IMO 2020 Report #2
Thursday 25 October 2018
More than enough quality MFO 0.5% if the price is right
The world’s refineries can produce more than enough quality MFO 0.5%
(Marine Fuel Oil) in 2020 using Straight Run Fuel Oil 0.5%. All that is needed is a sufficiently high product price, i.e. around USD 90/ton less than Gasoil.
.
Between 2020 and 2022, the first three years IMO regulations are in force, we expect MFO 0.5% to trade at a USD90/ton discount to the Gasoil 0.1%
price. Subsequently, we forecast the MFO 0.5% price premium to HFO 3.5%
will fall towards USD 90/ton.
We still expect a significant surplus of HFO 3.5% in 2020-22, as well as stock building and a sharply lower HFO 3.5% price. We forecast production of MFO 0.5% fuel oil will cause the Gasoil market to tighten, as middle distillates in the form of VGO are retained within MFO 0.5%. As a result, we still estimate the Gasoil to HFO 3.5% price spread will widen to more than USD 450/ton in 2020 and the MFO 0.5% to HFO 3.5% price spread to increase to over USD 360/ton, before slowly but steadily decreasing once again as the market adapts.
Bjarne Schieldrop Chief analyst commodities (47) 9248 9230
Bjarne.schieldrop@seb.no
SEB projection for yearly average product price spreads. Gasoil 0.1% to MFO 0.5% and MFO 0.5% to HFO 3.5% in USD/ton
Source: SEB, Bloomberg
Contents
Executive summary ... 3
Foreword – Enough MFO 0.5% if the price is right ... 4
Give me a scrubber (count) ... 6
Towards normality around 2023 ... 9
Forward prices: “All sorted by 2022?” ... 10
Spreads: Spots call the shots ... 11
An historical price guide ... 12
IMO 2020 – Like a candle in the wind? ... 13
Beware the Gasoil 2020 crack ... 14
The global crude barrel (32; 1.3%) ... 15
Hundred million different molecules ... 17
Butchering the barrel - Refining ... 18
It’s AR and VR sulphur that matters ... 19
Stripping VGO out or leaving it in? ... 22
Europe: 1 m b/d of quality MFO 0.5% ... 24
The road ahead ... 27
Abbreviations ... 28
Acknowledgements
I should like to thank Håkon Verås for his extensive research into the global refining system and global crude slates during the summer of 2018. Without his work significant parts of this report would not have been written.
I also wish to thank all our customers for the hundreds of meetings they have had with us and all the insights they have shared. Once again, they have provided important
foundations both for this report and our last IMO 2020 report published in March 2018.
Important note
The global crude slate data sets used in our research were both partial and incomplete.
To rectify this deficiency, we have cross-referenced different data sets from various sources. We have also developed our own algorithms to split different crudes into their constituent parts, as would occur in both simple and semi-simple refineries.
Consequently, while our tabulated data results should be treated cautiously and, to some extent at least, indicatively, we still believe our findings are generally fair and sound and provide a reasonably accurate representation of the position today.
Abbreviations
To assist readers to navigate our research and better understand the highly technical vocabulary used to analyse the oil and shipping sectors, we have provided an extensive explanatory appendix at the end of this report.
Executive summary
The world’s refineries should easily be able to supply enough quality MFO 0.5% given the quantities of low sulphur crudes available worldwide today.
However, they will only supply it if the price is sufficiently high in relative terms, i.e. around USD 90/ton less than the Gasoil 0.1% price during the first 3-4 years after IMO regulations take effect and USD 90/ton above HFO 3.5% afterwards.
EU28 can produce more than 1 m bl/d of MFO 0.5% by using the crude streams consumed in 2017. That is more than sufficient to cover domestic area demand as well as international bunkering taking place within EU28.
Production of MFO 0.5% will cause the Gasoil market to tighten. If a refinery produces MFO 0.5% from low sulphur atmospheric residue it will indirectly retain middle distillates in the form of VGO within the MFO 0.5% produced, decreasing supply to the middle distillates (Gasoil) market.
Hunting crudes like Bonny Light. Crudes with S% ≤ 0.24% and S% ≤ 0.12%
will be in demand by simple and semi-simple refineries so they can produce IMO 2020 compliant 0.5% sulphur atmospheric residue or vacuum residue, which can in turn be used to produce compliant MFO 0.5%. This implies strong demand and an added price premium for crudes like Bonny Light.
We expect a significant HFO 3.5% surplus and stock building in 2020-22.
The spot price of HFO 3.5% will fall sharply and the HFO 3.5% price curve will move into deep contango. Overhang of stocks will likely depress HFO 3.5%
prices for an extended period. This together with volumes of HFO 3.5% being increasingly stockpiled implies a comparable tightening of the global oil market.
Gasoil 0.1% is a very different product from MFO 0.5%. Almost 15 m bl/d of quality MFO 0.5% can be produced from straight run refining if refineries maximize for it. However not a single barrel of MFO 0.1% can be produced this way. Therefore, Gasoil 0.1% and MFO 0.5% are necessarily very different products.
The global shipping market is clearly moving down the scrubber path.
Prisoners’ dilemma and first mover advantage considerations have caused scrubber installations to snowball. We expect this situation to continue unless it can be proved that scrubbers are damaging the marine environment.
Beware the current price of the forward 2020 Gasoil crack to Brent. It represents a red flag, a warning. Such a high gasoil crack for a full year has not been seen since 2008 when the Gasoil market was tight and Brent crude rallied to USD 148/bl. If the market is right, we are probably set for considerable price volatility in 2020.
The switch to MFO 0.5% in 2020 is attributable to environmental politics. As such the most extreme outcomes are capped. Politics are about change, not disruption. We do not believe the IMO is in any way against significant oil product price moves and spreads as they are the key driving forces for change.
Spots will call the shots. We expect the implications of IMO 2020 to start to impact physical oil product markets from 2H-19, resulting in a sharp widening of product spot price spreads. At that point, we forecast a sharp increase in the 2020 forward Gasoil 0.1% to HFO 3.5% price spread.
We expect the MFO 0.5% to HFO 3.5% price spread to widen to more than USD 360/ton and the Gasoil 0.1% to HFO 3.5% spread to increase to over USD 450/ton in 2020, before slowly decreasing once again as the market adapts.
Prices and price spreads should partially normalize in 2023 after benefits from several years of both shipping and refinery investments are realized.
Plenty of MFO 0.5% if the price is right: USD 90/ton below Gasoil
Increased demand for Bonny Light type of crudes due to 0.5% S limit
2020 HFO 3.5% surplus, stock building, contango and low spots
Up to 15 m bl/d of MFO 0.5% can be produced globally from straight run refining. MFO 0.1%: Nothing.
