Compliance with IMO Regulations - New Strategies for Refiners in the U.S. and Internationally

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1 14 th Annual Bunker and Residual Fuel Conference Compliance with IMO Regulations - New Strategies for Refiners in the U.S. and Internationally Aaron Imrie June 20, 2017 Houston, Texas Baker & O Brien, Inc. All rights reserved.

2 Legal Notice Baker & O Brien, Inc., (Baker & O Brien) prepared this report for the S&P Global Platts 14 th Annual Bunker & Residual Fuel Conference. The opinions and findings in this report are based upon Baker & O Brien s experience, expertise, skill, research, analysis, and related work to date. This report relies upon public and proprietary data available to Baker & O Brien at the time this report was prepared. All forecasts and projections contained in this presentation represent Baker & O Brien s best judgment, utilizing its skill, and expertise. However, such forecasts and projections are inherently uncertain due to the potential impact of factors or future events that are unforeseeable at this time or beyond Baker & O Brien s control. Baker & O Brien prepared this report for the sole benefit of this S&P Global Platts 14 th Annual Bunker & Residual Fuel Conference. Any reproduction, distribution, or disclosure of this information is strictly prohibited without Baker & O Brien s prior written authorization. Baker & O Brien expressly disclaims all liability for the use, disclosure, reproduction, or distribution of this information by or to any third party. 2

3 Agenda IMO Regulation and Compliance Options Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Comparative Advantage of Refiners in the U.S. Versus Other Regions Summary 3

4 IMO Regulation and Compliance Options Compliance Options IMO 2020 SOx regulation for bunker fuel offers competing compliance options. Demand side responses: Emissions abatement, i.e., exhaust gas scrubbers Reduce demand (slower steaming, etc.) Waivers (Non compliance!) Supply side responses: Increase MGO, MDO, ECA fuel type volumes Manufacture LSFO (0.5 wt.% max. sulfur fuel oil) LNG and other low sulfur fuel alternatives 4

5 IMO Regulation and Compliance Options Questions Abound Which compliance option will dominate over the long run? What might a refiner be thinking now? Perhaps: 5

6 IMO Regulation and Compliance Options Questions Abound Which compliance option will dominate over the long run? What might a refiner be thinking now? Perhaps: This isn t our first low sulfur rodeo, and it probably won t be the last. But, this one doesn t look like the others. Let s look at this visually for more insight on that perspective. 6

7 IMO Regulation and Compliance Options Complex Market Dynamics SUPPLY SIDE Sulfur Crude Natural Gas Refining Steam Methane Reforming Gasoline (ultra low sulfur) Jet/Kerosene Diesel (ultra low sulfur) High Sulfur Fuel Oil Sulfur has been removed on the supply side in diesel and gasoline markets. 7

8 IMO Regulation and Compliance Options Complex Market Dynamics SUPPLY SIDE DEMAND SIDE Sulfur Low SOx Crude Refining Natural Gas Steam Methane Reforming Gasoline (ultra low sulfur) Jet/Kerosene Diesel (ultra low sulfur) Scrubbers Marine Use? HIGH SOx High Sulfur Fuel Oil IMO 2020 compliance allows an option for sulfur to be removed on the demand side. 8

9 IMO Regulation and Compliance Options Complex Market Dynamics SUPPLY SIDE DEMAND SIDE Sulfur Low SOx Crude Refining Natural Gas Steam Methane Reforming Gasoline (ultra low sulfur) Jet/Kerosene Diesel (ultra low sulfur) Scrubbers Marine Use? HIGH SOx? Low Sulfur Fuel Oil High Sulfur Fuel Oil IMO 2020 compliance allows an option for sulfur to be removed on the supply side as well. 9

10 IMO Regulation and Compliance Options Complex Market Dynamics SUPPLY SIDE DEMAND SIDE Sulfur Low SOx Crude Refining Natural Gas Steam Methane Reforming CAPEX, OPEX, Infrastructure Considerations Liquefaction? LNG? Gasoline (ultra low sulfur) Jet/Kerosene Diesel (ultra low sulfur) Low Sulfur Fuel Oil High Sulfur Fuel Oil Scrubbers Marine Use? HIGH SOx Natural gas competes in multiple ways as a solution. 10

