Presented by:
Tod D. McGreevy Muse, Stancil & Co.
June 11, 2013
“Residual Oil Disposition:
10TH ANNUAL BUNKER AND RESIDUAL FUEL OIL
CONFERENCE
Path Forward for U.S. &
Latin American Refiners”
2
HEAVY PRODUCT DEMAND: DECLINE ACCELERATES
Last year U.S. heavy product demand continued the downward trend that has been firmly in place since 2005, declining by more than 18% year on year
– The U.S. power sector has all but eliminated residual oils as a fuel source – Asphalt demand continues to slump as states struggle with funding road improvement
projects – Apparent bunker fuel demand dropped, although some of the drop is likely related to
fuel switching after implementation of the North American ECA last August
SOURCE: EIA
0200400600800
1,0001,2001,4001,6001,800
Thou
sand
b/d
Bunkers/Other Asphalt Sales Electricity Generation
3
02468101214161820
0100200300400500600700800900
1,000
Thousand b/d Thou
sand
b/d
Fuel Oil <=.3%S Fuel Oil >.3%S, <=1%S Fuel Oil >1%S Crude Run
REFINERY PRODUCTION OF RESIDUAL FUEL OIL
In response to declining domestic demand, U.S. refiners have reduced production of heavy fuel oil
– Aggregate production of fuel oil is down by more than 35 percent since early in the last decade
– This drop has occurred despite U.S. crude runs remaining relatively flat over the same period (15.006 million barrels per day in 2012)
SOURCE: EIA
4
0%10%20%30%40%50%60%70%80%
0500
1,0001,5002,0002,5003,0003,5004,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Percent to Coking
Thou
sand
b/d
Resid to Blending Feed to Cokers Percent to Coking
REFINERY DISPOSTION OF CRUDE RESIDUUM
Since 1990, the volume of residual oil (resid) feed to U.S. cokers has increased by more than 800 thousand b/d
– The drop in resid to blending accounts for about 60% of the gain – The balance has come mostly from incremental runs of heavy crude
Total runs have stayed between 14 – 15 million barrels per day since 1996
SOURCE: EIA
5
24
26
28
30
32
34
36
API
U.S. Total PADD I PADD II PADD III PADD IV PADD V
U.S. REFINERY CRUDE INPUT IS TRENDING LIGHTER
Annual average U.S. crude input moved above 31° API for the first time since 1999 – PADDs II & IV began the trend as the effect of rising domestic light crude production
was felt initially in the mid-continent – PADD III is now clearly demonstrating the same trend as the shale oil production
boom has worked south to the U.S. Gulf Coast – PADD V has remained remarkably stable over the past decade since it is relatively
insulated from developments east of the Rockies due to limited transport infrastructure
SOURCE: EIA
6
0100200300400500600700800900
Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
Thou
sand
b/d
Asphalt Sales Asphalt Production
ASPHALT DEMAND: SALES TRENDING DOWN? Despite a promising start In 2012, U.S. asphalt sales peaked at the lowest point
since 1990
Asphalt production, however, appears to have stabilized at about 350,000 barrels per day since the recession
SOURCE: EIA
7
0.002.004.006.008.0010.0012.0014.0016.0018.0020.00
0.0020.0040.0060.0080.00
100.00120.00140.00160.00
2000 2002 2004 2006 2008 2010 2012
Cracking M
argin, $/Barrel
Res
id V
alue
, $/B
arre
l
Cracking Margin Coking Fuel Oil Asphalt
RESID VALUES BY DISPOSITION
Resid typically achieves highest value in coking mode and 2012 was no exception
– Asphalt values are normally below coking value except during periods of supply disruption; most coking refiners lack the capability to switch
SOURCE: MUSE
8
LATIN AMERICA RESIDUAL FUEL BALANCES
The table below shows residual fuel balances for the three largest producers in Latin America with aggregate balance for all other countries in the region
0
200
400
600
