The evolution of Platts Asia gasoil assessments towards cleaner fuel standards

Transcription

1 W H I T E P A P E R OIL The evolution of Platts Asia gasoil assessments towards cleaner fuel standards By Paul Young, Dave Ernsberger and Tom Giaever-Enger, with Sharmilpal kaur and Clarice Chiam January 2010

2 White Paper: The evolution of Platts Asia gasoil assessments towards cleaner fuel standards By Paul Young, Dave Ernsberger and Tom Giaever-Enger, with Sharmilpal Kaur and Clarice Chiam The development of Platts FOB Singapore gasoil benchmarks has followed the broad evolution of low sulfur mandates in the Middle East and Asia Pacific. Platts currently assesses five different kinds of gasoil assessments in Singapore: 0.5% (5,000 parts per million of sulfur); medium sulfur, 0.25% (2,500 ppm); and low sulfur diesel grades 500ppm, 50ppm, and 10ppm. The oldest of those assessments, the longstanding 0.5% sulfur benchmark, was launched in The most recent assessment, 10ppm, was launched in November In the almost 30 years that have passed since Platts began assessing gasoil markets in Singapore, the gradual emergence of low sulfur markets have prompted many questions about when and how a new, low-sulfur benchmark for contract reference pricing might emerge. This White Paper has been published to address those questions. We also describe in detail Platts views on quality standards in the Asia Pacific 10ppm sulfur market, an area of general interest that has also prompted much discussion at Platts methodology forums and industry events for several years. Over the last decade there has been an irreversible switch towards cleaner fuel standards in Asia and the Middle East, but with different countries and regions moving at different paces. Countries that have moved to what is essentially sulfurfree diesel, often called gasoil in Eastern markets, have so far tended to be economically advanced countries that are members of the Organization for Economic Co-operation and Development. These include the most developed economies in North Asia (see Figure Two), and since the start of 2009, Australia and New Zealand. Understanding prevailing sulfur standards for diesel in the Middle East and Asia Pacific requires a constant analysis of complex and constantly changing national standards. There are widely different regulations and conventions in place governing the amount of sulfur that is allowed in the fuel supplied in each country. There are also variations on those standards within many countries themselves, depending on where and how the diesel will be used. Sulfur variations within some countries can depend on whether the diesel consumed is for use in agriculture or for private transport. As such, the diesel quality in practically every nation is different from its immediate and regional neighbors. The physical market premium for 10ppm diesel in Singapore, which measures the difference in value between the low sulfur product and 0.5%S gasoil, peaked at almost $8.00/barrel in February of 2009 (see Figure Three). However, the global slump in diesel demand, new refinery capacity and investments in desulfurization have had a major impact on the premium for low sulfur. When Platts launched its 10ppm assessment, its goal was to reflect trade of a robust, fully fungible grade of ULSD, with the potential for the diesel to be merchantable on a global basis. A whole host of variables made this task difficult, including special specification requirements that vary from consuming country to country, differing refinery configurations of key producers of 10ppm, and the fact that seasonal temperatures vary considerably between major markets in the northern and southern hemispheres. Figure 1: Timeline of Platts Singapore gasoil assessments Grade of gasoil Grade of gasoil Basis Date of launch Date discontinued Platts database code (% sulfur) (ppm) 1.000% 10,000 ppm FOB Singapore 01/06/ /02/2004 POAAS % 5,000 ppm CFR Singapore 01/07/ /12/2003 AALRF % 5,000 ppm FOB Singapore 12/07/1983 POABC % 2,500 ppm FOB Singapore 02/08/1999 AACUE % 500 ppm FOB Singapore 17/07/2000 AAFEX % 50ppm FOB Singapore 03/01/2005 AAPPF % 10ppm FOB Singapore 03/11/2008 AAOVC00 2

3 Figure 2: Global diesel quality standards 10 or 15 ppm 50 ppm ppm 1,000-12,000 ppm Countries may apply lower limits for different grades, regions/citiesor based on average content. Detailed information on limits and regulations can be found at Source: Reproduced with permission from the International Fuel Quality Center (IFQC) Wherever possible, Platts 10 ppm specifications have been designed to reflect a grade of diesel that can be bought and sold for export both to major import markets in the Asia Pacific region and to Western markets. Therefore, while diesel needs to withstand colder temperatures in the northern hemisphere winter, the specifications defined within Platts Asian 10ppm guidelines only overlap with typical European requirements during summer months, as the 10ppm specifications must match the great majority of Australian quality requirements throughout the year. Asian Gasoil Benchmarks 0.5%S resists the pull toward lower sulfur grades The trend towards cleaner fuel standards across Asia and the Middle East suggests that the future of gasoil benchmarking in Asia will trend over time to lower sulfur grades. It is indeed generally expected amongst market participants that the gasoil markets of Asia and the Middle East will migrate towards a low sulfur benchmark with time. However, in end-2009 trading in the more sulfurous grade of 0.5% sulfur gasoil still accounts for the great majority of gasoil cargoes traded in Singapore s wholesale markets. Physical supply contract price-settlement and retail diesel valuations around Asia and the Middle East are still generally tied to the high-sulfur benchmark. Contracts that financially settle against Platts 0.5%S physical assessments account for virtually all of the swaps contracts traded in Singapore s over-the-counter gasoil derivatives market. The level of over-the-counter derivatives activity (Figure Four) in Platts daily market on close assessment process reflects the continued dominance of the 0.5%-sulfur benchmark. Virtually 100% of all reported gasoil swaps trades are for 0.5%.S gasoil derivatives. The regrade swap the derivatives used to hedge the difference in value between gasoil and jet kerosene uses the 0.5%S gasoil in its settlement price, along with Platts jet kerosene assessment. The higher, 0.5% sulfur grade still therefore acts as the pricing reference for almost all gasoil, and gasoil derivatives bought and sold in Asia. Yet higher sulfur 3

