US Gulf Coast refiners look well positioned to cash in on the earlier than expected 2020 deadline for ship operators to start using lower sulfur bunker fuel. That seems to be the consensus among most analysts attending the 2017 American Fuel and Petrochemical Manufacturers conference in San Antonio, Texas this week.
Although the drop to 0.5% sulfur from the current 3.5% sulfur limit was widely anticipated, the timing was not. In a surprise move in October 2016, the International Maritime Organization agreed to implement the 0.5% sulfur limit for marine fuels in 2020, instead of the 2025 deadline which many expected.
“It’s always been 10 years away and now it’s three years out,” said David Hackett, a transportation fuel expert at California-based consulting firm, Stillwater Associates.
Hackett made his comments Monday during the conference as a panel member at the Platts Barrel Talk Lunch, sponsored by S&P Global Platts.
THINGS GO BETTER WITH COKE(RS)
USGC refiners invested heavily over the past decade or so to build coking units capable of processing heavy crude at their plants, with an eye to handling the heavy Canadian crude expected to flow down the Keystone XL pipeline from the oil sands of Alberta to the USGC.
While the XL has yet to materialize, the money was well spent, creating a world class center of complex and sophisticated refineries with the flexibility to handle most any crude.
USGC coking capacity rose to 1.58 million b/d in 2016, almost double the region’s 2007 capacity of 798,700 b/d, according to Energy Information Administration data.
Conversely, residual fuel output from these refiners fell during the same time period, to an average of 292,000 b/d in 2016 from the 319,000 b/d in 2007, EIA data shows.
In terms of global bunker fuel market share, “the US is under-represented,” Alan Gelder, Wood Mackenzie’s vice president of refining, chemicals and oil markets, said in a presentation to AFPM attendees Monday.
“Bunker fuel is an opportunity for USGC refiners,” he said, noting that North America has about 10% of the global bunker market, compared with Asia’s 47% and Europe’s 22%.
While technology in the form of scrubbers exists to clean emissions from high sulfur fuels on board, the upfront costs mean it is tough for ship owners to fund fitting them to existing ships.
Shippers are “making material progress” in taking steps to meet tighter specs, but they are “truly broke” due to the deep and prolonged downturn in demand and shipping rates, Gelder said.
He estimated that only about 14% of all vessels will have scrubbers in place in time to meet the tighter specs by 2020.
The alternative to scrubbing high sulfur fuels is burning new, low sulfur fuels — which puts the onus on refiners and blenders.
Texas-based refinery consultants Turner, Mason & Company anticipate slightly higher scrubber installations — about 20% by 2020 — but said the fact there have been virtually no announcements of construction of new residual hydrotreaters to make the cleaner bunker fuel is a concern.
The consultancy, which tracks refinery construction in its annual Worldwide Construction Report, expects lower sulfur fuel specs to be achieved by blending equal parts of very low sulfur distillates, such as ULSD, into the bunker fuel.
This in turn will back out a nearly equal amount of high sulfur fuel oil, cause a spike in global distillate demand, and result in rising distillate prices, it said.
“In 2020, 2021, 2022, we expect to see a big bump in distillate demand,” Turner, Mason executive vice president John Auers said, speaking as a panelist.
It will also leave HSFO with out a home, which could have a knock-on effect for light/heavy crude spreads and prices, although some is likely to find its way into asphalt markets.
But most of the surplus fuel oil is likely to be blended with lighter crude oil, creating a synthetic heavy crude oil. Increased heavy crude supply will depress prices, while light sweet crude oil will get renewed life along the USGC as a blendstock for the surplus fuel oil. While USGC refiners have options given their coking capacity, regions without cokers will suffer.
REGIONAL WINNERS AND LOSERS
“This is bad news for Europe,” said Auers, noting that there is a lot of fuel oil made there and virtually no coking capacity. ExxonMobil’s project to build a coker at its Antwerp refinery is about the only project on the books, he said.
Wood MacKenzie’s Gelder concurred. Almost 250,000 b/d of European fuel oil will be displaced, he said, while there is less than 100,000 b/d of spare upgrading capacity to process it.
Gelder expects the price for clean bunkers to be set by Chinese “teapot” refiners, because of the closer ratio of upgrading capacity to refinery throughput.
He estimates that in 2015 these independent refiners processed about 2.5 million b/d of crude, with spare upgrading capacity of about 2 million b/d.
“It is an interesting dynamic,” he said, adding that he expects to see a wider differential between fuel oil and gasoil.
Nevertheless, North America’s ratio of spare upgrading capacity to fuel displaced by bunkers is also favorable, at 300,000 b/d and 150,000 b/d, respectively, due in part to their deep conversion.
“They will be printing money,” he said.
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