Environmental politics is about change, not disruption. Most extreme outcomes are likely capped.
MFO 0.5% premium to HFO 3.5%:
USD 360/ton in 2020 but only USD 90/ton longer term
Foreword – Enough MFO 0.5% if the price is right
This report is a follow up to our IMO 2020 in report in March 2018, which summarised our conclusions following over 100 meetings with shipping and refinery clients regarding IMO 2020 sulphur regulations.
Subsequently, we have held many more such discussions, while others have written plenty of related reports. General awareness of the likely effects of the new rules has increased significantly. Currently, we see no sign that the IMO will back down.
This report summarizes our understanding of developments since March. It also revisits some of our conclusions in the March report which in general all still seems to hold water.
During the past summer, we reviewed global crude slates and refining in some detail. We examined the European refinery sector in greater depth to forecast potential EU28 production of Straight Run Fuel Oil 0.5% and therefore also conclude that EU28 can produce more than enough MFO 0.5% compliant fuel.
Several things became clear to us. The world should easily be able to produce sufficient Straight Run Fuel Oil 0.5% (SRFO 0.5%) and consequently also enough compliant MFO 0.5% fuel for the global shipping sector in 2020, even though its price will likely need to be similar to that of Low Sulphur VGO (LSVGO) or around USD90/ton below the Gasoil 0.1% price. Such a price level should suffice to incentivise refineries to retain middle distillate components within SRFO 0.5% rather than to split them out in a second stage process involving vacuum distillation. Therefore, producing sufficient quantities of compliant Marine Fuel Oil 0.5% is more about retaining middle distillate components within SRFO 0.5% than blending Gasoil with HFO 3.5% which would make little sense.
It has also become clear from detailed data provided by Eurostat, which include a comprehensive overview of EU28 crude streams used for refining in 2017, that EU28 can produce more than 1 m bl/d of SRFO 0.5% in 2020 if consumers of marine fuel are willing to pay the right price (~LSVGO). This 1 m bl/d of SRFO 0.5% supply will be enough to cover both domestic demand and international bunkering demand in EU28.
If a simple refinery (CDU only) wishes to produce SRFO 0.5% with less than 0.5%
sulphur, it would typically need a crude with less than 0.24% sulphur although this depends somewhat on the gravity of the crude. If a semi-simple refinery with a vacuum distillation unit wants to produce vacuum residue with less than 0.5% sulphur it would need a crude oil with less than 0.12% sulphur.
While both the ordering and uptake of scrubbers has accelerated since our previous report in March, it remains consistent with our March projection of “less than 2000 scrubber ships in the beginning of 2020”. Overall, the shipping market appears to be moving down the scrubber path though marine demand for HFO 3.5% will be low in 2020. Including cheating, demand for HFO 3.5% should be well below 1 m bl/d in 2020.
Overall, in 2020, we still expect sharply lower demand for HFO 3.5% and demand to switch either directly or indirectly towards the middle distillate segment (by retaining LSVGO within SRFO 0.5%). We therefore still believe the price spread between Gasoil 0.1% and HFO 3.5% will widen to more than USD450/ton in 2020 while the price spread between SRFO 0.5% to HFO 3.5% will increase to over USD360/ton. We forecast this further widening in 2020 price spreads will occur once the effects of IMO 2020 regulations start to impact spot price spreads in 2H-19 and 1Q-20.
A political market and a political event
The IMO 2020 sulphur regulation event is environmental politics with the IMO member states in the driving seat in general and IMO board members specifically. It’s about driving change and not about havoc or disruption.
There are no signs that the IMO will back down from its January 1, 2020 0.5% sulphur deadline.
Global crude slates + refineries can produce more than enough Straight- Run Fuel Oil 0.5% for global marine bunker demand if consumers of the fuel are willing to pay the right price, which we estimate is similar to Low Sulphur VGO.
EU28 crude slates (2017 Eurostat) together with EU28 refineries can easily produce 1 m bl/d of SRFO 0.5% in 2020. This is enough to meet both domestic demand and
international bunkering demand in EU28.
The global shipping market is increasingly installing scrubbers but we still expect “less than 2000 scrubber ships at the start of 2020”.
Marine demand for HFO 3.5% still looks set to fall sharply with demand switching either directly or indirectly to middle distillates driving their prices higher. We expect the next step in widening the Gasoil 0.1% to HFO 3.5% price spread to occur when it impacts the spot spread some time in 2H-19 or 1Q-20.
We imagine the IMO must be very pleased currently seeing adaption to their new regulations taking place in shipping (scrubbers), refining and financial markets in terms of widening fuel price spreads in 2020-21. The IMO stands firm on its 2020
implementation deadline and we believe it can safely continue to do so given it is possible to produce more than enough MFO 0.5% for global marine demand in 2020 at the right price.
However, if the 2020 shift to a 0.5% sulphur limit in fact causes havoc or disruption, the IMO will surely and immediately soften the regulation, to ease and soften the switch by implementing different transitional rules. After all, if the IMO sulphur regulation was to create havoc and disruption such an outcome would leave the IMO accused of undermining both IMO members and the IMO organisation.
In our view, the IMO is not afraid of high fuel prices or large fuel price spreads as a driving force for change to 0.5% sulphur, albeit within limits. We are however certain they will in no way accept nor allow the 0.5% sulphur shift to degenerate into chaos and disruption. Consequently, we do not support the most extreme disruption or chaotic oil market scenarios. These outcomes will undoubtedly be avoided.
There are many concerns for the stability and quality of future MFO 0.5% fuel. The main worry is that MFO 0.5% from different suppliers cannot be mixed or “comingled” and that the MFO 0.5% fuel will be a highly unstable hybrid fuel. Given our findings in this report, we believe these concerns are exaggerated. Given the crude streams available in the world today, refineries can certainly produce more than enough high quality MFO 0.5% in 2020. Comingling of HFO 3.5% is already a problem that ships need to resolve today. That issue should not be any greater with the new MFO 0.5% fuel, if it is produced according to the quality standards already applied to HFO 3.5% today.
In our opinion, the entire switch to MFO 0.5% would have been easy to implement and also to regulate if it had not been for the fact that there is an opening to install scrubbers and therefore to continue to use HFO 3.5% fuel. Scrubbers have complicated the shift significantly both for the shipping market, for refineries and for the IMO. It is however difficult for the IMO to backtrack on scrubbers at this stage. The only way to do so would be if scrubbers can be shown scientifically to be environmentally unsound or harmful.
We understand the use of scrubbers does not cause harm to the environment, but that is not our battle to fight.
HFO 3.5%, MFO 0.5% or Gasoil 0.1%?
It is difficult for the market to navigate properly in the run-up to 2020 given the fact that currently the MFO 0.5% product does not exist either physically or financially.
