Since we are just few steps away from 2020 which means new long-awaited IMO regulations shall come into full force, let us have a quick look into industry state.
As motor fuel demand is expected to slow down in the following years refineries that went by fuel scenario in their configuration shall re-evaluate opportunities that bunker fuel production along with other alternative routes may bring.
In only two-year-time a drastic change in plans of many companies has been made. Of course the most vulnerable territory is shipping/logistics industry who will directly face the challenge to find LSFO and comply will all regulations. Following the announcements done by transportation giants we learned that scrubbers will not essentially solve the issue of cleaning – at least not in long term.
A number of residue upgrading projects have been announced and started recently, especially in Middle East and Asia, but even though now large-scale projects can be done in less time than before still not all planned capacity will start-up on time to cover strong demand for new bunker fuel. This might mean that shortage of compliant fuel will eventually force IMO to extend transitional period if all the parties confirm that they are not ready to supply the required amount of LSFO (above the level that was provided to shippers operating in Emission Control Areas before).
Globally the era of HSFO is coming to a dramatic end. Wood Mackenzie predicts global bunker fuel costs to rise up to $60 billion per annum from 2020. There are still some opportunities for internal and market use for such product but not enough to absorb all the amount when the market will be flooded with non-compliant residue fuel:
Internal
- Refinery fuel (need critical examination of equipment and efficiency analysis)
- Blending – a good option for use of both non-compliant FO and excess light products like diesel fractions in areas that plan
- Recycle in FCC units
External
- Needle coke production (the market size is limited and primary feedstock quality is critical for the process)
- Carbon black production (market is growing but not all refiners have an opportunity to get slurry oil with required characteristic to feed into the process)
Shell evaluated that the best quick-win opportunity is to change the feedstock crude blend to include a proportion of opportunity crude. For a typical 200,000-bbl/d refinery, the inclusion of 10% of an opportunity crude with a relative discount of $1/bbl could increase the gross refinery margin by $7 million a year.
Nevertheless, not for all market players IMO 2020 is a threat: these upcoming changes positively affected not only licensing companies that provide technologies and equipment to treat and minimize Sulphur, but also catalyst providers. We observe several drivers for global refining catalyst demand growth:
- A wave of new downstream capacities addition, which in line is generated by demand for fuels and petrochemicals (automotive park growth, higher quality of life, urbanization, etc.)
- An urge to enhance resource efficiency of downstream processes: conversion level, target products yield to address market changes, energy optimization reliability and better utilization of all sources
- Stricter environment and safety regulations worldwide – both for fuel specifications and composition and for environmental impact
One of the most well-known refinery technology that has been developing for decades to be able to process different feedstock blends, sustain optimal working parameters and stability of gasoline quality and yield is the fluid catalytic cracking process. The FCC unit boom has slightly passed, but still there are quite a few projects under development or planned – a RFCC process being a new trend, especially in those abovementioned promising regions – some forecasts say FCC catalyst market will value over $ 3 bln by 2025, now the share is close to 50% of all refining catalysts. The IMO regulations might also surge the market for FCC catalysts as refineries aim to produce maximum middle distillates.
Generally, refineries use hydrogen either addition or carbon rejection technologies for converting residues into high value products. The residue hydrotreaters require high pressure and frequent changes of catalyst, making them both capital intensive and high in OPEX. According to HTE’s analysis, possible margin increase via optimized catalyst system is significant, i.e. in hydrocracking:
- 1-2% volume gain (basis 50,000 bbl/day)
- Margin uplift 10-15 $/bbl
- As a result, up to $5.25 mln. margin increase
One of world’s global hubs – Singapore – depended heavily on RFO supplied by or though Russia (about 30% in 2018 – more than Malaysia, UAE and others), and after regulations are activated the demand for it will drop which means a serious issue for FO utilization. Some experts suggest smaller-scale Chinese refineries have renewed interest in it so there might be still market for the product in Asia. A surplus of HSFO in 2020 should be somehow monetized. A few Russian refineries located in central part of the country announced they officially started production of low-sulphur bunker fuel at their modernized units. Others have either insufficient capacity to cover transportation costs and still secure margin from bunker fuel export or completed ‘no fuel oil production’ program that was initiated by the government and tax maneuver, which means a shift towards light and motor fuels or integration with petrochemical production. The main concern is crude being heavier and containing primarily more Sulphur and other elements than, for instance, crude used by Middle Eastern refineries, thus it needs more steps of treatment to get the result which means more CAPEX needed and margin cuts. Demand for West African LSFO will go up subsequently – we discussed in previous articles that western companies are still looking closely into opportunities for building plants there to produce bunker (and other) fuels from sweeter crude available in the region.
In ME a new generation of highly complex plants, combined with upgrades and expansions at existing plants, is radically altering the product mix. New unit configurations include hydrocracking, catalytic cracking and hydrotreating capacities designed to minimize fuel oil output and maximize low-sulfur middle distillate, diesel and gasoline production. Saudi Arabia and Kuwait are leading the charge in new clean fuels projects in the region. To comply with mandatory sulfur specifications for gasoline and diesel, Saudi Arabia is spending billions of dollars to construct multiple clean fuels projects. Kuwait is investing over $30 bln. on ambitious plans to overhaul its refining sector and become the region’s clean fuels leader by 2019.
As Argus has evaluated, US Gulf coast LSFO stream might soon secure relative stability in amount. About 200 mln t of HSFO will be taken out from the market next year which definitely cause imbalances. We discussed with different companies – shippers, traders and producers - their views on use of marine gasoil or methanol/LNG as bunker fuel. Some of them see certain market for these products and in long term methanol might become more popular in regions where FO is expensive or hard to reach but everyone agrees alternative bunker fuels will not dominate the market in the nearest future – even in case of LSFO insufficiency.
Will shortage of LSFO disrupt marine transportation market? To what extent changes in regulations will affect final product customers? Will large refineries producing quality bunker fuel win and restructure their operation model towards this product? Answers to these and many more questions remain uncertain as today’s markets are so much interconnected and sometimes non-resilient to sudden changes that predictions are more like looking into a crystal ball even if complex math models are used to calculate trends. Once again refiners will meet to discuss post-IMO scenarios and possible outcomes at BBTC MENA 2019 - Bottom of the Barrel Technology Conference in Bahrain in December.
Euro Petroleum Consultants is a technical oil and gas consultancy with offices in Dubai, London, Moscow, Sofia and Kuala Lumpur. Euro Petroleum Consultants also organises leading conferences worldwide.
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