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Approaching the shift in bunker fuel change 2020 - Middle East response


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How to respond quickly to the IMO 2020 regulation - Middle East response

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Approaching the shift in bunker fuel change 2020 - Middle East response

  1. 1. KBC ADVANCED TECHNOLOGIES Proprietary Information SUPERIOR RESULTS. SUSTAINED. How to Respond Quickly to the IMO 2020 Regulation Refining Response to Low Sulphur Bunker Fuel Regulations 11 April 2017
  2. 2. 2 Before We Get Started… • All lines have been muted on entry to avoid any noise interference • The webinar is approximately 45 minutes • A follow up email will be sent out with the webinar slides • Please submit all questions through the Questions pane on the right hand side of your screen – they will be answered at the end of the webinar in the Q&A session KBC ADVANCED TECHNOLOGIES Proprietary Information 11 April 2017
  3. 3. 3 Your Host Speakers Today KBC ADVANCED TECHNOLOGIES Proprietary Information Stephen George Chief Economist Arjan Baks Operations Manager IMENA 11 April 2017
  4. 4. 4 Background • The current maximum specification for ocean going vessels is emissions equivalent to burning 3.5 wt. % sulphur bunker fuel (HSFO) with no abatement.  ECA regions have and will continue to have more stringent standards, with current bunker fuel at just 0.1% sulphur equivalent • A 2015 study by CE Delft commissioned by the International Maritime Organization (IMO) determined that it was feasible for the global shipping industry to adopt lower shipping sulphur emissions from the earlier proposed date • The IMO meeting on 27 Oct 2016 adopted sulphur emissions at 0.5% sulphur equivalent starting 1 January 2020.  The time window for response is very short to meet this challenging target KBC ADVANCED TECHNOLOGIES Proprietary Information 11 April 2017
  5. 5. 5 Critical Questions What is the Refiners Position? • Remain a producer and supplier of HS fuel oil? • Reduce exposure to Bunker market? What is the future of the refining industry? • Response to additional ME / Asian complex capacity coming on line • Market access, CO2 and competition issues? 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information
  6. 6. 6 Middle East Fuel Oil Demand • Middle Eastern fuel oil demand split roughly evenly between demand for power, for bunker and for other industrial uses. • Gasoil for bunker a very small share of total pool today and not expected to grow considerably • “Big Five” markets: UAE, Iran, Saudi Arabia, Oman and Kuwait – account for over 90% of total FO demand
  7. 7. 7 East of Suez Fuel Oil Balances • Rising demand for fuel oil in the Middle East has led to a decline in exportable surplus, while Asian demand has continued to grow strongly, especially for bunker fuel • Asian demand expected to reach a short-term peak in 2020 and then to fall as higher prices and overcapacity slow demand for bunker fuel in the intermediate period • In the long term, rising absolute levels of international trade and stack scrubbing will lead to a recovery of bunker fuel oil demand in Asia
  8. 8. 8 East of Suez Product Balances Strong demand growth in India and slowing but still strong demand in Asia drive large regional deficits to 2030 Recent and new ME capacity additions spur additional exports from ME until demand increases in longer term soak up more ME refinery output Inter-regional trade in crude and refined products is expected to continue to grow, with fuel oil remaining a key traded product
  9. 9. 9 Overview Shift Today • Crude purchases to produce the highest value of regulated products at the “lowest” cost given the asset configuration • Bunker fuel is a by product • If the refiner could make high value product they would Tomorrow • On purpose bunker production means • Higher priced, low sulphur crude • Major capital investment for bottoms upgrading and desulfurization • Capacity rationalization • Its cost  build or buy 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information CE Delft Proposal for formulating Middle East compliant bunker
  10. 10. 10 Challenges: Marine Bunker Will Reset Price Relationships • Compliant fuel formulation will lead a re-ordering of the demand barrel • An order of precedence will emerge with the lowest value sweet blending components forming the base of the pool • Thereafter, competition for higher value blendstocks will eventually extend to VGO, straight run distillates and even hydrotreated distillates. We expect the marginal components to set the price of compliant bunker
  11. 11. 11 -25.00 -20.00 -15.00 -10.00 -5.00 0.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 ICE Low Sulphur Gasoil vs Brent & CME 3.5% Fuel Oil Rott Crack Swap ($/bbl) 1 Sept 16 Gasoil vs Brent 1 Nov 16 Gasoil vs Brent 3 Jan 17 Gasoil vs Brent 1 Sept 16 CME FO Swap crack 1 Nov 16 CME FO Swap Crack 3 Jan 17 CME FO Swap crack IMO Impact on Product Cracks HSFO price breakdown leads bunker spec change by about a year Gasoil/diesel cracks strengthen steadily through forecast period
  12. 12. 12 Total HS Fuel Demand 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information 0% 2% 4% 6% 8% 10% 12% 14% 5 6 7 8 9 10 11 2005 2010 2015 2020 2025 2030 Share %mil bpd Global Fuel Oil Demand Outlook Global Fuel Oil Demand Share of Total Oil Product Demand (RHS) The rate of demand decline averaged 250k bpd between 2006 and 2016 Global residual fuel demand has been declining for decades. The pace and nature of decline vary across the regions. Structural decline in fuel oil consumption: • Increasing switch from fuel oil to natural gas in power sector • A switch from fuel oil to crude oil among China’s teakettle refineries • Alternative fuels and fuel saving technologies – LNG bunkering, green ships, more frequent hull cleaning, etc. • Russian upgrading investments have slowed, but have the potential to resume in response to weak global demand