800
1,000
1,200
1,400
1,600
2006 Supply
2006 Demand
2007 Supply
2007 Demand
2008 Supply
2008 Demand
2009 Supply
2009 Demand
2010 Supply
2010 Demand
Thou
sand
Barre
ls pe
r Day
Mexico Brazil Venezuela Other Latin America Bunkers Net Exports
Notes: Country level data in the supply columns represent refinery output; consumption in the demand columns.Bunker and export data are combined totals for South and Central America and Mexico. Source: International Energy Agency
9
LATIN AMERICA RESIDUAL FUEL DISPOSITION
The chart to the right shows the dominating position Venezuela holds versus the rest of the region with respect to net fuel oil exports
With respect to bunker demand
however, the Big Three clearly do not command the same market dominance in the region
Brazil59.2
Venezuela13.8 Mexico
1.9
Other Latin America
106.2
Marine Bunker DemandAverage 2006 - 2010
(Thousand Barrels per Day)
Source: International Energy Agency
Venezuela189
Brazil93
Mexico53
Other Latin America
52
Net Exports of Fuel OilAverage 2006 - 2010
(Thousand Barrels per Day)
Source: International Energy Agency
10
MARPOL ANNEX VI COMPLIANCE
OPTIONS & TIMING
11
The timing for implementation and the range of compliance options available to ship owners will be problematic for refiners wishing to continue serving the market
MARKETPLACE UNCERTAINTY
MARPOLAnnex VI
Compliance
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2012 2014 2016 2018 2020 2022 2024
Max
. Sul
fur C
onte
nt (W
eigh
t Per
cent
)
Proposed Future Marine BunkerMaximum Sulfur Content
ECA Maximum Sulfur Non ECA Maximum Sulfur
Non ECA (Delayed)
ECA max. sulfur
IMO review of 0.5% sulfurbunker availability in 2018
Possible date range for non-ECA max. sulfur reduction to 0.5%
12
Sourcing suitable crude oil feedstock to direct blend low sulfur bunker fuel will be a challenge for most current refinery suppliers
– There are only a handful of commercially available crude oils world-wide with sulfur levels low enough to consider blending a 0.1wt% sulfur bunker fuel for use within the ECAs
– Blending 0.5 wt% sulfur bunker fuel is technically and economically feasible but limits remain on the availability of suitable feedstock
CRUDE OIL SELECTION & BLENDING OPTIONS Crude Oil Residue Sulfur Content
Atmospheric Vacuum Total CrudeResidue Residue Total Crude Sulfur
Crude Oil Name Source Country Sulfur (wt %) Sulfur (wt %) API Gravity (wt%)Readily Blend 0.5% Sulfur Fuel Oil Saharan Blend Algeria 0.27 0.34 43.6 0.07El Sharara Libya 0.20 0.28 42.2 0.09Nkossa Congo 0.10 0.14 39.9 0.06BTC Blend Azerbaijan 0.29 0.43 36.4 0.14Agbami Nigeria 0.22 0.47 48.1 0.05Palanca Blend Angola 0.36 0.52 37.0 0.21Troll Norway 0.24 0.55 35.9 0.14
Can Economically Blend 0.5% Sulfur Fuel OilBonny Light Nigeria 0.34 0.60 35.1 0.15EA Blend Nigeria 0.23 0.62 35.0 0.09DUC Blend Denmark 0.46 0.63 33.5 0.25Ekofisk Norway 0.48 0.70 38.4 0.22
Uneconomic or Technically Infeasible to Blend 0.5% Sulfur Fuel OilGirassol Angola 0.56 0.78 29.8 0.34Statfjord Norway 0.50 0.81 39.5 0.22Gullfaks Norway 0.56 0.89 37.5 0.22Oseberg Norway 0.57 0.89 37.8 0.27Dalia Angola 0.71 0.89 23.1 0.51Forcados Nigeria 0.62 1.53 30.4 0.28Es Sider Libya 0.64 1.04 36.7 0.37Kuito Angola 1.04 1.28 22.0 0.72Brent Blend UK 0.87 1.33 38.5 0.41CPC Blend Kazakhstan 1.18 1.76 45.3 0.56Tengiz Kazakhstan 1.34 2.16 46.4 0.51Forties UK 1.81 2.68 38.7 0.79
13
Proven crude reserves heavily favor production with sulfur levels much too high to make direct blending technically and economically feasible
– Muse estimates about 7 percent of the proved reserves contain crude suitable for future low sulfur bunker fuel blending
