The Barrel explored its darker side at Platt's Bunker and Residual Fuel -- aka the Bottom of the Barrel -- Conference in Houston. If you were tired of hearing about the broken WTI contract or record-high gasoline crack spreads, this was the place to be.
A couple of themes emerged from the event so far. The portion of residual fuel demand going into ship bunkers is outpacing that for power generation or manufacturing. That has led to more firms getting involved with blending bunker fuel, and more demand for tanks in bunker hubs such as Houston.
Tom Butler, former Vice President for Houston Fuel Oil Terminal Co., estimated the number of significantly active players has risen from 16 to 26 in the past 10 years. In addition, expanded catalytic cracking capacity has increased the amount of slurry oil in the market.
So with more supply and a larger number of traders needing a place to blend, panelists agreed that it's a good time to be a terminal owner. New construction is already spoken for, and tank builders have a backlog.
US and Chinese resid demand has shifted over to bunkers from inland use. In China, the government has encouraged power generators and manufacturers to switch over to natural gas or coal, to reduce reliance on imports.
While Chinese bunker demand has not ratcheted up to match the gains in port usage due to government controls on bunker pricing, according to ESAI analyst Joy Siew, if the market deregulates Chinese ports would steal away bunker demand from Singaport and Hong Kong.
The theme of tighter environmental regulations came up a number of times so far, as the US heads toward implementation of MARPOL VI and the specter of 1.5%S SECA zones crops up.
One presentation by Tom Hogan from refinery consultant Turner, Mason, dealt with the potential costs if Intertanko's proposal to make ships use only distillate, no resid. Obviously not a popular proposal with this crowd, and Hogan reassured them by outlining the difficulties -- more like impossibilities -- in making that a reality.
He layed out some possible approaches, the most expensive of which involved building 60 cokers and 60 hydrocrackers, as well as 9 new refineries. And it would only cost $133 billion.
The most realistic, while still far-fetched and expensive, would be to build cokers and hydrocrackers at the crude sources, to create a lighter synthetic crude -- something which is being done currently in Canada and Venezuela. But that would still be expensive.
One question that we need to ask is -- if all the new units were built and resid transformed to distillate, would there be much net emissions reduction from burning the cleaner fuel?
In general, the direction of the bunker/resid market is toward cleaner specs, both in the US and China. It's likely that in light of growing global concern about emissions and environmental damange, the days of exporting the more damaging grades to developing countries that don't have much in the way of environmental regulation will be over.
Good summary, Dave. One of the most striking points to me coming out of the conference was the uncertainty marine fuels environmental legislation and its impact on the residual fuel oil market, not to mention the global economy as a whole.
Whether it's the Intertanko proposal that suggests all ships switch to all distillate and shun resid, or we employ 0.1% sulfur limits either on a worldwide basis or in SECAs around the US (makes the MARPOL Annex VI 1.5%S SECAS look way more attractive), any of these changes could have far reaching consequences not only for the future of the residual fuel oil market, but the global economy as a whole.
Just imagine what would happen if all ships switch to distillate, or distillate is used more heavily in bunker blends. Marine suppliers, individual diesel consumers, and commercial truckers would all compete for a limited distillate stream, pushing up prices not only at the retail pump but dramatically raising prices on imported goods.
The effects are far-reaching, and economies of US and other industrialized nations could take a substantial hit. And there's the obvious issue, what do you do with all that extra resid?
As a manufacturer of an exhaust gas cleaning technology that provides 95+% SOx removal and 50% PM removal (measured by mass) I am baffled by Intertankos insistence that distilled fuel is the only option for lowering emissions.
There are a number of promising emission reduction technologies waiting for a regulatory standard that sets the emission limit for ships but leaves the method to the owner.
In 2001 a BeicipFranlab report estimated the marine HFO market at 110.2 million tones annually. At a $200 per tone premium for distilled fuel, that is a lot of incentive that will either flow to the refiners or be freed to the development of alternatives to residual fuel.
Lets hope the IMO sees the wisdom of allowing human ingenuity access to the capital needed to develop new solutions.