown in the figure above. The first is thermal cracking, in which naphtha is placed in a furnace, and the temperature of the feedstock is raised to about 850°C. Naphtha molecules have between five and 12 carbon atoms, and when the molecules are heated to over 800°C, the bonds between the carbon atoms are broken, generating light hydrocarbon compounds with between one and four carbon atoms, such as hydrogen, methane, ethylene, propylene, propane, and C4. Among them, ethylene, propylene, propane, and C4 are the main products, and hydrogen and methane are by-products used as fuels for other processes. The most energy- consuming naphtha cracking process is the pyrolysis process, which accounts for 80 percent of the total energy consumed in the naphtha cracking process.

Figure 2- 5. Carbon Composition of Naphtha and the Names of Saturated Hydrocarbons

Source: Yeochun NCC website (http://www.yncc.co.kr/ko/product/chemistry/naphtha1.do, last accessed on December 5, 2019).

나프타의 탄소 구성도 Carbon composition of naphtha

탄소수 Number of carbon atoms

포화탄화수소명 Name of saturated hydrocarbon

The second is the quenching process. If the cessation reaction does not occur at the appropriate time in the thermal cracking reaction process, the resulting light hydrocarbon compounds react with each other and are converted to other substances, thereby reducing the yield of the desired base oils.

Therefore, chemical reactions are stopped by subjecting the hydrocarbon compound gas from the furnace at a temperature exceeding 800°C to the quenching process, thus reducing the reaction temperature to about 38°C. In this process, waste heat is recovered to produce high-temperature, high- pressure steam, which is used as an energy source for other processes.

The third is the compression process, in which a compressor is used to efficiently separate and refine the quenched hydrocarbon compound gas by increasing the pressure to 38.4 kg/cm2G and significantly reducing the volume.

The fourth is the dehydration process. Any moisture remaining in the hydrocarbon compound gas hinders the refining process, as freezing or crystallization occurs when the temperature falls to a very low level in subsequent stages. Therefore, moisture is removed in this process to prevent such problem.

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The last is the purification process. Up until the previous steps, hydrocarbon compounds are mixed with hydrogen, methane, ethylene, propylene, propane, and C4. In the purification process, however, the temperature of the hydrocarbon compound gas, which has been compressed at high pressure, is lowered to an extremely low level of about -165°C, and then separated into hydrogen, methane, and each basic oil based on their different boiling points.

1.1.4. City Gas Consumption in the Basic Chemical Process

As mentioned in the previous section, thermal cracking consumes the largest share of energy in the entire naphtha cracking process. The fuel consumption of the facilities of a naphtha cracking center is about 250 gigacalories per hour during normal operation. About 80 percent of that (200 gigacalories per hour) is consumed by the furnace, while about 40 gigacalories per hour is consumed by the gas turbine for electricity production, and the remaining 10 gigacalories per hour is consumed by flare burners and other equipment. Of the total 250 gigacalories per hour, 200 gigacalories per hour is supplied through the combustion of the by-products, hydrogen and methane, and the remaining 50 gigacalories per hour is supplemented through LPG and city gas.¹⁰

Even in the naphtha cracking process, a large amount of hydrogen is used because hydrogenation reactions are used in BTX processing and other processes. Yet, since a huge amount of by-product hydrogen is produced in the naphtha cracking process, city gas is not used for hydrogen production, unlike in the refining process.

In addition to the naphtha cracking process, industrial gas manufacturers are huge consumers of city gas in the field of basic chemistry. For example, Deokyang Chemical is a company based in Ulsan that produces and distributes industrial gas, and its main product is hydrogen.¹¹ The company is the largest hydrogen producer in Korea, and its third plant in Ulsan produces 50,000 normal cubic meters of hydrogen per hour.¹² LPG and city gas are used as feedstocks for hydrogen production, with the most economical feedstock selected depending on energy market conditions.

1.2. Trend of City Gas Consumption in the Petrochemical Industry

The petrochemical industry has seen a significant increase in its city gas consumption in recent years.