– Location must also be considered as some crude oils containing resid suitable for direct blending are geographically inaccessible to the bunker market
GLOBAL LOW SULFUR CRUDE RESERVES
World Crude Oil Proved Reserves
Africa Low SulphurEurope Low SulphurAzerbaijan Low SulphurNorth America Low SulphurS. & C. America Low SulphurAsia Pacific Low SulphurMiddle EastRussiaKazakhstan & Other FSUAfrica OtherEurope OtherNorth America OtherS. & C. America Other
14
BOOMING US CRUDE PRODUCTION
More than half the forecast increment is light sweet crude oil from shale formations in Texas and North Dakota and conventional production in the mid-Continent
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Mb/
d
History ProjectionSource: Muse Stancil
15
WESTERN HEMISPHERE CRUDE OILS Eagle Ford Bakken WTI Marlim Castilla MayaS. Texas N. Dakota W. Texas Brazil Columbia Mexico
Crude Bulk PropertiesAPI 40.6 45.3 39.9 19.2 19.7 21.2
Crude Wt% S 0.19 0.12 0.38 0.76 2.09 3.55
Yield, lv%LPG 3.9 8.0 3.5 0.5 0.6 0.9
LSR (-180) 9.9 9.8 10.2 1.5 4.2 4.3Naphtha (180-360) 25.0 24.7 25.8 8.6 16.3 11.7
Jet (360-505) 15.8 15.7 15.8 9.7 5.0 11.0Diesel (505-640) 14.0 13.9 15.1 12.1 13.3 12.7
Gas Oil (640-1030) 26.6 23.9 21.3 36.3 28.4 27.2VTB (1030+) 4.6 3.9 8.2 31.2 32.1 32.3
VTB QualitySPG 0.9899 0.9918 0.9585 1.0210 1.0657 1.0731
Sulfur, ppm 5,980 6,060 9,752 10,070 35,900 60,234Visc @ 122, cST 1.86E+04 3.35E+05 6.52E+03 3.45E+05 1.56E+11 5.51E+13
Bunker Fuel Yield, lv% 6.7 6.3 10.9 46.5 58.5 61.2
ATB QualityVolume % 31.2 27.8 29.6 67.4 69.0 59.4
SPG 0.9205 0.9202 0.9205 0.9921 1.0313 1.0130Sulfur, ppm 3,273 3,258 6,891 9,337 30,872 48,501CCR, wt% 0.97 2.83 3.82 11.10 22.31 18.73
N2, ppm 395 1548 2254 7244 6830 5750Watson K Factor 12.02 12.02 12.04 11.49 12.03 11.48
Ni, ppm 1.6 3 4 27 130 90V, ppm 0.6 1 4 39 558 455
16
Refiners have several technologies from which to choose when it comes time to upgrade higher sulfur residual oil into low sulfur bunker fuels
– Coking plus hydro-treating to yield low sulfur marine diesel – Solvent extraction plus hydro-processing to yield low sulfur bunker fuel – Residual oil hydro-processing to yield low sulfur resid for blending
Coking process shown below is the most flexible and has the added attraction of
yielding streams suitable for upgrading into finished light transportation fuels – This is most likely the preferred approach to incremental residual fuel upgrading/
destruction in the Atlantic Basin
PROCESSING OPTIONS: COKING
Light gas, LPG & Naphtha
Vacuum Residue Coker Gas Oils 0.5% S Marine Bunker Fuel
Petroleum Coke
COKER DISTILLATE HYDROTREATER
17
The two hydro-processes shown below are configured to yield a 0.5 sulfur heavy fuel oil
– These are generally more sensitive to feedstock selection, potentially limiting a refiners choice in crude selection
PROCESSING OPTIONS: HYDRO-PROCESSING
Vacuum Residue DAOEXTRACTION HYDROTREATER/SOLVENT
MILD HYDROCRACKER
Pitch Residue
LPG & Naphtha
0.5% S Marine Bunker FuelUNIT
LPG/Napththa
Vacuum Residue Distillate0.5% S Bunker Fuel Blend
ResidueHYDROTREATER
RESIDUE
18
GLOBAL RESIDUUM HYDROTREATING CAPACITY
Global bunker fuel demand is estimated at roughly 165 million mt/year out of a total non-feedstock residual fuel demand of around 400 million mt/year
– Global resid hydrotreating capacity is only about 90 million mt/yr and concentrated in Asia
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Asia Europe Middle East North America World
Thou
sand
Bar
rels
per
Day
19
The table below breaks down the comparative economics of the various processing options available to refiners for upgrading high sulfur residual oils
MARINE FUEL – SULFUR REDUCTION
