US refiners expect major market shifts for the fuels they produce when the lower sulfur bunker fuel specification takes effect globally in 2020, but exactly how that will affect operations remains murky.
One thing is certain, the International Maritime Organization has made it clear the mandate is here to stay and there is no going back.
"This is the biggest individual fuel change that we've seen on a concerted global level that's ever taken place," Brad Levi, refining general manager for Marathon Petroleum, told attendees at the recent American Fuel & Petrochemical Manufacturer convention in New Orleans.
About 3 million b/d of high sulfur fuel oil will have to be replaced with lower sulfur fuel to meet the 6 million b/d of global demand expected in 2020, according to an S&P Global Platts Analytics report released earlier this week.
Of the three most widely discussed options to reduce bunker fuel sulfur content, using existing cleaner fuels to blend into the pool of heavier grades will likely be the first option. An alternative like adding scrubbers to ships, or building or retrofitting ships to run LNG, will likely take more time than there is before the mandate comes into effect. So will adding new units to existing refineries.
Blending, therefore, is expected to pull on fuels like 10-15 ppm ULSD, jet fuel or even low sulfur VGO, a gasoline-making feedstock.
AFPM panel participant Jason Breslaw, a senior originator with BP North America, said by 2019 shippers will "transition directly" to a new very low 0.5% sulfur fuel oil which will be compliant with the mandate.
"I expect it to be a majority distillate and a majority VSFO," said Breslaw.
Breslaw also expects strong demand for 0.1% and 0.5% DMA, a marine gasoil used in Asia. The price difference between the two grades is already widening. Lower sulfur DMA into western Japan averaged a $125.90/mt premium so far in the first quarter 2018, compared with the $96.40/mt premium held in the second quarter of 2017, Platts assessments show.
Other distillates will also be tapped for blending.
"We may even see some road diesel," Breslaw added.
The spread between NYMEX front-month ULSD cracks and the 24 month ULSD cracks continue to widen. So far in the first quarter of 2018, the March 2020 NYMEX ULSD crack is averaging a $4.82/b premium over the front-month. This compares with the $1.83/b premium it held in the first quarter of 2017. IMPACT ON GASOLINE?
BP's Breslaw reiterated that any increased use of VGO would likely impact the gasoline market.
VGO is generally used to feed the gasoline-making fluid catalytic cracking units, but lighter grades can easily be used in bunker fuel, he said.
"So you can't steal that much FCC feed or VGO from the FCCs or else you are not the making the gasoline," he added. "The problem is that when you look at the forecast for demand of distillate and gasoline in 2020, the world needs more of both products."
In the US, gasoline demand is expected to grow from 9.32 million b/d in 2017 to 9.39 million b/d in 2019, according to US Energy Information Administration forecasts. Distillate use will grow from 3.94 million b/d to 4.09 million b/d in the same timeframe.
USGC refiners will be early winners because they have enough coking capacity to upgrade the heavy, high sulfur resid and the flexibility to tweak their runs to get the most economic benefit in the early days.
"If it's one thing that [US] refiners are good at, and that is optimizing," said panel member Ralph Grimmer, senior associate with Stillwater Associates.
"Traders and optimizers are going to have a field day. Especially in the US where we have more resid destruction capacity," he added.