In 2004, the industry consumed 416.6 million cubic meters of city gas, accounting for only 10 percent of the industrial sector’s total city gas consumption. The petrochemical industry was ranked third in terms of city gas consumption, following the fabricated metal industry (20.2 percent) and steel industry (20.2 percent). However, city gas consumption in the petrochemical industry increased dramatically between 2004 and 2013, showing an average growth rate of 24.7 percent a year. In 2013, the petrochemical industry became the biggest consumer of city gas, accounting for 32.1 percent of the industrial sector’s total city gas consumption, which exceeded the proportion of city gas consumed by the second and third biggest industries—the fabricated metal industry (18.3 percent) and steel industry

10 Referred to “Naphtha cracking process,” Petrochemical Process Technique Assessment Manual (Korea Occupational Safety and Health Agency, 2009).

11 According to Jongwon Kim (2018), the major hydrogen distributors in Korea are Deokyang, SPG Chemical, Air Liquide Korea, and SDG. Among them, Deokyang is the only company that produces hydrogen completely independently. The other companies receive by-product hydrogen from petrochemical plants and supply it to other customers.

12 Referred to the website of Deokyang Co., Ltd. (http://www.deokyang.com/npageview.php?viewpage=product01&

pageNum=1, last accessed on December 5, 2019).

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(13.1 percent)—combined.

Figure 2- 6. City Gas Consumption and Production Index of the Petrochemical Industry

Source: Monthly Energy Statistics and the Korean Statistical Information Service (http://kosis.kr, last accessed on December 5, 2019).

백만 m³ 1 million m³

도시가스 소비 City gas consumption

생산지수 Production index

In 2014, however, the consumption of city gas in the petrochemical industry began to decline rapidly.

Starting with a decrease of 6.7 percent in 2014, city gas consumption fell dramatically by 45.5 percent and 32.6 percent in 2015 and 2016, respectively. In 2016, the consumption level fell to 1.05 billion cubic meters, lower than in 2008 (1.1 billion cubic meters). Most of the increase in consumption, accumulated over the several preceding years, was nearly wiped out in three years.

A more dramatic change in the petrochemical industry’s city gas consumption occurred in 2018. In 2017, the industry’s city gas consumption had remained at the level of the previous year, but it skyrocketed by 193.6 percent in 2018. The industry’s city gas consumption was only 1.05 billion cubic meters in 2017, but that amount nearly tripled to 3.08 million cubic meters the following year.

This significant increase in the volatility of the petrochemical industry’s city gas consumption was the result of the change in the relative price of city gas to oil and the subsequent structural change in the industry’s city gas consumption. Originally, city gas rates were linked to oil prices under the material cost linkage system,¹³ which meant that the relative price of city gas to oil did not change significantly.

From 2008 to 2017, however, the relative price of city gas to oil showed major change due to the Korean government’s market intervention.¹⁴

13 The city gas rate changes with the fluctuations in the international oil price and exchange rate, due to the material cost linkage system. Any fluctuation exceeding ±3% in the materials cost is reflected in the energy prices once every two months.

14 Changes in the relative price of city gas to oil is a major issue that has a significant impact on the city gas consumption of not only the petrochemical industry but also the entire industrial sector, and is therefore discussed in detail in Section 4.1 of Chapter 2.

60 70 80 90 100 110 120 130

0 50 100 150 200 250 300 350

2004.01 2006.01 2008.01 2010.01 2012.01 2014.01 2016.01 2018.01

백만m3

도시가스 소비 생산지수

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For the five years from March 2008 to February 2013, city gas became available at a much more competitive price due to the suspension of the material cost linkage system and increasing international oil price. However, KOGAS began to collect the receivables incurred from the suspension of the material cost linkage system by increasing the city gas rates, significantly reducing the price competitiveness of city gas from March 2013 to October 2017. In November 2017, the price competitiveness of city gas rebounded as its price fell again after the receivables were collected. Figure 2-7 (below) is a graph that shows the prices of industrial city gas and its competitors, Bunker C and LPG. There are three places marked with a red dot on the graph: the first marks the starting point of the temporary suspension of the material cost linkage system; the second marks the point at which the material cost linkage system was restarted; and the third marks the point at which KOGAS completed its collection of receivables. Based on these three points in time, it is possible to see that the price of city gas was less competitive than Bunker C before March 2008, more competitive than Bunker C and LPG after March 2008, less competitive than LPG after March 2013, and more competitive than Bunker C and LPG after November 2017. In addition, these changes in relative prices are also linked to the rapid increase in city gas consumption in the petrochemical industry until 2013, the sharp decrease from then until 2016, and the sudden rise in 2018.