Therefore, both technical and financial planning is difficult.
Without a physical and financial MFO 0.5% product, the market is forced to choose Gasoil 0.1% as a proxy product for MFO 0.5%. There is however a huge difference between 0.5% sulphur and 0.1% sulphur. Our report has found that 12.3 m bl/d of Straight Run Fuel Oil 0.5% (SRFO 0.5%) can be produced with worldwide crude streams today, again resulting in almost 15 m bl/d of finished MFO 0.5% if refineries maximized for it. However, considering present day crude streams worldwide, it is not possible to produce a single barrel of SRFO 0.1%!
Spot prices for SRFO 0.5% are quoted by main price agencies today like Argus. Typically, the price given is around USD 90/ton above the HFO 3.5% price and some USD 170/ton below its Gasoil 0.1% counterpart. We see comparable markings for IFO 380 0.5%
versus 3.5% sulphur in the US Gulf. These price markings are however during a situation where there is no stress or pressure in this product segment. During 2020-22, we expect SRFO 0.5% and thus MFO 0.5% to trade much closer to the Gasoil 0.1% price to incentivise refineries to produce enough MFO 0.5% fuel. However, beyond this period, we think it will once again fall back towards its current spot price mark-up of USD 90/ton over HFO 3.5%.
IMO wants change, not havoc. The IMO is not afraid of high fuel prices but we believe it would immediately ease regulations marginally if the switch to 0.5% sulphur became disruptive.
Global refineries and crude streams easily have the capability and capacity to produce MFO 0.5% fuel to the same stability and quality standards as HFO 3.5% is produced currently. Comingling of HFO 3.5% is an issue now. Comingling of MFO 0.5% is unlikely to become a more serious issue provided it is produced to quality standards equal to those of HFO 3.5% today.
Gasoil 0.1% is very different from MFO 0.5%. Given the lack of both a physical and a financial MFO 0.5%
product, the market currently uses Gasoil 0.1% as a proxy for the upcoming MFO 0.5% product.
Between 2020 and 2022, the first three years IMO regulations are in force, we expect MFO 0.5% to trade at a USD90/ton discount to the Gasoil 0.1% price and at a premium of up to USD 360/ton over MFO 0.5%.
Subsequently, we forecast the MFO 0.5% price premium to HFO 3.5% will decrease to USD 90/ton.
Give me a scrubber (count)
Since our March 2018 report, shipowners have rushed to order scrubbers. Clearly, the effect has snowballed as the 2020 deadline has moved closer, with the IMO refusing to make any concessions. Instead, a “chicken race” is taking place involving the IMO (which has held its ground) and shipowners (who have resigned themselves to complying).
Our belief, expressed in our March report, that the market would likely install scrubbers unless they were forbidden seems to have come true. The prisoners’ dilemma - “if none of us have it then everyone is fine, but if you buy it then I’ll have to buy it as well” - together with the fact that early movers will make a scrubber-profit while late movers will only make a scrubber-saving have probably contributed to the current snowballing effect taking place.
However, despite the rush to order scrubbers, we do not believe there will be more scrubber ships in 2020 than we forecast in our March report, i.e. “less than 2000”.
Instead, market expectations have been very, very low with the latest figures exceeding these projections.
Several agencies are closely monitoring the scrubber market, e.g. DVN and Clarksons Platou. A data overview is available free at DNV GL’s AFI site, subject to registration.
More details can be accessed by subscription. Latest freely available data are reproduced in this report with DNV’s permission.
DNV’s latest scrubber count for 2020 is 1623 installed and on order. Their 2021-2022 figures are not much higher, though we think that has more to do with the structure of order books. Many more will be installed during this period in our view.
Of particular significance is that bulkers, tankers and container ships are taking the lead with overall scrubber penetration of between 3% and 5% in each segment by 2020. As fuel savings from a scrubber are greatest for the biggest vessels, it is hardly surprising that penetration is well above average among the largest ships: Large Bulkers: 9%;
largest Containers: 15%; and largest crude carriers (VLCCs): 15%.
Almost all bunker oil consumption in 2020 will be MFO 0.5% since 95% of ships will not have scrubbers. Of course, there is therefore well-founded concern over the availability of HFO 3.5% fuel. Can it be bought everywhere? Probably not but it will be available at major hubs. Refineries will produce it, if nothing else because they have no choice. High sulphur residue is a natural by-product of global refining and HFO 3.5% is an important way of getting rid of it.
HFO 3.5% fuel oil will not be available in all ports but mostly in larger, selected ports.
Ports will need multiple fuel storage tanks in order to sell it. Vessels best positioned to deal with this will typically be container ships on fixed routes between two points, crude and product carriers that trade between refineries and oil hubs, and possibly also larger bulkers sailing on selected routes where HFO 3.5% bunkering is possible.
Therefore, both practically and economically, it is hardly surprising scrubber penetration is highest in these segments. For example, penetration in the VLCC segment will hit 15%
by 2020, and the same goes for larger container ships. Scrubber installation will advance most rapidly in these segments. But that also means that they will move faster to the point where the value of having a scrubber shifts from profits to savings.
Given the local competitive nature of freight rate setting, one might imagine that the profit generating capability of using a scrubber is inversely proportional to the penetration of scrubbers within a segment. The higher the penetration, the more likely two scrubber ships will come into direct competition on any given hub and compete on price down to the HFO 3.5% cost floor if the freight market is weak. Assuming the profit for operating a scrubber is proportional to USD200/ton * 50 ton/day = USD10,000/day, the profit generating capability of using a scrubber versus ship segment penetration would theoretically be as shown in table 2. If this is how it would work, then operating a scrubber ship in a segment with 50% scrubber penetration would reduce profit generating capacity from USD10,000/day to USD5,000/day.
Though there are 60,000 ships in the global trade fleet, there are only 20,000 larger ships that really matter, i.e. that consume significant quantities of fuel oil. If we assume a 20-year life span, this implies an average new build rate of 1,000 of these larger ships each year. Given the new sulphur regulations, we believe scrubbers will naturally be Scrubber ship count by DNV GL AFI
The stabilization at around 1600 after 2020 is solely due to the limited horizon of order books.
Table 1: Scrubber ship count by DNV GL AFI
Table 2: The profit generating capacity of a scrubber should be inversely proportional to scrubber penetration within a segment. Here we have assumed an s-curve shaped function relationship. Assuming fuel savings amounts to USD10,000/day.