4 gasoil itself accounts for only 10% or less of supplies to end users in the region. This includes some relatively minor importers -- of which Pakistan is the largest -- and marine fuels that are occasionally shipped to Africa and Hong Kong. Much of the traded 0.5%S gasoil in Singapore ends up being used as a blendstock to produce medium sulfur fuels containing anywhere from 0.25% sulfur to 0.35% sulfur, which is then supplied to end users in Southeast Asia. Sulfur can be blended on a linear basis, making it relatively simple for any blender with storage tanks. To meet this vestigial regional demand, a number of Asia- Pacific and Middle East refineries still produce 0.5%S gasoil, including the three refineries in Singapore. But production continues to decline regionally, as refineries Figure 3: Low sulfur gasoil premiums in Singapore Jan-08 Number of trades reported by month (July December 2009) Jul-08 Jan-09 Jul-09 10ppm 50ppm 500ppm 0.25%S Figure 4: Liquidity in reported Singapore swaps trading Regrade Jet Gasoil Jan-10 upgrade their secondary processing plants to maximize lower-sulfur output to meet regional and global needs, or to meet tightening national sulfur emissions standards. The continuing dominance of the 0.5% sulfur grade over lower sulfur markets is reflected in the number of physical transactions concluded during the Platts Market on Close assessment process each trading day (see Figure Five). In any given month, the higher sulfur gasoil grade accounts for the great majority of trading activity. An annualized view (Figure Six) of trading activity during Platts end-of-day assessment process confirms that almost 80% of the physical transactions are still for gasoil containing 0.5% sulfur. Notably, trade in lower sulfur gasoil grades switched from predominantly 50ppm sulfur gasoil in 2008, to 10ppm at the start of This switch in trading coincided with Australia s switch to a 10ppm sulfur standard. Dealing in the lowest sulfur 10ppm grade has gained momentum since March In 2006 and 2007, many traders were of the opinion that 0.25%S gasoil would replace 0.5% as the regional benchmark. It has since become clear that as an intermediate grade of gasoil in a much larger move towards lower sulfur standards, 0.25%S gasoil could at best act only as an interim benchmark. The Australian Additives Question While many countries use 10ppm gasoil in the Asia Pacific region, Australia is for now the only major net importer of 10ppm diesel. Fuel supplied to Australian end-users might commonly be supplied at a premium to Platts benchmark 10ppm assessment. These premiums can account for Australia s particular quality requirements, as well as additional costs like shipping and distribution. Most of the Asia Pacific s other lowsulfur diesel countries meanwhile are self sufficient, and indeed Japan and South Korea are net exporters of the product. Platts has given, and continues to give, careful thought to the quality standards described in its Singapore 10ppm specification. This specification is designed to balance the needs of key import centers with the broader regional and world market for ULSD Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 In an independent report commissioned and published by the Australian Competition & Consumer Commission in December 2009, Australian consultancy McLennan Magasanik Associates Pty. Ltd. found the specification to be suitable for use as a contract reference in Australia. Australian refiner marketers have been benchmarking 4