Figure 2- 7. Trend of Industrial City Gas and Competitor Fuel Prices

Source: calculated based on internal data of the Korea Energy Economics Institute.

도시가스 City gas

With the increasing volatility of the relative price of energy, companies tried to adapt to the constant changes in the market environment. Efforts to respond flexibly to this volatility led to the reduction of costs and increased profits. The most representative of such efforts are the proliferation of dual boilers, which allow for the selective use of fuels, and diversification of raw materials for hydrogen production in the petrochemical industry.¹⁵

Due to the increased flexibility in the use of fuel and feedstocks, the changes in city gas consumption in the petrochemical industry have also become increasingly sensitive (or resilient) to the changes in relative prices. Consequently, the growth rate of city gas consumption in the petrochemical industry

15 Since the proliferation of dual boilers and the consumption of city gas as a feedstock are two very important issues in terms of recent city gas consumption in the industrial sector, these issues are discussed in detail in Sections 4.2 and 4.3 of Chapter 2.

0 200 400 600 800 1000 1200 1400

2004.01 2006.01 2008.01 2010.01 2012.01 2014.01 2016.01 2018.01

천원/toe

도시가스 B-C LPG

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gradually increased, recording an unprecedented annual increase of 193.6 percent in 2018.

2. City Gas Consumption in the Steel Industry

This section examines the major processes in the steel industry, as well as the characteristics of the industry’s city gas consumption and recent structural changes in energy consumption. In the energy balance, the steel industry is referred to as “primary metal” manufacturing, but this is different from the definition of the industry according to the Korean Standard Industry Classification.¹⁶ In general,

“primary metal” is considered to include non-ferrous metals. Therefore, for the sake of reducing possible confusion, this industry will be referred to as the “steel industry” in this study.

2.1 City Gas Consumption in the Steelmaking Process

The steelmaking process can be divided into blast furnace steelmaking, using iron ore and bituminous coal, and electric furnace steelmaking, in which iron scraps are melted and recycled. Since the two steelmaking methods differ only in the way in which they produce molten steel as a raw material for steel and the subsequent processes are similar, the steelmaking process will be explained here with a focus on blast furnace steelmaking. In addition, after explaining the steelmaking process, this section will explain how and for what processes city gas is used.

2.1.1. Blast Furnace Steelmaking

The blast furnace steelmaking process is the process of making pig iron by melting iron ore, which is then subjected to a series of processes to create a final steel product. Blast furnace steelmaking can be roughly divided into the ironmaking, steelmaking, continuous casting, and rolling processes.

The ironmaking process is a process of making pig iron by feeding iron ore and coke into a blast furnace. The blast furnace has a cylindrical structure, as shown in the figure below, within which the iron ore and coke are layered and hot air is blasted up from below to melt molten iron (pig iron) from the iron ore. Coke serves as a heat source and a reducing agent for removing oxygen from the oxidized iron ore. The reduction reaction that occurs in the furnace is expressed by the following chemical formula:

2Fe2O3 + 3C → 4Fe + 3CO² Fe2O3 + 3CO → 2Fe + 3CO²

The first equation describes a direct reduction reaction, in which the iron ore reacts directly with the carbon in the coke, while the second equation shows an indirect reduction reaction, in which carbon

16 According to the 10th Korean Standard Industry Classification, “primary metal” manufacturing is divided into “basic iron and steel” manufacturing, “basic precious and non-ferrous metal” manufacturing, and “metal casting.” “Metal casting” is further divided into “steel and iron casting” and “non-ferrous metal casting.” In the energy balance, “basic iron and steel”

manufacturing and “iron and steel casting” are grouped under “primary metal” manufacturing, while “basic non-ferrous metal” manufacturing and “non-ferrous metal casting” are referred to as “non-ferrous metal” industry. Currently, Korea is working on revising the energy balance, and the revised energy balance will maintain consistency in terms of industry names, following the industry names found in the Korean Standard Industry Classification.

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monoxide, produced by the combination of oxygen and carbon in the coke, reacts with the iron ore.