Stylistically:
Yr 2020
Ship type Count All Large
Bulk carriers 552 5% 9%
Tankers(Oil/Chem) 401 6% 15%
Container ships 243 5% 15%
Cruise ships 155
Ro-Ro cargo ships 88
Gas tankers 47
Crude oil tankers 38
RoPax 33
General cargo 26
Car/pass. ferries 22
Car carriers 15
Fishing vessels 1
Other 1
Offshore vessels 1
Total scrubbers 1623
Large: "Share of largest ships in segment Market share
Scrubber penetration in segment
Profit generating capacity of a scrubber. Cost of scrubber should
be subtracted
Fuel cost savings on Low cost fuel
vs. High cost fuel 0% 10,000 10,000 10% 9,962 10,000 20% 9,772 10,000 30% 9,088 10,000 40% 7,475 10,000 50% 5,000 10,000 60% 2,525 10,000 70% 912 10,000 80% 228 10,000 90% 38 10,000 100% - 10,000
USD/Day
installed on all larger newbuilds. At the newbuild stage, the cost of the scrubber is small compared to the overall cost. It is also cheaper and easier to install than retrofits.
Therefore, our base assumption is that there will be 1,000 new scrubber ships annually of new builds. In the first couple of years, the installation rate will likely be held back, due to lack of scrubber production capacity. The rate of retrofits will probably be higher initially when there are many old non-scrubber ships that are reasonably suitable for retrofits both technically and economically.
We have held many meetings with different shipping companies since our March report, many of whom have decided to install scrubbers on at least part of their fleet with some still at the testing stage. We now summarize their arguments for and against installing a scrubber.
Proactive: Going for profits
A very small proportion of those shipping companies we met have taken a proactive approach: “IMO 2020 is the greatest investment opportunity in shipping in decades”.
They have typically gone all in with scrubber orders and installations.
Reactive: Customers want it + Operations are more reliable using HFO 3.5%
These shipping companies still hate scrubbers but have begun to order and install them because 1) Their customers are asking for them; and 2) the shipper wants to continue to run its ships on HFO 3.5% for operational stability reasons. Typically, they are concerned that upcoming MFO 0.5% fuel is not operationally stable and reliable. Currently, it is a totally unknown fuel with much discussion arguing it will not be possible to blend MFO 0.5% from different suppliers, that it will be too close to Gasoil and therefore possibly damage the engines, or that it will be generally unstable and disrupt operations as e.g.
large VLCCs or containerships suffer engine failures in critical situations and narrow shipping lanes, etc.
As one large shipping company stated: “We are opting for scrubbers in order to make our ships marketable”. Customers want it and operational stability is critical.
Tip-toeing: Let’s test a few
Currently, most shippers likely fall into this category, choosing to install scrubbers on a smaller part of their fleet to build step-by-step experience. Still, by doing so they are also contributing to the snowballing effect, as the market increasingly adopts scrubbers.
Not unless the customer is paying for it
A few of our clients who are in the business of offering their fleet of ships on long term chartering contracts have argued strongly that they will not install a scrubber unless it is included as a clause in the contract that the customer has specifically requested a scrubber ship and therefore expressly agreed to pay for a scrubber through the freight agreement.
Long term solution? – Not a clue!
Those of our customers who have opted to use scrubbers, partially or totally, generally have no strong views whether scrubbers represent a good long-term solution or not.
Indeed, mostly their opinions have suggested the opposite - that scrubbers are probably/possibly not a viable long-term solution. However, they are likely a sound solution for the next 5-10 years and very profitable for the first 3-5 years. Broadly, they believe that if they can get scrubbers installed on their ships early, they will earn a freight rate profit (and not just a fuel cost saving) that will enable them to pay down the scrubber cost within 1-3 years. In this case, it does not really matter whether it
represents a long-term solution or not.
The key argument for using scrubbers is that this method is cheaper for removing sulphur from exhaust gases where sulphur is present as short SO2 molecules than removing sulphur embedded deep within long, heavy hydrocarbon molecules. The argument why scrubbers are a bad solution focuses on the soundness of disposing of sulphur in the sea and suggests that the simplest and cleanest solution is to run ships on
“clean fuels”.
Graphing of Table 2: The competitive advantage effect of having a scrubber will likely rapidly start to drop as scrubber penetration reaches 40-50%. Here assuming a USD 200/ton fuel price cost premium for MFO 0.5% over HFO 3.5% and a fuel consumption of 50 ton/day.
Source: SEB
Open loop dominates: Cheap and simple. Run your ship on MFO 0.5% or 0.1% in waters where open loop is not allowed.
Retrofit is more prevalent than newbuild. That is not so strange given the large pool of non-scrubber ships. However, all larger new-build ships will likely be built with scrubbers. We therefore expect a new-build rate for scrubber-ships of around 1,000 each year going forward.
Source: DNV GL AFI
Clearly, scrubbers appear to be the cheapest solution to technically removing sulphur, with post-combustion removal cheaper than pre-combustion removal. However, this calculation does not include the environmental cost of emitting sulphur into the sea. If scrubber producers want a long and prosperous future producing marine scrubbers, they probably need to argue more forcefully (and of course scientifically) through the media that emitting this sulphur into the ocean is both safe and sound. In our view, they already have the necessary data available covering the safety of such discharges, though we believe it is now time to more actively promote this evidence in the media and with all interest groups involved in this area. Otherwise, it becomes easy to argue that all that is happening is that pollution is being taken out of the air only to be dumped in the sea, a formidable objection indeed unless properly refuted.
Scrubber fuel savings (or profits) as a function of ton/day fuel consumption and forward market price spreads (Oct 5, 2018) between our Synthetic MFO 0.5% price (44% HFO 1.0% + 56% Gasoil 0.1%) and the HFO 3.5% price in USD/ton
Source: SEB, Bloomberg Scrubber producers need to argue
their environmental case for discharging sulphur into the sea.
Otherwise they risk facing strong objections from others concerned with this subject.
Scrubber fuel cost savings are significant. Even if the MFO 0.5% to HFO 3.5% fuel price spread is as low as USD50/ton, it would still only take 4 years to pay down a USD2.5 million scrubber installation on a VLCC consuming 50 tonnes of fuel per day for 230 days a year.
Towards normality around 2023
We have prepared a table (table 3) showing the supply/demand balance for marine HFO 3.5% fuel. Although it has been simplified to make it easier to understand, we might instead have assumed that larger ships consuming very high quantities of fuel (more than 50 ton/day) will be equipped with scrubbers first, causing HFO 3.5% consumption to recover faster, and additionally assumed a different uptake rate for scrubber retrofits, or more rapid refinery adaption, all of which would have improved the outcome.