11 ~ ~ IMO Regulation and Compliance Options Complex Market Dynamics SUPPLY SIDE DEMAND SIDE Sulfur Low SOx Crude Refining Natural Gas Steam Methane Reforming CAPEX, OPEX, Infrastructure Considerations Liquefaction? LNG? Gasoline (ultra low sulfur) Jet/Kerosene Diesel (ultra low sulfur) Low Sulfur Fuel Oil High Sulfur Fuel Oil Scrubbers Marine Use Substitution?? HIGH SOx Scrubbers Inland Power/Heat Substitution? Coal, others 11

12 Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Questions to Consider Depending on Perspective How will your industry adjust? For Refiners: If bunker fuel oil is NOT currently part of a your product slate, will LSFO (0.5% S) prices and demand be attractive enough to adjust the slate? If HSFO is currently part of the product slate, how low will HSFO prices go? 12

13 $/B Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Any Indication From the Financial Markets? $- 3.5% Fuel Oil Barges FOB Rotterdam Crack Spread Futures $(2.00) $(4.00) $(6.00) $(8.00) January 2020 $(10.00) $(12.00) =~$6/B (increasing discount) $(14.00) $(16.00) $(18.00) Source: CME Group (Platts) 3.5% Fuel Oil Barges FOB Rdam (Platts) Crack Spread Futures Quotes Globex 13

14 Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Types of Strategies CAPEX related (proactive) Increase resid upgrading capacity (Cokers, Hydrocrackers) Increase distillate hydrodesulfurization capacity Increase sour gas treatment and sulfur recovery capacity Various combinations and/or newer technologies What about the future of jet fuel (last sulfur sink )? OPEX related (reactive) Crude diet adjustments Adjust refinery flow rates (shift heavy, low-sulfur barrels) Increase (any) available unit capacity utilization 14

15 Vacuum Tower Atmospheric Tower Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Basic FCC Cracking Refinery Simplified Model 11 Gas Plant -Treating Sulfur Recovery Reforming Alkylation & Isomerization Naphtha Hydrotreating Light Ends Naphtha S Sulfur Fuel Gas LPG Gasoline Crude 450 F 650 F S HDT Jet/Kero Diesel/AGO 650 F F LVGO 1050 F HVGO FCC LCO MCB/Slurry 1050 F+ Vacuum Resid Source: PRISM TM Assay Viewer 15

16 Vacuum Tower Yield (vol. %) Fuel Oil Sulfur (wt. %) Atmospheric Tower Yield (vol. %) Diesel Sulfur (wt. %) BEFORE HDT Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Basic FCC Cracking Refinery Simplified Model BASE CASE - BRENT CRUDE 11 Crude Gas Plant -Treating Sulfur Recovery Reforming Alkylation & Isomerization Naphtha Hydrotreating Light Ends Naphtha 450 F 650 F S Sulfur Fuel Gas LPG Gasoline S HDT Jet/Kero Diesel/AGO 50.0% 40.0% 30.0% 20.0% 10.0% Middle Distillates Yield and Quality 0.0% Diesel/AGO Jet/Kero Diesel Sulfur (RHS ) Brent 37.5 API 0.40 % S Fuel Oil Yield and Quality 650 F+ VR MCB LCO FO Sulfur (RHS ) 950 F 1050 F 1050 F+ LVGO HVGO 1 FCC LCO MCB/Slurry Vacuum Resid 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Brent 37.5 API 0.40 % S Source: PRISM TM Assay Viewer 16

17 Vacuum Tower Yield (vol. %) Fuel Oil Sulfur (wt. %) Atmospheric Tower Yield (vol. %) Diesel Sulfur (wt. %) BEFORE HDT Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Basic FCC Cracking Refinery Simplified Model COMPARE CRUDES 11 Crude Gas Plant -Treating Sulfur Recovery Reforming Alkylation & Isomerization Naphtha Hydrotreating Light Ends Naphtha 450 F 650 F S Sulfur Fuel Gas LPG Gasoline S HDT Jet/Kero Diesel/AGO Middle Distillates Yield and Quality 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Diesel/AGO Jet/Kero Diesel Sulfur (RHS ) Bonny Light 35.1 API 0.15 % S Brent 37.5 API 0.40 % S Arab Light 32.5 API 1.93 % S F+ Fuel Oil Yield and Quality VR MCB LCO FO Sulfur (RHS ) 950 F 1050 F 1050 F+ LVGO HVGO 1 FCC LCO MCB/Slurry Vacuum Resid 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonny Light 35.1 API 0.15 % S Brent 37.5 API 0.40 % S Arab Light 32.5 API 1.93 % S Source: PRISM TM Assay Viewer 17