Values in Million US$ except for price differential (US$ /MT)Investment Option Coker ROSE/Hydroprocessing Residue Hydrotreater
Total Estimated Capital Investment 1368 1447 1731
Annual Margin For Capital Recovery 171 181 216(8 year simple payback)
Annual Incremental Operating Cost 68 94 112
Margin Adjustment for Yield Shifts 148 -12 -35
Value Uplift Required on 0.5%S Marine Fuel 387 263 294to provide 8 year payback and cover operatingcost increase and yield adjustments
Price Differential Required for 0.5%S Marine 312 205 180Bunker Fuel versus HSFO (US$ per MT)
20
The chart below shows the range of price increases for various marine fuels as new sulfur standards are phased in per the IMO schedule
MARINE FUEL PRICE OUTLOOK
500
600
700
800
900
1000
1100
US$
per
Met
ric To
n
Forecast Marine Fuel Price
Gasoil ECA Fuel PriceNon ECA Fuel Oil Price Non ECA Distillate Fuel Price
Increases in 0.1%S gasoil market price due to increased demand as marine bunker fuel
ECA fuel switch to
0.1%S gasoil
Estimated 0.5%S distillate
marine fuel price
Minimum price for 0.5%S residual fuel to
provide return on investment by refiners in desulfurize/upgrade
projects
21
IMPLICATIONS FOR THE REFINING INDUSTRY
Crude oil selection may provide limited benefit to refiners wishing to supply low sulfur bunker fuel without incurring significant capital expenditures
– Existing production of low sulfur crude oil isn’t always available to bunker fuel producers
– Global reserves of low sulfur crude oil adequate for direct blending are limited – Increased global demand may drive up the price for low sulfur crude oil
The shale oil boom in North America may lead to further declines in U.S. bunker fuel production
– To date, supply growth has mostly displaced imports of similar quality crude oil at the tidewater
– Shale oils have much lower residual oil yields than competing heavier grades; Muse expects some displacement as domestic production continues to expand through the end of the decade
– The bottoms from these oils can be relatively easily converted to higher valued products in existing conversion units, providing refiners with options other than bunker fuel blending
22
IMPLICATIONS FOR THE REFINING INDUSTRY
Processing upgrades to make low sulfur bunker fuel would require billions of dollars of capital investment - Many of the smaller refiners in the western hemisphere without residual oil
upgrading don’t have the financial wherewithal to pursue projects on their own - Financing options would likely require securitization in the form of long-term off
take agreements combined with guaranteed processing margins (commercially difficult to execute)
- U.S. refiners in particular have repeatedly demonstrated their preference to invest in residuum upgrading processes (coking) or destruction processes (gasification) to produce higher value products rather than produce heavy fuel oil
Given many uncertainties, refiners in the western hemisphere are likely to take a wait and see approach with respect to future market participation - Implementation date is not definitive - Project lead times do not correspond with the IMO’s planned 2 year review in 2018 - Competing, non-refining technologies may be viewed by ship owners as more
cost-effective, resulting in diminished demand for low-sulfur fuel
REAL WORLD
EXPERTISE
15455 Dallas Parkway Suite 350
Addison, TX 75001-4690 Phone: 214-954-4455
Fax: 214-954-1521
Two Allen Center Suite 1600, 1200 Smith Street
Houston, TX 77002 Phone: 713-890-1182
Fax: 214-954-1521
48/54 Moorgate
London EC2R 6EJ United Kingdom
Phone: 44-0-207-374-8994 Fax: 44-0-207- 374-8995
Level 58 Republic Plaza 9 Raffles Place
Singapore 048619 Phone: 65-6832-1341
Fax: 65-6832-1491