Table 3: Supply-demand balance for HFO 3.5% using approximate assumptions for scrubber installation rates, cheating and refinery adaption
Source: SEB
Notwithstanding our reference to “Refinery Marine HFO 3.5% production”, the market will of course be unable to run and store a surplus of 2.6 m bl/d in 2020 followed by another 2.2 m bl/d surplus in 2021 - it is impossible to store that much fuel oil. So that surplus will need to be resolved either on the refinery supply side or on the demand side outside of the shipping market. However, HFO 3.5% inventory will increase sharply, resulting in a persistent, lengthy market overhang for some time after the
supply/demand balance has been restored. This implies HFO 3.5% prices will stay low for longer.
Our proxy table indicates that the situation should start to ease around 2023/24, i.e. we will likely see 3-4 years of low HFO 3.5% prices vs. high MFO 0.5% prices before the supply/demand balance normalizes for HFO 3.5%, MFO 0.5% and price spreads.
Historically, the price spread between Gasoil 0.1% and HFO 3.5% has been around USD250/ton. Intense debate has focused not just on how wide this spread will be in 2020 and subsequently, but also where inside this spread the new MFO 0.5% will trade both in early years and in the longer term.
In table 3 we assumed that MFO 0.5% will trade on a par with Low Sulphur VGO (LSVGO) in the early years, to provide an economic incentive for refineries to produce sufficient amounts of Straight Run Fuel Oil 0.5% (SRFO 0.5%). Historically LSVGO has traded some USD80-90/ton below Gasoil 0.1%. Therefore, by implication we expect MFO 0.5% to trade USD80-90/ton below Gasoil 0.1% during those first years.
In the longer term however, this may however change. The MFO 0.5% price will then likely trade some USD50-90/ton above the HFO 3.5% price, firstly because SRFO 0.5%
appears currently to be priced around USD90/ton above HFO 3.5%, and secondly because RAI data (discussed later in the report) indicate that normally MFO 3.5% can be produced at a premium of around USD50-100/ton above the HFO 3.5% price.
We expect the Gasoil to HFO 3.5% price spread to expand to USD450/ton in 2020.
Assuming MFO 0.5% trades USD90/ton under Gasoil, this implies an MFO 3.5% to HFO 3.5% price spread in 2020 of USD360/ton. Subsequently, we believe the MFO 0.5%
price will trend convergently downward toward a USD50-100/ton premium to the HFO 3.5% price.
Year New Retro Total/yr
2019 50 - 3.6 3.6 - 250 160
2020 600 1000 1600 1,600 50 - 0.3 - 0.5 3.4 2.6 450 360
2021 1000 500 1500 3,100 50 - 0.6 - 0.4 3.2 2.2 350 260
2022 1000 1000 2000 5,100 50 - 1.0 - 0.3 3.0 1.7 300 200
2023 1000 1500 2500 7,600 50 - 1.6 - 0.2 2.8 1.0 275 165
2024 1000 1000 2000 9,600 50 - 2.0 - 0.1 2.6 0.5 250 130
2025 1000 750 1750 11,350 50 - 2.3 - 2.5 0.2 250 110
2026 1000 500 1500 12,850 50 - 2.6 - 2.5 - 0.1 250 100
2027 1000 250 1250 14,100 50 - 2.9 - 2.5 - 0.4 250 90 Scrubber
ships
Average HFO 3.5%
scrubber fleet burn in
ton/Day Scrubber installations
"Legal"
Marine HFO 3.5%
fuel burn in m bl/d
Refinery Marine HFO 3.5%
production in m bl/d
Supply minus Demand of HFO 3.5% in m bl/d
Gasoil 0.1%
to HFO 3.5%
price spread in USD/ton
MFO 0.5% to HFO 3.5%
price spread in USD/ton
"Cheating"
Marine HFO 3.5%
in m bl/d
We expect several transitional years before balances are restored and price spreads normalize, probably around 2023.
SEB projection of Gasoil premium over MFO 0.5% and MFO 0.5%
premium over HFO 3.5%
Source: SEB
During the first couple of years, MFO 0.5% will likely trade near the SRFO 0.5% price and therefore USD80- 90/ton below Gasoil 0.1%.
In the longer term, we expect MFO 0.5% to trend convergently
downward toward a USD50-100/ton premium to the HFO 3.5% price.
Forward prices: “All sorted by 2022?”
Generally, forward product prices discount almost no IMO premium in the Gasoil 0.1% to HFO 3.5% spread in 2022. In terms of the Gasoil 0.1% to HFO 3.5% spread (GOFO), forward prices indicate that “Everything will be resolved by 2022”, i.e. that IMO 2020 will only impact the GOFO spread in 2020 and 2021. By 2022 the forward market only discounts a USD14/ton premium in the GOFO spread compared with the normal historical relationship between crude oil, Gasoil and HFO 3.5% prices. The “normal” GOFO spread is based on forward crude oil prices to 2024 from which “normal” Gasoil 0.1% and HFO 3.5% prices are calculated.
Forward price curve for Gasoil 0.1% and HFO 3.5% in USD/ton
Actual and “normal” Gasoil 0.1% to HFO 3.5% forward prices
Source: SEB, Bloomberg SEB, Bloomberg
These observations are nevertheless subject to several qualifications. Firstly, the market only really discounts a problematic surplus HFO 3.5% in 2020 when HFO 3.5% is priced at a discount of only USD35/ton to its normal level. Subsequently, forward prices discount a tightening HFO 3.5% market in which HFO 3.5% will trade at an increasing premium to historical normal levels.
Secondly, the market discounts a consistent tighter than normal Gasoil 0.1% market to 2024 with a clear premium for Gasoil 0.1% over Brent crude compared to previous historical norms.
Gasoil – Brent, HFO – Brent and both vs. normal (USD/ton) Forward spread – Normal spreads = “Net IMO effect” (USD/ton)
Source: SEB, Bloomberg SEB, Bloomberg
We should certainly avoid reading too much into these forward skews as liquidity and price discovery is poor more than 2-3 years into the future. In our view, the market underestimates the downside price risk for HFO 3.5% in 2020, but also in 2021/22 as carried over HFO stock building in 2020/21 to the following years will depress prices also during this period. Surprisingly the forward market is today pricing in stronger than normal price levels for both Gasoil 0.1% and HFO 3.5% from 2022 to 2024 which is an outcome we find unlikely.
Forward product prices discount almost no IMO premium in the Gasoil to HFO spread in 2022, i.e. IMO 2020 will be resolved by 2022 - but subject to several caveats.
Forward market discounts a tight Gasoil market to 2024, pricing in a distressed HFO 3.5% surplus only in 2020, a “normal” HFO 3.5% market in 2021, and an increasingly tight HFO 3.5% market subsequently.
The forward market cannot possibly be correct to discount a normalized HFO 3.5% market in 2021,
especially given a likely carryover of stock building of HFO 3.5% from 2020 to 2021.
