High Gas Prices Burden Fuel Availability Amid Rising Operating Costs

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  • European gas values at historic highs
  • Refiners, utilities turn to fuel oil
  • Tight supply drive record high bunker prices

High gas prices have been raising costs for the production of very low sulfur fuel oil — the key marine fuel post the International Maritime Organization’s global low sulfur mandate — and curbing output of the residual fuel, reports Platts.

Surging prices for power

Refineries that run on gas are facing surging prices for power and this has been forcing them to trim some operations, including production of 0.5% sulfur fuel oil.

High natural gas prices have pushed the cost of desulfurization extremely high, which removes an incentive for refiners to produce lower sulfur molecules,” a fuel oil trader told S&P Global Platts.

European gas prices remain at historic highs on continued winter supply concerns given curtailed Russian deliveries and relatively low storage stocks.

The TTF day-ahead price hit an all-time high of Eur182.78/MWh on Dec. 21, 2021, an increase of 985% year on year, according to Platts price assessments. Though prices have cooled since, they still remain near historic highs.

The TTF day-ahead contract was assessed Jan. 18 at Eur79.20/MWh, still a year-on-year increase of 290%. According to the forward curve, prices are set to remain high in the coming months, with the TTF contract for March assessed at Eur78.25/MWh.

Premium to price levels

The higher power costs are resulting in a noticeable premium to price levels. “This has raised operating costs by roughly $3-$5/b for those refineries fully exposed to purchased spot gas [for refinery fuel and hydrogen production],” S&P Global Platts Analytics said Jan 14. “Electricity costs are also higher in many of those markets.”

The forward curve shows prices falling slightly from April, with the second-quarter contract assessed at Eur64.15/MWh on Jan. 18, but that is still three times higher than the same contract a year ago, Platts data showed.

The effect is most pronounced in Europe, where some refineries are particularly exposed to the spot gas market for their refinery fuel. In Asia, contracts are more spot oriented, Platts Analytics said.

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Source: Platts

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