Changes in Bunker Fuel Quality Impact on European and Russian Refiners Russia & CIS Bottom of the Barrel Technology Conference 23 &24 April 2015, Moscow Euro Petroleum Consultants
TABLE OF CONTENT Requirements to Bunker Fuel Quality Options Influence on refining in Europe and Russia Summary & Conclusions 2
REQUIREMENTS TO BUNKER FUEL QUALITY The International Maritime Organization (IMO) Standards to provide safety on sea and prevent pollution from ships The International Convention for the Prevention of Pollution from Ships MARPOL 73/78 3
REQUIREMENTS TO BUNKER FUEL QUALITY IMO MARPOL Protocol (Annex VI) International Standards limiting SOx, NOx and PM emissions Emission Control Areas (ECAs): Baltic Sea, North Sea and English Channel established in 2006 and 2007; US and Canada established in 2012 4
Max. Sulphur Content (Weight Percent) REQUIREMENTS TO BUNKER FUEL QUALITY 4.0 Proposed Future Marine Bunker Maximum Sulphur Content 3.5 3.0 2.5 2.0 1.5 1.0 0.5 IMO review of 0.5% sulphur bunker availability in 2018 ECA max. sulphur to 0.1% in 2015 Possible date range for non - ECA max. sulphur reduction to 0.5% 0.0 2012 2014 2016 2018 2020 2022 2024 ECA Maximum Sulphur Non ECA Maximum Sulphur Non ECA (Delayed) 5
OPTIONS - IMO REGULATION COMPLIANCE - SHIP OWNERS Install flue gas scrubbing to remove SOx from flue gas Seek out the relatively small volumes of < 0.5 percent sulphur content fuel oil available on the market Switch to distillate fuel only minor changes to fuel systems required Switch to LNG clean and relatively low cost fuel, but relatively high cost for pressurised/refrigerated storage retrofit on existing vessels Nuclear for new build ships? High capital cost and security concerns Other alternatives methanol, biofuel, power, etc. 6
OPTIONS - IMO REGULATION COMPLIANCE - SHIP OWNERS ECONOMICS Fuel Costs Fuel Oil with Scrubbers LSFO MGO LNG Investment NONE NONE Overall Profitability CONSTRAINTS Technology Development NO CHANGE NO CHANGE Green Acceptability Operational Constraints NONE NONE Retail Availability Poor (low profitability, high investments, etc.) Medium Good 7
OPTIONS FUEL GAS SCRUBBING IMPACT ON REFINERS Only 21% of the fuel oil available is consumed as inland fuel oil Heavy fuel surplus has been managed by sale of marine bunker fuel in European ports and cargo exports The European fuel oil surplus is augmented by large volumes of HSFO from Russia Source: IEA 8
OPTIONS FUEL GAS SCRUBBING IMPACT ON REFINERS European inland fuel oil consumption has followed a long term downward trend Fuel oil production has also declined, mainly due to refinery closures but partly due to commissioning of some new residual upgrading units 140 120 100 80 60 40 20 0 Source: IEA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Fuel Oil Net Exports Fuel Oil Production Fuel Oil Consumption The surplus versus inland consumption has remained fairly steady at around 55 to 60 million MT per year 9
MM tpa OPTIONS FUEL GAS SCRUBBING IMPACT ON REFINERS Russia: Large volume of fuel oil production remains despite of the Government incentives to switch to production of higher valued oil products 350 300 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Refining Throughput Fuel Oil Source: Companies data, EPC analysis 10
OPTIONS LS FUEL OIL IMPACT ON REFINERS Technically possible to produce heavy fuel with a sulphur content of less than 0.5% by: Topping of very sweet crudes: Some Russian crudes are suitable SDA units to treat vacuum residues: SDA raffinate from some North Sea crudes will meet the 0.5 percent sulphur specification Hydroconversion of residue: Slurry Processes; Ebullated Bed Hydrocrackers 11
OPTIONS LS FUEL OIL IMPACT ON REFINERS Topping of Sweet Crudes Shortage of such crudes on the market Higher crude price vs. sour grades SDA Shortage of and higher prices on suitable crudes Overall refinery configuration changes Residual Hydroconversion Major investments Overall refinery configuration changes Importance of crude selection Blending Issues 12
OPTIONS LS FUEL OIL IMPACT ON REFINERS New development: non-standard new marine fuels meeting 0.1%S Kinematic Viscosity, cst @ 50 C Density @ 15 C kg/m³ MFO AFME 200 HDME 50 MGO <10-700 67 25-45 1,4-11 (@ 40 C) <920-1010 917 895-915 <890-900 Flash Point, C >60 >70 >70 >43-60 Source: ExxonMobil 13