Spreads: Spots call the shots
What we see repeatedly in commodity markets particularly and often in financial markets generally is events not being properly priced in till they occur, even if everyone thinks they will in fact take place. Seemingly, the market needs to see real events play out in the spot market before it is willing to properly discount them in forward prices.
Concerning developments in the price spread between Gasoil 0.1% and HFO 3.5%, forward price spreads follow changes in the spot price spread closely. Clearly, the IMO 2020 effect was partly discounted in forward prices when the IMO made its decision in October 2016. However, subsequently the spot spread has guided and controlled forward price spreads.
Historical spot price spread (ARA) between Gasoil 0.1% and HFO 3.5% in USD/ton and forward yearly spreads to 2024
Source: SEB, Bloomberg
We believe IMO 2020 is still only partly discounted in forward prices. The forward 2020 Gasoil 0.1% to HFO 3.5% spread stands at USD330/ton. We expect this to increase to over USD450/ton in 2020, but not before it does so in the spot spread. The market will need to see real physical action before it prices in a wider 2020 spread.
We believe physical action and a wider spot price spread will start to materialize in 2H19 and 1Q20. At this point, IMO 2020 will be reflected increasingly in the physical market with fuel tanks cleaned out as ships switch to MFO 0.5% fuel, at first gradually but more increasingly in 2H19 and fully in 1Q20.
During this period we expect an increasing inventory build of HFO 3.5% as demand disappears leading to a deep drop in the HFO 3.5% spot price and a deepening contango for the HFO 3.5% fuel price forward curve. Inventory of HFO 3.5% is likely to build significantly through 2020, 2021 and probably also 2022 leading to an overhang of HFO 3.5% stocks which will likely linger in the market for quite some time thus depressing prices for longer.
The opposite is likely to happen to Gasoil 0.1% and MFO 0.5% prices as demand shifts to these products. As demand shifts abruptly towards these products inventories are set to drop, spot prices to rise with forward curves for these moving into steep backwardation.
As this unfolds in the spot market and the spot price spread for Gasoil 0.1% to HFO 3.5%
widens to more than USD450/ton in the second part of 2019 and early 2020 then the forward price spread for 2020/21/22 are also widening out significantly, properly pricing in the IMO 2020 event.
Spot prices and spot price spreads have a powerful impact on the pricing of futures contracts.
It is VERY difficult for the market to price the future significantly different from spot and near term prices.
There is therefore an illogically strong relationship between the Gasoil to HFO spot price spread and the 2020 forward spread for the same products.
The forward 2020 spread moves in lockstep with the spot spread.
We expect forward 2020 price spreads to be contained until mid- 2019. In 2H19 and 1Q20 we forecast IMO 2020 to impact spot prices causing spot spreads to widen sharply. At that point, forward price spreads for 2020, 2021 and 2022 will increase substantially along with the widening spot price spread.
An historical price guide
In the table 4 we extract historical average prices for different oil product prices and spreads versus the Brent crude oil price, as both product prices and product price spreads are often proportional to crude oil price levels.
As we argue later in this report, we expect 2020 non-scrubber compliant marine fuel oil, often dubbed MFO 0.5%, to trade close to the price of Straight Run Fuel Oil 0.5% (SRFO 0.5%). Once again, we expect this to trade at a similar price to that of Low Sulphur VGO (LSVGO) because in order to produce enough MFO 0.5% and SRFO 0.5% production of LSVGO must be cannibalized as a large ramp up in SRFO 0.5% must necessarily be at the expense of LSVGO output.
Under circumstances where the Brent crude price lies between USD60-80/bl, LSVGO typically trades at a price mark-up of USD171/ton over HFO 3.5% with Gasoil 0.1%
trading around USD89/ton above the LSVGO price.
Therefore, initially, MFO 0.5% and SRFO 0.5% should trade close to the LSVGO price in 2020-2023 and so around USD90/ton below Gasoil. However, circumstances are unlikely to be “normal” during these years. Gasoil 0.1% will probably be driven higher than usual vs. Brent crude and HFO 3.5% lower than normal versus Brent. Consequently, 0.5% sulphur products should be dragged upwards together with Gasoil.
The table shows that under such circumstances the LSVGO price increasingly lags the rising Gasoil price. When Gasoil and Brent crude prices spiked back in 2008, Gasoil traded at a price premium of USD242/ton over the LSVGO price with the Brent crude price around USD130/bl.
At the time of writing, the ARA spot price of SRFO 0.5% is at a premium of USD90/ton above HFO 3.5% and at a USD170/ton discount to Gasoil 0.1%. Therefore, the current spot price of SRFO 0.5% is not at all similar to that of LSVGO. However, we still think it will be in 2020-2023.
The present SRFO 0.5% spot price and its spreads to both HFO 3.5% and Gasoil 0.1%
likely suggest that in the longer run, when the dust has settled around 2023, the SRFO 0.5% price should end up trading at a premium of about USD90/ton to HFO 3.5% while the LSVGO price will trade at a premium of USD170/ton to HFO 3.5%. i.e. in the longer term the SRFO 0.5% price, and therefore the MFO 0.5% price also, will lose their close connection to the LSVGO price and once again trade spot as it does today at a premium of around USD90/ton to HFO 3.5%.
Throughout the upheaval in 2020, we expect the Gasoil to HFO 3.5% price spread to widen to at least USD450/ton, while MFO 0.5% premium to HFO 3.5% will increase to around USD360/ton as MFO 0.5% trades some USD90/ton below the Gasoil 0.1% and LSVGO prices. However, the price discount to Gasoil 0.1% may be larger as in 2008.
Table 4: Historical average prices and price spreads for different products versus selected Brent crude oil price levels
Source: SEB, Bloomberg. Note: “Synthetic ULSFO 0.5%” is defined as “44% * LSFO 1.0% + 56% Gasoil 0.1%”
The MFO 0.5% price must be similar to Low Sulphur VGO in 2020 to incentivise refineries to supply sufficient quantities of MFO 0.5%.
This implies a price for MFO 0.5%
equal to Gasoil 0.1% minus USD90/ton.
As we write, the ARA spot price of Straight Run Fuel Oil 0.5% is USD90/ton above HFO 3.5% and USD170/ton below Gasoil 0.1%.
This is likely a good indication of the longer-term price outlook after IMO 2020 changes have taken full effect around 2023.
The Gasoil 0.1% to HFO 3.5%
spread is likely to expand from a spot spread of USD250/ton today to more than USD450/ton in 2020, while the MFO 0.5% to HFO 3.5%
spread will likely increase from USD90/ton today to more than USD360/ton in 2020 before again falling back towards current and normal historical price spreads where it will trade at some USD90/ton above the HFO 3.5%
price.
IMO 2020 – Like a candle in the wind?