18 Vacuum Tower Yield (vol. %) Atmospheric Tower Fuel Oil Sulfur (wt. %) Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Basic FCC Cracking Refinery Simplified Model CRUDE DIET CHANGE 11 Gas Plant -Treating Sulfur Recovery Reforming Alkylation & Isomerization Naphtha Hydrotreating Light Ends Naphtha S Sulfur Fuel Gas LPG Gasoline 25.0% Fuel Oil Yield and Quality VR MCB LCO LVGO FO Sulfur (RHS ) Crude 450 F 650 F S HDT Jet/Kero Diesel/AGO 20.0% % F+ 10.0% F 1050 F LVGO HVGO 1 FCC LCO 5.0% F+ MCB/Slurry Vacuum Resid 0.0% BL : Brent 50 : Source: PRISM TM Assay Viewer 18

19 Vacuum Tower Yield (vol. %) Atmospheric Tower Fuel Oil Sulfur (wt. %) Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Basic FCC Cracking Refinery Simplified Model CRUDE DIET CHANGE II 11 Gas Plant -Treating Sulfur Recovery Reforming Alkylation & Isomerization Naphtha Hydrotreating Light Ends Naphtha S Sulfur Fuel Gas LPG Gasoline 25.0% Fuel Oil Yield and Quality VR MCB LCO LVGO FO Sulfur (RHS ) Crude 450 F 650 F S HDT Jet/Kero Diesel/AGO 20.0% % F+ 10.0% F 1050 F LVGO HVGO 1 FCC LCO 5.0% F+ MCB/Slurry Vacuum Resid 0.0% BL : Brent 50 : 50 BL : Brent 75 : Source: PRISM TM Assay Viewer 19

20 Vacuum Tower Yield (vol. %) Atmospheric Tower Fuel Oil Sulfur (wt. %) Strategies for Refiners Heading Toward 2020 and the 0.5% Sulfur Cap Basic FCC Cracking Refinery Simplified Model CRUDE DIET CHANGE WITH VGO DOWNGRADE 11 Gas Plant -Treating Sulfur Recovery Reforming Alkylation & Isomerization Naphtha Hydrotreating Light Ends Naphtha S Sulfur Fuel Gas LPG Gasoline 25.0% Fuel Oil Yield and Quality VR MCB LCO LVGO FO Sulfur (RHS ) Crude 450 F 650 F S HDT Jet/Kero Diesel/AGO 20.0% % F+ 10.0% 0.40 LVGO (0.3%) S % F 1050 F 1050 F+ LVGO HVGO FCC LCO MCB/Slurry Vacuum Resid 0.0% BL : Brent 50 : 50 BL : Brent 75 : 25 BL : Brent 75 : 25 FCC BYPASS Source: PRISM TM Assay Viewer 20

21 Comparative Advantage of Refiners in the U.S. Versus Other Regions Source: EIA 21

22 Comparative Advantage of Refiners in the U.S. Versus Other Regions Advantage Boost for U.S. Refiners? Highly complex refinery configurations. Under utilization might allow some flexibility in adjusting yield slate; some room to fill. Relatively lower energy costs supported by inexpensive, abundant natural gas. Access to competitively priced over-the-fence hydrogen. Relatively minimal (forced) exposure to HSFO markets. 22

Comparative Advantage of Refiners in the U.S. Versus Other Regions Inexpensive and Abundant Natural Gas U.S. natural gas forecast for 2017 is 73.3 Bcf/d. 2018 is forecast at 3.3 Bcf/d (+4.

23 Comparative Advantage of Refiners in the U.S. Versus Other Regions Inexpensive and Abundant Natural Gas U.S. natural gas forecast for 2017 is 73.3 Bcf/d is forecast at 3.3 Bcf/d (+4.5%) above Henry Hub price expected to remain low. Henry Hub natural gas price dollars per million Btu Historical spot price STEO forecast price NYMEX futures price 95% NYMEX futures upper confidence interval 95% NYMEX futures lower confidence interval Jan 2016 Jul 2016 Jan 2017 Jul 2017 Jan 2018 Jul 2018 Source: EIA (Short-Term Energy Outlook, June 2017); EIA (Today In Energy) United States Remains the World s Top Producer of Petroleum and Natural Gas Hydrocarbons, June 7,

Comparative Advantage of Refiners in the U.S. Versus Other Regions Access to On-Demand Hydrogen Multiple hydrogen pipeline networks available; e.g., Gulf Coast Connection Project (2012) Houston to New Orleans 600 miles of bidirectional pipeline 22 hydrogen plants Over 1 Billion Scf/D of hydrogen capacity Source: http://www.

