- Pricing methodology used to calculate fuel energy value.
- This resulted in greater demand for atmospheric high sulfur residues as cracker feedstocks, thus resulting in a hike in the price of IFO 380.
- VLSFO is definitely here to stay and is likely to develop into a liquid commodity market, allowing better hedging opportunities to ship operators.
- The imposition of a global carbon tax that incentivizes carbon reduction will help in moving the decarbonization agenda forward quickly.
Buyers of marine fuels may need to think harder about their decision-making when considering what to put in their vessels, reports Petroleum Economist.
Marine fuel economics fails to look at fuel values critically in terms of their respective energy values. And the pricing methodologies used in bunker fuel purchasing are underestimating these criteria.
Boil-off gas
Most modern vessels run on slow speed diesel engines, except for LNG carriers, which use boil-off gas to fuel boilers and thus run steam turbines.
Without the unique LNG characteristic of boil-off, steam turbines are not as efficient as ICEs.
To carry out a comparison we need to compare the calorific value, or heat energy, per tonne of each fuel. This is known as energy density.
The figure below gives the energy density expressed as a percentage of energy per tonne and the energy values of the different fuels.
So, how do we value energy in ICEs? The main thrust of the argument is that energy in fuels should be equated to calorific or thermal values.
When we apply pricing to the methodology, we find that the correlation through the price range is maintained.
Methodology
The methodology is to look at the price of fuels as a cost in $/mn Btu, using as a starting point the price of each fuel as a percentage of the price of Brent crude oil.
It can also be calculated in megajoules (MJ), which is a direct conversion (947.817 Btu = 1MJ).
The basic formula for cost per mn Btu is:
(Pc x R) /J / E= $/mn Btu
Where: Pc = Price of Brent crude in $/t = ($/bl*7.55)
R = Ratio of the relevant fuel as a percentage of Pc
J = mn Btu/t of product
E = Energy density percentage
The formula for LNG is slightly different as LNG is quoted in $/mn Btu so it would read as follows:
P c x PG
Where: Pc = Price of Brent crude oil in $/bl.
PG = Ratio of LNG price per mn Btu to Pc
As IMO compliant fuel started to be made available, it was soon realized that the initial 115pc of Brent being asked for very low sulfur fuel oil (VLSFO), would soon be eroded and, at the same time, the factor for diesel lowered.
As more and more supply of VLSFO came onto the market, so the difference between VLSFO and IFO 380 narrowed.
Increased demand despite the pandemic
The result of the lockdown in many countries due to Covid-19 was a steep reduction in demand for aviation fuel and a corresponding increase in diesel surpluses.
And these changes to refining economics resulted in greater demand for atmospheric high sulfur residues as cracker feedstocks, thus resulting in a hike in the price of IFO 380.
Ratio of product prices to crude oil
Comparing the prices observed over the last three months to the 2017 calculations, the changes were also marked.
What does this tell us? Firstly, as the energy values of the three main bunker fuels are similar, there is little justification for investment in scrubbers.
This price parity is the clearest signal yet that, when under pressure, refiners will always find ways of making products.
However, if price competition keeps VLSFO prices below the price of crude, then supply will become uneconomic and refiners will reduce runs, resulting in a higher VLSFO price.
Commoditization
VLSFO is definitely here to stay and is likely to develop into a liquid commodity market.
And it could play an expanded role in the spectrum of futures/swaps traded oil, allowing better hedging opportunities to ship operators.
The reason for the lack of historic success in commoditizing HSFO with a benchmark futures contract was the risk of adulteration of the final product in deliverable contracts.
VLSFO will diminish this risk, due to the sensitivity of its sulfur content, which will deter adulteration.
Another possible consequence is the adoption of more ULSGO burning engines.
Up to now, there has been resistance from ships’ engineers to purchase ULSGO, as they argue that it has less upper cylinder lubricity and leeches out of faulty valves.
Advantages of ULSGO
The advantages of burning ULSGO are worth considering.
- It is ubiquitous in its availability
- It is competitively priced
- It does not need preheating
- It does not cause a mess if accidentally spilled
- It is easy to handle
- It does not block filters as often as heavy fuel
- It is easy to hedge
It burns more cleanly and thus emits much lower sulfur oxides and particulates.
ULSGO blends can also include biofuels compatible with the maritime sector, such as hydrotreated vegetable oil (HVO), which will in turn increase the shipowner’s ability to comply with the future decarbonization targets.
Low carbon options
Another significant finding is, that over the years, the price of gas, and therefore LNG, has decoupled from the price of crude.
This will make it attractive to ship operators. But, like the rush to validate scrubber economics, it may be a false dawn, should other lower-carbon products come on the market faster than currently forecast.
Decarbonization of the entire shipping fleet is now underway and, whereas it took some 20 years to go from 5pc sulfur in fuel to 0.5pc, we believe that the environmental lobby is gaining the upper hand politically—and there will be resulting in greater pressure to move the decarbonization agenda forward quickly.
What will win the race is unknown, but as we may be seeing with Covid-19, throw enough money at a problem and a solution—in its case a vaccine—will be found in a very short time.
The imposition of a global carbon tax that incentivizes carbon reduction will change our views on the speed of change radically.
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Source: Petroleum Economist