Many years’ experience in commodities markets has taught us the wisdom of listening not only to powerful voices but also to opinions expressed less forcibly.
In particular, the Refinery Automation Institute (RAI) published a report in August 2017 which was later republished in the Oil & Gas Journal in January 2018:
http://refautom.com/NewsDB/IFO380%202020%20sulfur%20spec.pdf
Although they did not explicitly state that the effects of IMO 2020 would vanish like “a candle in the wind”, that is how we interpret their report (above). They argue that there is more than enough low sulphur blending components in the US Gulf to meet the global needs of 0.5% sulphur bunker oil in 2020 or “0.5%S IFO 380” as they call it. That there is no need for costly additional residue hydro-cracking and hydroprocessing and that their blending recipes for 0.5% bunker fuel meet all the ISO8217 specs, are not “Gasoil”
with no risk for Gasoil induced thermal engine shocks or other related issues.
What the RAI is selling is competence and “0.5%S IFO 380” recipes in the form of computer programs, knowledge and petrochemical insights. We have no reason to doubt their ability, nor the soundness of their recipes or their estimates for available blending components in the US Gulf and their relative cost. The prices of these components are however taken at a point in time (August 4, 2017) when there was no tightness in the market for them. Things will be very different in 2020 in our view.
We believe RAI materials suggest what the likely longer-term price mark-up for “0.5%
IFO 380” vs. “3.5% IFO 380” should be, i.e. around USD50-100/ton, as suggested by their example and data as of August 4, 2017.
In their example at that time, they concluded that five different stable “0.5% IFO380”
blends could be made that on average cost USD344/ton and USD51/ton more than the Bloomberg US Gulf marker for HFO 3.5% of USD293/ton; and also that these five blends had an average discount of USD41/ton less than the Platts marker for “IFO380 0.5%S”
which was marked at USD385/ton that day.
However, reading their study, it does not represent a global balance of low sulphur components of which “IFO380 0.5%S” will be a part in 2020. Our view is that all low sulphur components indicated by the RAI in their report to be in the US Gulf are already used today for other purposes. Therefore, we believe that to assume a significant quantity of these can suddenly be taken up and used to supply 2.5 to 3.0 m bl/d of IFO380 0.5% in 2020 without any price consequences is like shuffling cards around a table, i.e. doing so does not increase the amount of low sulphur components per se.
Consequently, the RAI report does not change our view that the price for MFO 0.5%
(IFO380 0.5%S) will be driven higher along with LSVGO and Gasoil 0.1% due to low sulphur tightness and a tight Gasoil market, while the price of HFO 3.5% will fall sharply.
Their report does indicate what the longer term 3.5% versus 0.5% fuel oil spread should be: USD50-100/ton.
If we read the study correctly, we recommend treating the RAI’s warning that the IMO 2020 event will have no more than a passing effect - “like a candle in the wind” - very cautiously. Still, it is important to remember that a fuel cost saving of USD50/ton will pay down a VLCC scrubber in 4 years.
Table 5: RAI’s Au 4, 2017 IMO 2020 study example for 0.5%S IFO380 blend recipes
Source: SEB, RAI, Oil & Gas Journal, Bloomberg
Blend component Recipe 1 [wt%] Recipe 2 [wt%] Recipe 3 [wt%] Recipe 4 [wt%] Recipe 5 [wt%] Average
Atm Straight Run-LS 74.0% 71.4% 31.8% 73.0% 0.0% 50.0%
Vac Resid-LS 0.0% 0.0% 31.8% 0.0% 47.3% 15.8%
LCO-LS 0.5%S 2.1% 9.9% 29.2% 3.3% 18.5% 12.6%
No6 Fuel Oil 1%S 6.8% 0.0% 7.2% 0.0% 4.8% 3.8%
No6 Slurry 17.1% 0.0% 0.0% 23.7% 0.0% 8.2%
VGO LS 0.0% 18.6% 0.0% 0.0% 29.4% 9.6%
Blend results
Sulfur m/m % 0.5% 0.3% 0.5% 0.5% 0.5% 0.5%
Visco, cSt (50C) 380 80 101 337 120 204
Blend Cost (USD/ton) 307 379 335 308 389 344
U.S. GoM HFO 3.5% Blbrg 293 293 293 293 293 293
Platts IFO 380 0.5%S 385 385 385 385 385 385 Prices as of Augut 4, 2017
RAI 2017 Study of IMO 0.5% S IFO380 Recipes (for 2020) in USA Gulf Coast
“More than enough low sulphur blending components in the US Gulf to make stable “0.5% IFO380”
blends with no need for additional hydro-cracking or hydroprocessing”
- (Refinery Automation Institute)
Five stable “0.5%S IFO380” blends with an average blending cost of USD51/ton above HFO 3.5% and USD41/ton below the Platts
“IFO380 0.5%S” marker on August 4, 2017
The RAI study is probably a good indicator for the longer term price mark-up for MFO 0.5% over HFO 3.5% which should likely be around USD50-100/ton
SEB: The RAI study is not an accurate view of the global balance in low sulphur products in 2020. Low sulphur components available in the US Gulf today are already fully utilized. Their price example from August 4, 2017 is from a time when there was no market tightness. It will be very different in 2020 when demand for low sulphur components jumps and demand for high sulphur HFO 3.5% falls sharply.
Beware the Gasoil 2020 crack
The forward 2020 Gasoil crack to Brent crude in USD/ton does not seem especially extreme compared to daily Gasoil cracks to Brent. From such a perspective, the USD120/ton Gasoil to Brent crude oil crack for 2020 appears modestly priced, residing as it does in the outer “cloud” of this daily distribution. See first graph below.
However, daily Gasoil cracks are erratic. So, if instead we consider the 120 day moving average of daily historical Gasoil cracks to Brent crude (second graph below), the Gasoil crack to Brent has only remained at USD120/ton for 120 days consecutively once, in 2008. Therefore, the market’s present willingness to discount a crack of USD120/ton for all of 2020 is certainly extreme. Of course, the market may be wrong, but if it is right this would indicate a volatile outlook not seen since 2008 with a spike in both Brent crude and Gasoil ahead in 2020.
Gasoil 0.1% crack to Brent in USD/ton versus Brent crude in USD/bl. Daily cracks back to 2001 with daily points from 2008 highlighted as well as the 2020 forward crack.
In our view the largest price dislocation is for a large discount for HFO 3.5% versus Brent crude in 2020. However, the most dangerous is for Gasoil 0.1%, as it may potentially drive a spike in prices for the whole light sweet crude and middle distillate complex.
Graph as above but filtered with a 120 day moving average
Source: SEB, Bloomberg A USD120/ton Gasoil 0.1% crack to
Brent is currently priced for 2020 in the forward market. A crack of such a magnitude for a full year has not been seen since 2008 when Gasoil and Brent crude oil prices spiked in lockstep at high levels.