Figure 2- 8. Structure of a Blast Furnace

Source: Doosan Encyclopedia (https://terms.naver.com/entry.nhn?docId=1130011&cid=40942&categoryId=32387, last accessed on December 5, 2019)

철광석, 코스크, 석회석 Iron ore, coke, and limestone

가스배출 Gas emission

철판외피 Iron plate outer shell

내화재 Refractory material

동판 Copper plate

열풍로 Blast furnace stove

송풍구 Tuyere

선철 Pig iron

내화벽돌 Refractory bricks

슬래그 Slag

In general, the iron ore used in steelmaking is powdered. When placed in the blast furnace, powdered iron ore reduces the air permeability and interrupts the circulation of hot air. Therefore, before the powdered iron ore is placed in the furnace, it undergoes a treatment process that converts it into lumps through the sintering process. In addition, in the coke production process, coking coal undergoes dry

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distillation¹⁷ to produce coke, which serves as a reducing agent. If coking coal is added as a reducing agent without the dry distillation process, the quality of the pig iron is reduced due to the impurities in the coal. Therefore, through the coke production process, impurities in the coking coal are removed, and the carbon content is increased. Coking coal is also usually in powder form, but coke is made into lumps to ensure air permeability inside the blast furnace.

Steelmaking is the process of making molten steel by adjusting the carbon content and increasing the purity to increase the processability of the pig iron¹⁸ produced in the ironmaking process. Due to its high carbon content, pig iron is easily broken or shattered.¹⁹ Therefore, to increase the ductility and malleability of pig iron, the molten iron and auxiliary materials from the blast furnace are fed into the converter, and oxygen is blown into it to control the carbon content of the molten iron. At the same time, impurities such as phosphorus and sulfur are removed, and other necessary components are added to make molten steel with target components and an appropriate temperature.

17 Dry distillation refers to the heating and decomposition of solid organic matter, such as coal and wood, in the absence of air to separate it into volatile matter and carbonaceous residues. (Doosan Encyclopedia, https://terms.naver.com/entry.nhn?docId=1058567&cid=40942&categoryId=32396, 2019.10.11.) The coke oven gas (COG) generated in the process of producing coking coal is used as a heat source for other processes.

18 Pig iron produced in the ironmaking process is sometimes referred to as molten iron, as it is in liquid state.

19 Pig iron refers to iron with a carbon content of 1.7 percent or more. Pig iron produced in the steelmaking process usually has a carbon content of around four percent.

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Figure 2- 9. Flow Chart of Blast Furnace Steelmaking

Source: Energy Greenhouse Gas Total Information Platform Service (http://tips.energy.or.kr/overconsector/over consector_view_01.do?code_num=MI&ch_code_num=MI01, last accessed on December 5, 2019).

Ironmaking Iron ore

↓

Sinter plant

Bituminous coal

↓

Coke plant Blast furnace

Steelmaking Converter Continuous

casting

Continuous caster

Billet Slab

Rolling Wire rod rolling mill

Plate rolling mill

Hot rolling mill Hot rolled coil

↓

Cold rolling mill

Main products Wire rod Plate Hot rolled coil Cold rolled coil

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Continuous casting is the process of pouring molten steel from the steelmaking process into a casting mold to cast intermediate steel products, such as billets (semi-finished products for making rebar), slabs (for making steel plates), and blooms (used to make large steel sections for construction).

Rolling is a process through which the semi-finished casting products created in the continuous casting process are placed between two rolls to produce various types of final steel products, such as steel plates, wire rods, and steel sections.

2.1.2. City Gas Consumption of the Ironmaking Process

In the steelmaking process, city gas is mainly used in the rolling process. When intermediate castings such as billets, slabs, and blooms produced in the continuous casting process arrive at the rolling process, the temperature of these products is between 740 and 800°C. In general, adequate processability is required for rolling, which requires a temperature of about 1000 to 1100°C.²⁰ Therefore, prior to rolling the casting products, semi-finished casting products are heated in a heating furnace to raise their temperature.

Figure 2- 10. Diagram of Hot Rolling

Source: POSCO website (http://product.posco.com/homepage/product/kor/jsp/process/ s91p2000120h.jsp, last accessed on December 5, 2019).

슬라브 Slab

가열로 Heating furnace

가열 Heat

20 Referred to the DaehanSteel website (https://www.idaehan.com/kr/business/steel/rebar_view?seq=13&keyword=&field=, last accessed on December 5, 2019).