Power sector’s thirst for fuel oil after IMO low sulfur cap shifts bunker demand
Fuel oil traders are turning to the power sector to assess how much demand may remain for their product after the International Maritime Organization’s tighter bunker sulfur limits leave most ship operators buying cleaner fuels in 2020.
Only about 10%-15% of the fleet are expected to have scrubbers installed that would then allow shipowners to burn 3.5% fuel oil, according to a study from consultants CE Delft. Bunker fuel demand is currently estimated at over 300 million mt/year globally, according to industry estimates.
From the CE Delft study, commissioned as part of the sulfur proposal’s mandatory review, the IMO predicts that heavy fuel oil-based products will make up around 84% of the bunker market in 2020, out of about 320 million mt annually, of which 233 million mt will be 0.50% compliant fuel oil. Therefore a vast amount of excess heavy fuel oil will be available, most likely at a hefty discount.
Most of the power sector globally has largely shifted to cleaner, more efficient fuels and away from fuel-oil-fired generation for environmental and cost reasons, particularly in the developed world. However, developing nations are more price-focused about fuels for generation and the likely reduction in the price of HSFO from 2020 could encourage the use of fuel oil in power plants, once most shipowners do not have a use for the product.
If there is an appropriate discount for fuel oil, approximately 500 million b/d of HSFO is expected to go into on-shore thermal uses, displacing crude and gas, according to S&P Global Platts Analytics.
EAST OF SUEZ
Fuel oil is predicted to be one of the fastest-growing components in the Middle East in the coming years, as the appetite for fuel oil-generated electricity soars. The International Energy Agency projected in its Oil 2018 report in March that Middle East demand for fuel oil for power generation will increase by 3.1% from 2017-23.
The agency projected demand for residual fuel oil in the Middle East would rise from 1,559,000 b/d to 1,876,000 b/d in 2023.
Saudi Arabia’s fuel oil demand from 2016-17 was predicted to rise by 80,000 b/d due to fuel switching in the power sector, the IEA said. This was coupled with a decline in gasoil demand by 105,000 b/d as Saudi Arabia had begun to replace gasoil-fired generation with natural gas and had increased the use of fuel oil in new generating capacities to accommodate coming changes in the structure of oil demand. The Saudis will also take advantage of cheap fuel oil for desalination purposes.
Bangladesh and Pakistan have also been highlighted by traders as potential outlets for fuel oil from Europe for power generation and cement plants. Nonetheless, others believe the high sulfur volumes pulled by these countries will be minimal in comparison to volumes drawn currently by the bunker market.
Russia will also likely take advantage of the lower HSFO netbacks to refineries and will use its domestic fuel oil production in power generation, displacing gas, Platts Analytics said.
“I think the demand for HSFO will be greater east of Suez,” a trader said. “Maybe the east-west spread will be wide enough for the arb to be workable over summer [for power generation demand].”
In the fuel oil paper market, the east-west spread — 380 CST SG vs FOB Rotterdam 3.5% FO Barge Diff — was last traded on ICE at $19.25/mt for Cal 19, and $13.70/mt for Cal 20, showing a heavily backwardated structure.
“If you look at the east-west curve in Cal 19/Cal 20, it is in backwardation,” a second trader said. “The arb from west to east will be reduced.”
The lack of demand for 380 CST bunker fuel oil from the world’s largest consumer of the product, Singapore, will result in a decrease of barrels being pulled in by the eastern region, the trader added.
WEST OF SUEZ
Latin American and Caribbean countries Mexico, Venezuela, Colombia, Peru, and Trinidad & Tobago produce large volumes of fuel oil due to their intake of heavy sour crudes and lack of coking capacity.
These five countries alone produced an average of around 650,000 b/d of residual fuel oil from 2011 to 2015, S&P Global Platts Analytics data showed. Mexico and Venezuela have fuel oil yields from their refineries of around 22% and 30%, respectively. Both countries produce high volumes of sour crudes from wells, and use much of these sour crude grades in their own refineries.
US Energy Information Administration import data showed only 961,000 of the 91.828 million barrels of fuel oil imported from Mexico since 2012 had sulfur content below 2%. Around 14% of the fuel oil imported from Venezuela to the US since 2012 was below 2% in sulfur content.
The question of where this fuel oil will go once HSFO bunker demand evaporates in 2020 is still open.
In other regions, a less dramatic turn of events could be that HSFO will compete with coal if the price discounts are favorable. Even with low prices, a lack of oil-fired power generation infrastructure in some countries could limit or prevent large purchases of HSFO.
In addition, territories and countries that still use fuel oil for power generation like Puerto Rico, Brazil and Argentina have strict sulfur regulations that would prevent burning of HSFO from Mexico and Venezuela.
Any large-scale move to fuel oil for power generation will likely be a slow one and will not be enough to absorb all the excess product globally.
“There are not that many oil-powered or dual capability power gens left in the world and everyone is trying to get rid of them,” an analyst said.
US fuel oil traders and refiners said some domestic refineries may have to cope with excess fuel oil, but the prevalence of delayed coking and refinery complexity would limit any major impact post-2020. US delayed coking capacity rose from 1.9 million barrels/stream day in 2000 to 2.8 million barrels/stream day in 2017, EIA data shows.
US EIA data shows the fuel oil yield of US refineries has averaged 2.5% in 2018, down from around 4.1% a decade earlier, even as more heavy sour crudes have been run into refineries.