24 Comparative Advantage of Refiners in the U.S. Versus Other Regions Access to On-Demand Hydrogen Multiple hydrogen pipeline networks available; e.g., Gulf Coast Connection Project (2012) Houston to New Orleans 600 miles of bidirectional pipeline 22 hydrogen plants Over 1 Billion Scf/D of hydrogen capacity Source: 24

25 Bottom-of-the-Barrel Yields Distillate + Gasoline Yields Comparative Advantage of Refiners in the U.S. Versus Other Regions Asphalt Coke 25.0 US Refining Yield Trends: Less Heavy, More Light Oil Products Yields (Volume % of Crude Oil) Resid Fuel Oil Distillate + Gasoline (RHS ) Average Resid Fuel Oil wt.% Sulfur Source: PRISM TM, EIA 0.0 PADD % Sulfur PADD PADD % Sulfur PADD PADD % Sulfur PADD

26 Vacuum Tower Utilization Rate (%) Atmospheric Tower Utilization Rate (%) Comparative Advantage of Refiners in the U.S. Versus Other Regions Underutilized Resid Upgrading Capacity 11 Gas Plant -Treating Sulfur Recovery Reforming Alkylation & Isomerization Naphtha Hydrotreating Light Ends Naphtha S Sulfur Fuel Gas LPG Gasoline Coker and Hydrocrackers have (some) room to fill? Hydrocracking Utilization Rates PADD 1 PADD 3 PADD 5 100% 80% Crude 450 F 650 F S HDT Jet/Kero Diesel/AGO 60% 40% 20% 0% F+ Coking Utilization Rates PADD 1 PADD 3 PADD 5 100% 950 F 1050 F LVGO HVGO 1 FCC S HCU 80% 60% 40% 20% 1050 F+ Vac Resid Coker 0% Source: EIA 26

27 B/D B/D Comparative Advantage of Refiners in the U.S. Versus Other Regions Available Upgrading Capacity PADD 3 offers most availability. Total 2016 U.S. coastal PADD available upgrading capacity was approximately 850,000 B/D (high end estimate). Coking Capacity (2016) Hydrocracking Capacity (2016) Used Available Used Available 2,000,000 2,000,000 1,500,000 1,500,000 1,000,000 1,000, , ,000 Source: EIA - PADD 1 PADD 3 PADD 5 - PADD 1 PADD 3 PADD 5 27

28 Weight % of Coker Feed Comparative Advantage of Refiners in the U.S. Versus Other Regions It Matters What You Fill It With 100% Delayed Coker Yields for Different Feed Blends Coke Gas Oils Naphthas Light Ends 80% 60% 40% 20% 0% ATB VTB VTB + FCC Slurry 75 : 25 VTB + Visbreaker Pitch 85 : 15 SDA Pitch (65% Yield) SDA Pitch (35% Yield) Source: AFPM Paper AM Heavy Oil Import for Delayed Coking Feed (Table 2 Delayed Coker Yields for Different Feed Blends) Sloley et. al., March 22-24, Reproduced with authorization from CH2M HILL. 28

29 Lots of uncertainty! Which creates: Barriers to investment. Stand-offs between shippers & refiners. Reducing fuel oil sulfur can be challenging and options limited without making investments. U.S. refiners are generally poised to take advantage. Low energy costs (abundant, low-cost natural gas). Access to hydrogen. Asset underutilization? Although there are reports of significant underutilization of upgrading assets, it is not enough to solve the global problem. 29 Summary

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Growing U.S. Light Crude Exports and IMO 2020 Driven Discounts: Who Benefits?

Growing U.S. Light Crude Exports and IMO 2020 Driven Discounts: Who Benefits? OPPORTUNITY CRUDES CONFERENCE OCTOBER 22, 2018 Baker & O Brien, Inc. All rights reserved. Legal Notice Baker & O Brien, Inc.