How are refiners preparing for 2015 marine fuel spec changes?

2014-06-10

Much attention has been paid to how shippers will adjust to stricter emissions regulations in 2015, but less to what refiners will do with an expected surplus of residual fuel oil.

Next year, ships traveling within 200 miles of shore in North America and the Baltic and North seas must limit sulfur emissions from fuel to 0.1%, down from 1%, according to International Maritime Organization rules.

Demand for fuel oil is expected to wane while industry consumption of distillates such as ULSD will rise.

“That’s a problem for the refining industry,” said John Mayes, director of special studies at Dallas-based engineering consulting firm Turner, Mason & Co.

Mayes and other industry analysts expect refiners to pursue one of two strategies: blend the fuel oil into a product that could work on ships or upgrade the fuel oil into higher-margin, more desirable products such as distillates, something at least one refiner plans to do.

ExxonMobil will install a coker at its 270,000 b/d Antwerp, Belgium, refinery “to upgrade low-value bunker fuel into higher value diesel, which is in high demand,” CEO Rex Tillerson said last week during a shareholder meeting.

“That’s the ultimate strategy, because at that point you’ve made your fuel oil go away,” Mayes said.

Finland-based oil refiner and marketer Neste Oil said last week it would begin producing an Emission Control Area-compliant, middle distillate-based gasoil or marine diesel oil available in Finnish ports at the end of the year. Neste Oil said there is a $200-300/mt difference between the new low-sulfur gasoil and heavy fuel oil.

“The demand for middle distillates will increase and the markets will become more favorable to us because gasoil is much better suited for our production processes than heavy fuel oil,” Neste’s Johan Perander said in a statement.

The potential total market in Europe is about 10 million tons/year, while the Baltic Sea markets total about 5 million tons/year, Neste said.

Projects like those of ExxonMobil and Neste, in which refiners shift to more distillates production, are likely to appear more frequently outside of the US, which has a higher accumulation of refineries with coking capabilities.

“The US has made a massive conversion to cokers because of its use of the very heavy Caribbean grades of crude, like those from Venezuela and Mexico, and now from Canada,” Mayes said. “The Eastern Hemisphere has not built this type of infrastructure, but this will likely stimulate that.”

US residual fuel yield was about 3% in 2013 compared with “15.2% for the rest of the world,” Turner Mason said in a 2013 report.

Northwest European refineries are preparing for the low sulfur fuel oil changes by testing new specifications similar to 0.1%S marine diesel grade, traders said. One major oil company and two big Amsterdam-Rotterdam-Antwerp fuel oil suppliers are already offering the new product, priced at a $10-20/mt discount over gasoil, one European trader said.

An alternative bunker fuel grade is slated to replace a share of the 1%S LSFO market, still dominant within ECAs, offsetting the decrease of LSFO output from refineries in the end of the third or fourth quarter of 2014, traders said.

Shell, one of the largest LSFO suppliers, said it will end LSFO supplies in Q4, one Rotterdam bunker trader said.

At the same time, Russian refineries are working hard to modify different specifications to match properties of the LSFO grade, though specification properties were not disclosed yet because they are in a testing mode. The fuel should be similar to RMB or RMD blending 20% gasoil and 80% 380 fuel oil, one Russian trader said.

A few alternative options have been already produced, though refineries are struggling to meet marine flash point standards that are higher than in on-land distillates, traders said.

Many shipowners have been approached by big oil companies to participate in the testing of alternative fuel and have already signed confidential agreements to try new specifications using currently installed ship engines. According to one shipping source, a new distillate specification does not require adjustments to the ships’ tanks and can be burned using existing equipment.

Source from : Platts

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