The Changing composition of bunker fuels: Implications for refiners, traders, and shipping

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1 Platts 4 th European Refining Markets Conference The Changing composition of bunker fuels: Implications for refiners, traders, and shipping Wade DeClaris, EVP Marine World Fuel Services Corp.

2 Agenda: Role of Fuel Oil in the Global Bunker market ECA Bunker Demand through 2019 ECA Bunker Supply through 2019 Impact on the Market through 2014 & through 2019 Future Scenarios & Economic Drivers 2020 and Beyond Page 2

3 Role of Fuel Oil in the Global Bunker Market 20 years ago, prior to gasification and coalification of the utility sector, bunkers represented less than 20% of global fuel oil consumption. With the ongoing inland demand decline & bunker demand growth trends, it will be approaching 40% in 10 years time The USA provides an example of the decline of inland consumption and the continued growth of marine consumption in a developed country USA Residual Fuel Oil Consumption Page 3 Source: EIA, April 2009 Monthly Energy Review

4 Role of Fuel Oil in the Global Bunker Market Shipping 5-year trend Global cargo transported (tonnes) up just under 4% p.a. Overall merchant shipping fleet (DWT tonnes) up 5% p.a. Global seaborne trade (tonnemiles) up 6% p.a. Bunker demand expected to grow at just under 3% p.a. Page 4

5 Role of Fuel Oil in the Global Bunker Market Fuel oil demand growth continues in the bunker sector Global bunker residual fuel oil demand Page 5 Source: PIRA

6 ECA Bunker Demand USA & Canada ECA by 2012 Baltic Sea & North Sea ECA % % % Global Cap % % % California State & Port LSFO legislation tightened in 2009 No discussions underway for South American ECA Except for France, Mediterranean countries not interested in an ECA Emissions problems debated in HK and Japan but no movement towards an ECA. HK proposing an incentive program similar to Long Beach and has announced it will spot check Annex VI Page 6-6 -

7 ECA Bunker Demand now through 2019 EXISTING LEGISLATION Page 7

8 ECA Bunker Demand now through 2019 RECENT LEGISLATION The California Air Resources Board passed a regulation limiting sulphur levels in main engines within a 24-mile range, effective as of July 1st The sulphur level will decrease to 0.10% as of January Page 8

9 ECA Bunker Demand now through 2019 RECENT LEGISLATION The USA EPA & Canada joint application for a 200-mile range ECA was formally adopted by the IMO in March and is scheduled to be inplace by 2012 with a 1.0% sulphur cap. This ECA will also reduce to a 0.10% sulphur cap in Page 9

10 ECA Bunker Demand now through 2019 Early estimates ( ) of the European LSFO bunker market size were in the range of 8-16 Million MT per year 8-10 Million MT/YR 16 Million MT/YR IMPACT STATEMENT OF THE IMPLEMENTATION OF THE PROPOSED AMENDMENTS TO EU REGULATIONS 1999/32/EC AND ANNEX VI OF MARPOL 73/78 Presentation to: SEAaT March 2003, Robin Meech - Marine and Energy Consulting Ltd MARPOL ANNEX VI IS THERE A FUTURE FOR MARINE FUELS Presentation to: Sustainable Shipping Forum, May 2005, Donald M. Gregory Director, Environment & Sustainability, BP Marine However current estimates put this market size in the range of Million MT/YR. If LSFO bunker consumption in the USA/Canada ECA is similar to NWE, it will represent a LSFO bunker market size of approx 6-8 Million MT/YR. Therefore the global total in 2015 will be approx Million MT/YR or the equivalent of MBD conversion of residual fuel to distillates Page 10 10

11 ECA Bunker Supply now through % % % % % % % % % % % % % % % % % % % % % % % Areas where sulphur levels are marked in RED represent possibilities to source products with a relatively low sulphur in order to meet post ECA requirements of max 1.0% sulphur Page 11

12 ECA Bunker Supply now through 2019 Refineries Uses of 1.0% LSFO Alternatives Utilities Refinery fuel Catalytic cracker feed Coker feed Asphalt production Natural & cracked gases VGO HSFO VTBs HSFO & Cement Industry Electric power Process heating Steam generation Hydropower, Coal, HSFO with emissions abatement, Natural Gas, Nuclear Natural gas Distillates Page 12