OPTIONS DISTILLATE FUEL IMPACT ON REFINERS Switch to Marine gasoil (MGO) European bunker demand will shift to 70% fuel and 30% MGO from the 80:20 ratio in 2014 Some of the marine diesel consumption can be met by heating oil The increase in marine diesel consumption will add to Europe s overall middle distillate deficit 14
OPTIONS DISTILLATE FUEL IMPACT ON REFINERS Price premium of MGO versus IFO with 380 cst viscosity has been $240 on average in the last six months Source: Platt s 15
OPTIONS DISTILLATE FUEL IMPACT ON REFINERS Relatively few European refineries have significant residual oil conversion facilities such as cokers or residue hydroprocessing units, so fuel oil yield is about 14% Significant investment will be needed in European refineries to: Convert heavy fuel oil to middle distillates and Desulphurise distillates to meet MGO specification 16
OPTIONS DISTILLATE FUEL IMPACT ON REFINERS Can the high capital cost be recovered from higher marine bunker fuel prices and improved higher value product yields? All the investment options are energy intensive and increase refiners operating costs through the need to buy additional CO2 emission allowances Coke/ROSE residue disposal issue refiners can build gasifiers/igcc plants but this adds further capital investment cost and CO2 emission allowance costs 17
OPTIONS DISTILLATE FUEL IMPACT ON REFINERS Refinery Unit Capacity, Mmtpa Year Kuybyshev Isom 0,28 2014 Khabarovsk VGO HCR 0,5 2014 Khabarovsk DHT 1,2 2014 Ufa FCC NHT 1,3 2014 TANECO VGO HCR 2,9 2014 Kirishi VBU 1,8 2013 Kirishi VGO HCR 2,9 2013 Kirishi VDU 4,9 2013 Moscow Isom 0,7 2013 Moscow FCC NHT 1,2 2013 Moscow DHT 2,0 2013 Novoil Alky 0,45 2013 Yaroslavl DHT 1,5 2013 Tuapse CDU/VDU 12,0 2013 Saratov Isom 0,3 2013 Yaya CDU 3,0 2013 Source: Companies data, EPC analysis Russian refining projects to increase CDU/VDU capacities or improve product qualities A significant number of deep conversion projects is under construction Production of middle distillates for export is a key driver of deep conversion project profitability 18
OPTIONS DISTILLATE FUEL IMPACT ON REFINERS Tax Maneuver Export Duties Factors 2014 2015 2016 2017 Crude 0,59 0,42 0,36 0,3 Naphtha 0,9 0,85 0,71 0,55 Gasoline 0,9 0,78 0,61 0,3 Kero/Diesel 0,65 0,48 0,4 0,3 Fuel Oil 0,66 0,76 0,82 1 Source: The Russian Government Due to Tax Maneuver, Russian refiners with high conversion will have significantly higher margins versus low complexity refiners Gross Refining Margins @ Brent 50 $/bbl, $/bbl 12,0 10,0 8,0 6,0 4,0 2,0 0,0 2014 2015 2016 2017 Hydroskimmimg Cracking Conversion Source: EPC Analysis 19
OPTIONS ALTERNATIVES IMPACT ON REFINERS Development of alternatives (LNG, Nuclear, Methanol, Biofuel, Power) can arrive to exclude marine transport from the refining clients Fuel oil export from Europe will increase twice reducing refining margins Source: IEA 20
SUMMARY & CONCLUSIONS Ship owners have a number of options to comply with the proposed IMO regulations, with varying degrees of certainty and cost There is a strong need for many refiners to increase conversion and shrinking markets for heavy fuel makes this decision quite urgent Choice of Configuration & Technology will require in depth study to evaluate which scheme best fits your requirements for Markets & Budget 21
SUMMARY & CONCLUSIONS Conversion to expand middle distillates to tackle current shortage in the inland European market versus meeting changes in the bunker fuel market are the options for European as well as for Russian refiners Refiners have to be ready to situation that ship owners are switched to alternatives and marine bunker market will be lost for refiners 22
Thank You The information upon which this presentation is based comes from our own experience, knowledge and databases, supplemented by reference to primary sources and published industry data. Any opinions expressed are those of the author as of this date. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. We do not accept any liability for your reliance upon them. Euro Petroleum Consultants is a specialist consultancy firm working in oil, gas and petrochemicals. We offer technical consultancy and we also deliver high quality training courses & conferences. For further details contact enquiries@europetro.com 23