Implications Across the Supply Chain Prepared for Sustainableshipping Conference San Francisco 30 September 2009
Agenda Residual Markets & Quality Refinery Bunker Production Supply & Pricing 2
World marine bunker demand has been increasing as total residual fuel demand remains stable Residual Fuel Demand 700 Million Tons 35% Feedstocks 600 30% 500 Other Industrial 400 25% 300 Power 200 20% Bunker 15% Percent Bunker 100 0 1995 1997 1999 2001 2003 2005 2007 2009 Includes all stationary, domestic and international bunker and refinery residual feedstocks 3
Residual fuel oil demand for power generation has been falling in most, but not all regions Power Sector Residual Fuel Demand 300 Million Tons North America 200 CIS Africa Europe 100 Latin America Middle East Asia 0 1995 1997 1999 2001 2003 2005 2007 2009 Many large consumers have switched fuels but certain countries will continue to use and even grow oil-fired power generation 4
Global bunker demand expected to decline this year. Long-term growth projected at ~2.5%/yr. 400 Million Tons 350 Tankers Bulk Carriers Container/ Dry Goods Other Vessels 300 250 200 150 100 50 0 1995 2000 2005 2010 2015 By our estimates, bunker has been growing at nearly 4%/yr on average since 1995 5 2020
West Coast market is a relatively small residue fuel and bunker market PADD V is west of Rockies including Hawaii and Alaska PADD V (West Coast) Residual Balance 500 Thousand B/D Production Major refining system with 2.5 million B/D of crude runs Feedstocks 400 Bunker 300 Dominated by sour Alaskan and California crudes Stationary Gross production residue from crude 200 100 Feedstocks are mostly VGO streams either imported or traded in region 0 Demand Production VGO ~ 600 KB/D Vacuum Res. ~ 650 KB/D 6
IMO sulfur regulation timeline 5.0 % Sulfur, max Study in 2018 determines availability of LS fuel and start date for 0.5% S limit 4.0 3.0 Global ECA 2.0 1.0 0.0 2005 2010 2015 2020 7 2025 2030
Most immediate regulations relate to ECAs Current (S)ECAs established in the North Sea and Baltic Sea U.S. EPA has submitted a ECA request to the IMO in conjunction with Canada California has issued a Marine Notice that only distillate fuels can be used within 24 n.m. from July 2009 ECAs likely to be adopted in other areas 8 Med? Straits of Melaka? South Korea?
Reduction of bunker fuel emissions is a complex inter-industry issue Shipping Industry Requires low cost fuel very competitive market Resists capital and added complexity of scrubbers Facing complex regulatory environment Uncertain ECA and global regulation schedule NOx, PM and perhaps CO2 Refining Industry Bunker has traditionally been a low-value by-product Difficult to envision investing for bunker production Stranded investment risk if emissions technology evolves Concerned with magnitude of investment required Needs clear signal from fragmented shipping industry on fuel requirements 9
Fuels Refinery Selling Bunker Fuel Marine Diesel (DMB/DMC) HDS VGO HDS Residue HS Bunker (Scrubbing) 10 Increasing Bunker Price Diesel Increasing Refinery Capital Risk Refinery Production Options and Risk
Our study is based on a scenario analysis to understand impact on refining industry Scrubbing of stack gases, while not commercially available, has the potential to significantly reduce compliance cost Degree of scrubber adoption will have a direct effect on refiners The uncertainty of this variable examined through two scenarios: Scrubber Compliance Broad scrubbing adoption key ship types and routes which moderate need for fuel quality improvements Moderate refining industry impact Fuels Compliance Stringent and disruptive case for refining, suppliers and bunker consumers Significant refining industry impact 11
Cracking refinery configurations are common and somewhat marginal refining capacity FUEL GAS PROPANE GAS PLANT LIGHT SOUR CRUDE BUTANE GASOLINE BLENDING NAPHTHA REFORMER JET DISTILLATE HDS DIESEL ALKYLATION VGO FCC UNIT LIGHT CYCLE OIL SLURRY OIL VACUUM (SHORT) RESIDUE (~20%) GASOLINE BLENDING 12 FUEL OIL BLENDING ~30%
Residue hydrotreating is one option to produce low-sulfur bunker fuels from existing residue FUEL GAS PROPANE GAS PLANT BUTANE NAPHTHA REFORMER DISTILLATE HDS ALKYLATION VGO FCC UNIT LIGHT CYCLE OIL RESIDUE RESIDUE HDS 13 LOW SULFUR RESIDUAL BUNKER
Coking investment is another way to reduce residue yield and produce more light products FUEL GAS PROPANE GAS PLANT BUTANE NAPHTHA REFORMER DISTILLATE HDS ALKYLATION VGO FCC UNIT LIGHT CYCLE OIL LIGHT CYCLE OIL NAPHTHA VACUUM (SHORT) RESIDUE COKING UNIT LOW QUALITY DIESEL PETCOKE 14
Residue hydrotreating has been added in Asia but most upgrading capacity has been coking and cracking 6 5 4 Capacity Additions 1998-2008 - Million Barrels per Day Other Europe U.S. Middle East Asia 3 2 1 0 Residue HDS Coking 15 FCC/HCU
Bunker market is large enough to shift price relationships in many markets Cost of Production Currently, LSFO-HSFO spread is small compared to diesel-hsfo MGO/MDO LSFO volumes are small relative to bunker MGO/MDO Adding LS spec to bunker fuel will increase LSFOHSFO spread LSFO LSFO might move from being a HSFO plus product to a diesel minus product LSFO HSFO Current Situation HSFO Compliance Scenario 16
Investments to produce lower sulfur bunker will raise cost to well above HSFO380 500 400 300 Premium to HSFO380 Bunker, $/T Marine Diesel - HSFO380 MDO Coker Cost Residue Hydrotreating Cost 200 100 0 2001 2003 2005 2007 Includes operating costs and investment return. Return set consistent with alternative fuels investment (coking to produce finished transportation products) 17 2009
Bunker quality changes will impact refining, bunkering and shipping industries Regional impact in the ECAs is most immediate but global changes are more significant Residue upgrading or desulfurization required level of investment depends on scrubber adoption Refineries have alternatives to low sulfur bunker production i.e. transportation fuels Ship owners face fleet investment or significantly higher fuel costs through gasoil purchases Complex inter-industry issue What fuel quality is needed? Who invests? What new blending streams are available? How do these move through the supply chain? 18
In summary... Bunker quality changes are important to refiners and bunker suppliers Refiners may choose to install coking and cracking instead of residue hydrotreating Bunkers have been a low value by-product but may be moving into more direct competition with light products Low sulfur bunker price should be below finished diesel but well above high sulfur residual bunker 19
In summary... Bunker quality changes are important to refiners and bunker suppliers Refiners may choose to install coking and cracking instead of residue hydrotreating Bunkers have been a low value by-product but may be moving into more direct competition with light products Low sulfur bunker price should be below finished diesel but well above high sulfur residual bunker 20
About this presentation This analysis has been prepared for the sole benefit of Sustainableshipping Conference attendees. Any third party in possession of the analysis may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the analysis does not carry with it the right of publication. Purvin & Gertz conducted this analysis utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. Some of the information on which this analysis is based has been provided by others. Purvin & Gertz has utilized such information without verification unless specifically noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in information provided by others. 21
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