A USD120/ton Gasoil 0.1% crack to Brent for 2020 is extreme. Either the forward market is wrong and completely off the mark or we are set for a potentially wild ride in 2020 with a spike in both Gasoil and light sweet crude oil prices.
The global crude barrel (32; 1.3%)
What particularly simple and semi-simple refineries produce largely reflects the characteristics of whichever of the 300 differently named crude oil inputs available worldwide have been used. Typically, crude oil is ground extracted so every oil well yields a slightly different crude that reflects local chemical, mineral and metals composition.
Typically, one barrel of crude oil will contain 100 million different compounds, each comprehensively defined by its crude assay.
Most simply, crude is categorized by reference to its gravity and sulphur. While confining our discussion throughout this report to these factors, we have also considered the key constituents of crude after it has been boiled, distilled and vacuum-distilled.
In the following graph we plot 247 different crude streams by weight and sulphur content. The two main segments are:
(a) Light Sweet crude (which appears in the lower right-hand corner) which is typical of Brent crude slate found in the North Sea, etc. Brent crude has an (API; S%) = (38; 0.4%)
(b) Medium Heavy Sour crude (the upper middle rectangle) which is typical of Middle East crudes. Dubai crude has an (API; S%) = (31; 2.0%).
Aggregating all crudes in a single barrel and considering volumes for each different stream, the average global barrel has an (API; S%) = (32; 1.3%).
Crude Streams (247) by Weight and Sulphur
Source: SEB, ENI, Wikipedia
Table 6: Global crudes with respect to sulphur and gravity (API)
Source: ENI
From To From To 1,000 bl/d Share
Ultralight 50 3,354 4%
Light & Sweet 35 50 0.0% 0.5% 14,955 18%
Light & Medium Sour 35 50 0.5% 1.0% 4,115 5%
Light & Sour 35 50 1.0% 3.3% 2,534 3%
Medium & Sweet 26 35 0.0% 0.5% 7,629 9%
Medium & Medium Sour 26 35 0.5% 1.0% 3,331 4%
Medium & Sour 26 35 1.0% 3.3% 33,863 41%
Heavy & Sweet 10 26 0.0% 0.5% 2,269 3%
Heavy & Medium sour 10 26 0.5% 1.0% 1,720 2%
Heavy & Sour 10 26 1.0% 3.3% 7,199 9%
Unassigned Production 765 1%
The global crude barrel 81,734 100%
API Sulphur
The characteristics of each of the 300 different crude streams available today are largely determined by the chemical, mineral and metallic composition of the area from which they are extracted.
A Crude Assay comprehensively defines a crude stream by its hydrocarbon distribution, minerals, metals, sulphur …
The two principle characteristics of crude oil are gravity (API) and sulphur (S%).
The global crude oil barrel - the volume weighted average of all crudes - is Medium Heavy and Sour (abbr. Medium Sour) with (API 26- 35) and (S% ≥ 1%), typical of Middle Eastern crude.
Graphically, this data appears as follows:
Global Crude Slates by Weight and Sulphur Content [1,000 bl/d]
Source: SEB, ENI
Significantly, Medium Sour (in full: Medium Heavy & Sour) is the largest category, sourced mostly from the Middle East with Dubai crude typically the global benchmark for this category of crudes. As the leading category of crude produced, most new refineries are usually built to process it.
Light Sweet crude accounts for 15 m bl/d of crude production and is usually the category most in demand as it possesses a large amount of gasoline and diesel components.
Consequently, Brent and WTI crudes have typically been the price benchmarks leading gains and declines in the global crude oil market.
Classifying global crudes by sulphur content shows 28 m bl/d of sweet crude produced sulphur content below 0.5%.
Cumulative crude (247) production vs. Crude S% Global crudes (81 m bl/d) by S%
Source: SEB, ENI, Wikipedia SEB, ENI
Pooling and averaging lowest sulphur crudes shows 47 m bl/d of crude produced worldwide have average sulphur concentration of 0.5%.
Further, there are very few crude streams with Crude S% >3%. These account for ~6 million bl/d of production, mostly from Venezuela, Canada, Mexico and the Middle East.
Moreover, many smaller streams possess Crude S% <1% and <0.5%.
28 m bl/d out of 81 m bl/d of crude production has S%≤0.5%.
Pooling and averaging lowest sulphur crudes shows 47 m bl/d of crude produced worldwide have average sulphur concentration of 0.5%.
Hundred million different molecules
Chemically, one barrel of crude oil contains 100 million different molecules. Refining aims to remove various constituents to produce oil with the requisite specifications.
Firstly, crude is boiled. Its vapour is then fed into a distillation tower where it is
condensed and collected at different selected temperatures, which can be set largely as required to collect and separate various molecular elements in crude into different pools or groups based on the boiling point of each type of molecule, a process known as
“cutting the barrel”. Refineries will often specialize in the production of specific oil output, preferably based on a subset of global crudes, and “cut the barrel” according to its specialization.
Usually, the boiling points of different molecules are closely related to their gravity. The lower the boiling point, the lighter the molecule. However, there are of course other chemical attributes which also help determine these boiling points.
Generally, distillation occurs in two stages:
1) Simple: Atmospheric 2) Semi-simple: Vacuum.
A semi-simple or more complex refinery will feed the Atmospheric Residue (AR) from the atmospheric distillation into a vacuum distillation unit, further separating molecules in the AR into either a) Vacuum Gasoil (VGO) or b) Vacuum Residue (VR). Together, these two components comprise the AR of the first round.
Splitting the global crude oil barrel into its component parts by temperature without modifying different molecules (i.e. no coking, cracking etc):
Note: Atm. Resid = Vacuum Gasoil + Vacuum Resid.
Atmospheric Dist. and Vacuum Dist. of the Global Barrel by Volume and S% by Cut
Source: SEB
Of course, sulphur content in marine bunker oil is of greatest significance for the new IMO 2020 regulations. While the current sulphur limit in HFO 3.5% fuel oil is 3.5%, the actual average sulphur content in bunker oil today is only around 2.5%. The crude oil barrel residue is used to produce fuel oil either AR or VR.
Significantly, the previous graph shows that the sulphur concentration of the global barrel in both the AR (2.3%) and VR (3.3%) is fully consistent with the present 3.5%
HFO limit. Today’s sulphur limit of 3.5% sulphur presents no current problems for refineries, with most refinery residues well within the limit. However, this also means that refineries will face major difficulties when the IMO lowers the limit to 0.5% in 2020, as they will then have no outlet for their high sulphur residue. Still, it may not be too hard to produce adequate MFO 0.5% fuel.