5 diesel against the gasoil 10 ppm sulphur benchmark since January The quality of the 10 ppm benchmark matches the Australian specification very well, states the ACCC report ( phtml/itemid/906872). A critical issue facing the Australian market concerns additives. All ULSD must be treated with a lubricity enhancer to prevent wear and tear of the engine. This is because sulfur acts as a lubricant in the combustion engine, and when the sulfur content is reduced, the diesel is stripped of its lubricating properties. There are a range of lubricity additives used by the industry around the world. While the Australian 10ppm grade broadly conforms to global standards for ULSD, Australia has effectively excluded the addition of certain common lubricant additives that are used in the rest of the world in the production of diesel. Specifications defined in Platts assessment processes are always designed to allow for trading of fungible, merchantable commodities, so we have not reflected those apparent restrictions in the Singapore benchmark specification. The National Industrial Chemicals Notification and Assessment Scheme, or NICNAS, acts as the Australian Government regulator of industrial chemicals. Chemical additives must generally be registered with NICNAS before being imported into Australia either on their own, or as part of a fuel mixture. One major challenge in the Australian market is that NICNAS is understood to maintain two lists of chemicals approved for import into the country. One is a publicly available list, the other is a comprehensive guide to approved chemicals that is not publicly available. The fact that certain additives might, or might not, be on the organization s confidential list creates significant risk and difficulty for companies seeking to supply ULSD to Australia. The significant confusion surrounding NICNAS list of approved chemical additives has been compounded in Australia by pipeline regulations. In some cases, pipeline operators additionally limit lubricity additives to a shortlist of defined chemicals. When pipeline operators put such limits in place, they often refer to concerns that other, untested additives could have an adverse impact on jet fuel, when both jet fuel and diesel are allowed to move through the same, multi-product oil pipelines. Infineum R655 is the most typical additive for ULSD supplied into Australia by the local refiners (Shell, BP, Exxon and Caltex). Infineum is a petroleum additives enterprise, a joint venture between Exxon Chemical and Figure 5: Breakdown of physical trading Number of physical trades done by month and spec (July December 2009) 50 10ppm 50ppm ppm 0.25%S 0.5%S Aug-07 Dec-07 Figure 6: Summary of physical trading by grade, 2008 vs 2009 Trades Done By Sulfur Content in Platts MOC 50 ppm, 35, 15% 500 ppm, 6, 3% 0.25% S, 16, 7% 500 ppm, 6, 2% 0.25% S, 15, 5% Apr-08 Aug Dec-08 Apr-09 Aug ppm, 1, 0% 0.5% S, 173, 75% 10 ppm, 46, 16% 0.5% S, 229, 77% Shell International Chemicals Ltd. Contrary to common perception, however, there is no mandate that R655 in itself should be the sole lubricity enhancer used in Australia. It is, however, the most common enhancer known in the country, and one of the few brands that is known to be registered with NICNAS. At least three other lubricity enhancers are now known to be on NICNAS list of approved additives: Lubrizol 539M, Tolad 9121 and Infineum R650. Japan, Korea, Malaysia, Taiwan and most recently India are the principal exporters of ULSD in Asia, Dec-09 5

6 supplying local regional markets, plus Europe and the US. R655 is typically added on request at the production stage. For instance, Taiwan s Formosa charges an additional 10 cents/barrel for using R655 in its regular 10ppm gasoil sales tender. In the spot Singapore market, the premium for R655 has been observed as high as 50 cents/barrel. While it is understood to be fairly simple to source R655, refineries / terminals will only keep it in routine stock if there is a regular need for it. Once added to diesel, the additive cannot easily be taken out. Because of these circumstances, should any 10ppm sulfur standard state R655 as a specific, required element of the finished gasoil itself, the Asia-Pacific region might conceivably face a situation where ULSD is in plentiful supply, but ULSD containing only R655 (and no other common additive) might be hard to come by. In turn, this scenario might cause a significant price distortion for diesel for delivery to the Australian market with specific additive requirements. Platts 10ppm specifications describe typical requirements for ULSD supplied in the region, without stating which additives must be used to meet those specifications. This allows for the largest possible supply of merchantable ULSD in the wholesale market to be assessed by Platts. While developing its Singapore 10ppm standards, Platts considered launching a 10ppm assessment as an additive-free grade, where a semi-finished grade would be supplied to a buyer, which would further blend the diesel with additives suitable for final destination, to match end-user specifications. Blending could be done under such a scenario at a shore-tank, or on board an oil tanker. While it is possible, and indeed common, to blend on board a vessel, it is not always practical. For a company owning the export and receiving terminals, as well as the vessel moving fuel between those points, blending on board a tanker is relatively straight-forward. But for a company using a third-party terminal and vessel, it will not always be possible as additives might not be readily available at loadport, or the ship s captain might be reluctant to load drums of chemicals onto the ship. These options were researched and considered for Platts 10ppm specifications. But since most diesel is manufactured with a lubricity enhancer added at the original point of supply, additive-free specifications would not have been practical. The diesel supplied during Platts assessment processes must ultimately be fit for purpose using standard blendstocks and additives. ADDITIONAL REFERENCE MATERIALS: Australia s National Industrial Chemicals Notification and Assessment Scheme: Australian Competition & Consumer Commission: www. accc.gov.au International Fuel Quality Center: Platts: About Platts Platts, a division of The McGraw-Hill Companies (NYSE: MHP), is the market leader for independent real-time news, pricing, and data metals markets. From our 17 worldwide offices, we create market transparency and drive better decision-making for traders and investors in more than 150 countries. More information is available at For information on Platts publications, please contact the Platts sales office nearest to you North America EMEA Latin America Asia-Pacific Russia PLATTS8 (toll-free) +44-(0) support@platts.com (direct) 2010 Platts, a Division of The McGraw-Hill Companies, Inc. Reproduction of this publication in any form is prohibited except with the written permission of Platts. Because of the possibility of human or mechanical error by Platts sources, Platts does not guarantee the accuracy, adequacy, completeness, or availability of any Platts information and is not responsible for any errors or omissions or for the use of such Platts information. Platts gives no express or implied warranties, including, but not limited to, any implied warranties of merchantability or fitness for a particular purpose or use. In no event shall Platts be liable for any direct, indirect, special, or consequential damages in connection with subscribers or others use of this publication. 6