13 ECA Bunker Supply now through 2019 The LSFO readily available in the market will be quality challenged due to the history/evolution of the LSFO industry and LSFO s consumption in non-engine applications. Production Consumption Refineries Utilities Industry Page13

14 Impact on crude through 2014 & through 2019 World Crude Oil Quality 33.5 API Gravity % Sulfur Page 14 Source: Purvin & Gertz

15 Impact on crude through 2014 & through 2019 Through 2014, the value of 1.0% sulphur residual fuel oil will be supported by the ECA demand Residual fuel oil represents less than 10% refinery yield in OECD countries In the period 2015 through 2019 the requirement of 0.1% sulphur max will require a distillate fuel Page 15 Source: EIA

16 Impact on crude through 2014 & through 2019 In the period , the premium paid for 1.5% sulphur bunkers in Rotterdam was approx $20/mt or roughly $3.00/bbl $ % Rotterdam 380CST vs. Rotterdam 380CST $90 $75 USD/MT $60 $45 $30 $15 $- 2-Jan Jan Feb Mar Apr-08 6-May May Jun Jul Aug-08 8-Sep-08 3-Oct Oct Nov Dec Jan-09 5-Feb-09 2-Mar Mar Apr May Jun-09 5-Jul Jul Aug Sep Oct-09 7-Nov-09 2-Dec Dec-09 Page 16

17 Impact on crude through 2014 & through 2019 The forward curve of 1.0% vs. 3.5% Rotterdam barges is approx $30/mt or roughly $4.75/bbl $38 1% Rotterdam Barges vs 3.5% Rotterdam Barges $36 $34 $32 $30 $28 $26 $24 $22 $20 JUN Q312 CAL13 CAL14 CAL15 CAL16 Page 17

18 Future Scenarios & Economic Drivers 2020 and Beyond $90 $80 $70 USGC Singapore NW Europe Gasoil vs. Fuel Oil $60 $50 $/BBL $40 $30 $20 $10 $0 Page 18

19 Future Scenarios & Economic Drivers 2020 and Beyond The refining capacity constraints of the past few years has resulted in distillation capacity additions at a faster pace than earlier this decade DISTILLATION CAPACITY Year to Year Change, Million B/D 5 Percent 5 4 Barrels Percent 4 3 Announced Projects (Most Likely + Probable) Page 19

20 Future Scenarios & Economic Drivers 2020 and Beyond But conversion capacity additions are even stronger as the industry responds to this decade s strong light product demand and the resulting conversion margin... Year to Year Change, Million B/D FCC Equivalent Capacity CONVERSION CAPACITY Barrels Percent Announced Projects (Most Likely + Probable) Percent Page 20

21 Future Scenarios & Economic Drivers 2020 and Beyond The IMO has set a 0.5% sulphur global cap on all marine fuels from In the absence of a wholesale move towards exhaust gas scrubbers and/or residual fuel oil desulphurization, this will require ships currently using fuel oil to switch to high sulphur (0.5%) gas oil. Global marine fuels based on gasoil rather than fuel oil would require radical changes to the refining industry. Approx 10MMbd of crude would be needed to produce this approx 4MMbd of additional gasoil. This is approx today s sustainable crude oil production capacity of Saudi Arabia. Page 21

22 Future Scenarios & Economic Drivers 2020 and Beyond Shipowners run a risk investing in scrubbers as expected capex+opex requires a low to high sulphur spread of $35-45/mt to breakeven. Refiners run a risk investing in residual fuel oil desulphurization as expected capex+opex requires a low to high sulphur spread of $ /mt to breakeven. Page 22

23 Future Scenarios & Economic Drivers 2020 and Beyond Post-2014 an economic driver will be created inside the ECAs for shipowners to begin adopting scrubbers. Post-2019, without the marine market, there will be a huge vacuum of demand for residual fuel oil, reinforcing wide gasoil vs. fuel oil price differentials, and a strong economic driver worldwide for all owners of larger, higher consuming vessels to make the move to exhaust gas scrubbers. In a world where shipowners are achieving compliance through scrubbing, the impact on crude values will be negligible. Page 23

24 Thank You Wade DeClaris, EVP Marine World Fuel Services Corp.

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