  13. 13. 13 Bunker Fuel Demand By Region (2015-2030) 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information In thousand bpd 302 295 274 275 2015 2020 2025 2030 N.America 252 252 258 272 2015 2020 2025 2030 Latin.America 700 667 664 688 2015 2020 2025 2030 Europe 412 418 407 405 2015 2020 2025 2030 Middle East 1,469 1,582 1,477 1,465 2015 2020 2025 2030 Asia Pacific 93 109 117 123 2015 2020 2025 2030 Africa 94 94 105 108 2015 2020 2025 2030 FSU
  14. 14. 14 Markets are Global / Nothing in Isolation • Crude Oil flows freely in the world • LNG exports are changing the entire fuel sourcing industry Global Interaction • Carbon Tax being implemented • Lower emissions allowances with lower tolerances Regulatory Changes • Access to capital, subsides are all shifting to manage profit and debt Competition Abounds 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information
  15. 15. 15 Topping Refining (very few left in the world) • Generally no fuel oil product (rationalisation) Hydro-skimming (rationalisation) • Makes fuel oil product as high as 50% VGO Cracking (number of plants are declining as not profitable) • Does make fuel oil product as high as 30% of crude Full Conversion Complex Coking Refinery • No on purpose fuel oil production Refining Reaction / Response – Who is at risk? 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information Profitability Questionable
  16. 16. 16 • FO crack drops from – ($10/bbl) to ($20/bbl) under Brent • At a - $10/bbl on a production of 5 million tonnes/year => $330 million per year (loss) • Cracker Feed (gasoil not diesel) is a premium of $15/bbl over Brent • Tapis to Dated Brent ≈ $3.0 to $3.5 / bbl premium to Brent • Sour Heavy to Brent ≈ - $8.5 to - $10/bbl discount to Brent • Moving from Heavy Sour to light sweet may be $11.5 to $13.5/bbl swap • For every 1 bbl of 3.5 wt% S bunker 7 bbls of ULSD 10 wt. ppm S Diesel are required • Even if only half of the HS bunker (80 Million MT/yr) would be blended the result would increase the total Bunker fluids to greater than 2 times the demand. Exposures to Market 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information FO and Gasoil shifts Crude Consideration Dilution is not the solution (neither is concentration)
  17. 17. 17 Low Sulphur Bunker Impacts 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information Bottoms Conversion Delayed Coking, Residue Hydrocracking Other CO2 Impact 0.5 wt% S Bunker higher price Distillate Supply Impact Hydrotreating Capacity to 0.5 and or 0.1 wt% S What is outlet of HS Fuel Oil Production? H2 Addition
  18. 18. 18 Crude Switch – Low Sulphur for High Sulphur 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information Loss of Competitiveness Limited crude basket Counter to crude supply quality trend Limit Operating Flexibility LS crude demand opens out HS/LS differential
  19. 19. 19 Capital Options Technology Crude Flexibility? Secondary Processing Required? Commercially Proven? Specific Bottoms Stream Cost Coking ++ Yes Yes Coke $$ RFCC + Yes Yes Decant Oil $$ SDA ++ Yes Yes High Viscosity Residue $$$ Slurry Hydrocracking + Yes No Residue w/Metals $$$$ Residue Hydrotreating + Yes Yes Residue $$$$ Gasification ++ Yes (flue) Yes None $$$$ $ Relative cost including secondary system investments 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information • Take a carbon rich stream and either produce coke or attempt to add hydrogen to upgrade  Hydrogen addition on slurry or residua systems are 210 to 310 barg without accounting for additional hydrogen demand, metals on catalyst and cycle length and other aspects • Sulphur recovery systems upgrades
  20. 20. 20 Balancing Supply / Demand / Price 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information Shortage of Distillate Price Increases Marine Fuel Balance Price stability Cause Effect Rebalance – When?
  21. 21. 21 ABody in Motion Tends to…. Looking Beyond IMO History Lesson • Nothing is constant and entropy is ever increasing • Emissions targets are more stringent today than 10 years ago Why stop at 0.5 wt.% S • History teaches that once the balls is rolling down hill, just keep it moving • IMO monitoring CO2 and NOx for additional controls 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information Investment considers long haul
  22. 22. 22 Summary 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information • The oil industry is resilient with the capability to adjust hardware and catalyst to meet the challenges of clean fuels to lower emissions. • The technology solution is present, no innovations are required to meet low emissions in SOx and CO2 compliance for bunker fuels. Two questions 1. Can a facility remain profitable at low refining complexity? 2. Will the market bear the cost increases needed to produce? • There is still time to analyse specific situations / asset mix to determine the best course of action…… but this should be done as a matter of urgency • Risk analysis based upon various pathways provides input to the refiner to support decisions
  23. 23. 23 KBC Difference – For The Future Independence • KBC provides unbiased assessment with clients best interest first People • Global Experience and knowledge with Local focus in all major elements of refinery processing including energy Petro-SIM • Reaction models kinetically based to provide accurate assessment of change Customised solution • The inputs that are specific to client, location and market 11 April 2017 KBC ADVANCED TECHNOLOGIES Proprietary Information
  24. 24. 24 What’s Next? KBC ADVANCED TECHNOLOGIES Proprietary Information 11 April 2017 • Each Refinery is different • Each with its own unique set of problems with unique solutions • No “one size fits all” approach to success • KBC recognises these differences • Good at evaluating various scenarios • Please do contact us individually to enable us to help you.
  25. 25. 25 Questions?
  26. 26. 26 Thank you for joining us! • For additional information and for any other questions please email • We welcome suggestions for future topics – please email • Webinar slides will be sent out shortly • Please be sure to fill in our short survey after the webinar • Thank you for joining us and watch out for the next webinar from KBC!