Bunker Fuel: Supply, Demand and Pricing -...

Bunker Fuel: Supply, Demand and Pricing

Prepared for

Bunkerworld Business ExchangeHouston – 10 March 2010

2 Bunkerworld Business Exchange – Houston 2010

Agenda

Introduction

Residual Demand & Quality

Refinery Supply

Pricing


Purvin & Gertz, Inc.Technical, strategic and commercial advisory services for the global energy industry

Energy Market Analysis Refinery Valuations Technology Evaluations Crude Oil Valuations Project Finance Assistance Independent Engineer Conferences/Training

Core Competencies


Purvin & Gertz - Background

Founded in 1947 Independent firm owned by active consultantsConsulting staff of Engineers/MBAs

Join with 10-15 years of industry experience

Technical, commercial and financial experience with an average of 23 years firm-wide


Ongoing Detailed Analysis of Energy Markets

Global Petroleum Market Outlook Two modules

• Balances updated in March• Price & Margin forecasts updated quarterly

Widely used in oil industry for strategic planning Short-term Crude Oil and Refining Outlook

Separate market reports for tactical planning Other Market Publications

LPG studies North American Natural Gas Global LNG Petrochemical Feedstocks

Special Topic Studies Residual Fuel Canadian Oil Sands China’s Rapid Growth


Agenda

Introduction


Refinery Supply

Pricing


World marine bunker demand has been increasing as total residual fuel demand remains stable

Million Tons

Residual Fuel Demand

Includes all stationary, domestic and international bunker and refinery residual feedstocks

0

100

200

300

400

500

600

700

1995 1997 1999 2001 2003 2005 2007 2009

15%

20%

25%

30%

35%Feedstocks

Other

Industrial

Power

Bunker

PercentBunker


Residual fuel oil demand for power generation has been falling in most, but not all regions

Million Tons

Power Sector Residual Fuel Demand

Many large consumers have switched fuels but certain countries will continue to use and even grow oil-fired power generation

0

100

200

300

1995 1997 1999 2001 2003 2005 2007 2009

North America

CIS

Africa

Europe

Latin America

Middle East

Asia


Global waterborne trade for most categories has grown faster than overall world GDP

Percent Growth in Tonne-Miles vs. GDP, %1986-89 Average (S)

1990-93 Average (W)

1994-2000 Average (S)

2001-03 Average (W)

2004-08 Average (S)

S= Relatively strong global economic growth

W= Relatively weak global economic growth

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Petroleum

Bulk Commodities

Dry Goods


Global bunker demand expected to decline this year. Long-term growth projected at ~2.5%/yr.

Million Tons

By our estimates, bunker has been growing at nearly 4%/yr on average since 1995

0

50

100

150

200

250

300

350

400

1995 2000 2005 2010 2015 2020

Tankers Bulk Carriers

Container/ Dry Goods Other Vessels


The globalization of product manufacturing will drive driven bunker demand in all regions

FIGURE II-4REGIONAL BUNKER FUEL DEMAND(Million Tonnes)

0

50

100

150

200

250

300

350

400

450

1995 2000 2005 2010 2015 2020 2025 2030

Asia Middle East Latin America EuropeAfrica CIS North America

Eastof

Suez

Westof

Suez


IMO sulfur regulation timeline

0.0

1.0

2.0

3.0

4.0

5.0

2005 2010 2015 2020 2025 2030

Global

ECA

% Sulfur, max

Study in 2018 determines availability of LS fuel and start date for 0.5% S limit


Most immediate regulations relate to ECAs

Current (S)ECAs established in the North Sea and Baltic Sea

U.S. EPA has submitted a ECA request to the IMO in conjunction with Canada

California has issued a Marine Notice that only distillate fuels can be used within 24 n.m. from July 2009

ECAs likely to be adopted in other areas

Norway

Med?

Straits of Melaka?

South Korea?


RFO bunker consumption is concentrated in a small portion of long-haul vessels

Percent of Global RFO Demand

Percent of Vessels (approx. 100,000 total)

Installing scrubbers on a few thousand of the largest bunker consuming vessels would allow a large portion of bunker to remain high sulfur

- - Use in ECA’s less likely - -

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 5% 10% 15% 20% 25% 30%


Agenda

Introduction


Refinery Supply

Pricing


Reduction of bunker fuel emissions is a complex inter-industry issue

Requires low cost fuel – very competitive market

Resists capital and added complexity of scrubbers

Facing complex regulatory environment Uncertain ECA and global

regulation schedule

NOx, PM and perhaps CO2

Bunker has traditionally been a low-value by-product

Difficult to envision investing for bunker production

Stranded investment risk if emissions technology evolves

Concerned with magnitude of investment required

Needs clear signal from fragmented shipping industry on fuel requirements

Shipping Industry Refining Industry


Our study is based on a scenario analysis to understand impact on refining industry

Scrubbing of stack gases, while not commercially available, has the potential to significantly reduce compliance cost

• Degree of scrubber adoption will have a direct effect on refiners• The uncertainty of this variable examined through two scenarios:

Scrubber Compliance – Broad scrubbing adoption key ship types and routes which moderate need for fuel quality improvements

• Moderate refining industry impact

Fuels Compliance – Stringent and disruptive case for refining, suppliers and bunker consumers

• Significant refining industry impact


Refiners have a range of bunker fuel production options, each with a set of market risks

Diesel

Marine Diesel (DMB/DMC)

HDS VGO

HDS Residue

HS Bunker (Scrubbing)

Fuels

Refinery

Selling

Bunker Fuel

Inc

rea

sin

g R

efi

ne

ry C

ap

ital

Ris

k

Inc

rea

sin

g B

un

ke

r P

ric

e

Diesel

Marine Diesel (DMB/DMC)

HDS VGO

HDS Residue

HS Bunker (Scrubbing)

Fuels

Refinery

Selling

Bunker Fuel

Inc

rea

sin

g R

efi

ne

ry C

ap

ital

Ris

k

Inc

rea

sin

g B

un

ke

r P

ric

e


Capacity Additions 1998-2008 - Million Barrels per Day

Residue hydrotreating has been added in Asia but most upgrading capacity has been coking and cracking

0

1

2

3

4

5

6

Residue HDS Coking FCC/HCU

OtherEuropeU.S.

Middle EastAsia


Agenda

Introduction


Refinery Supply

Pricing


Fuel Oil and Bunker Pricing Methodology

Finished Diesel/Gasoil Price (Non-Marine)

1. Refining Conversion Reinvestment Economics

1. Relative LCO Hydrotreating Cost

ECA Bunker Price (0.1%S)

High Sulfur LCO Price/Value

LS Bunker Price (0.5%S)

1. Cost of Production Economics

Low Sulfur Fuel Oil Price (1%S)

High Sulfur Fuel Oil Price (3-3.5%S)

1. Blending Economics (to LS Bunker)


Bunker market is large enough to shift price relationships in many markets

Currently, LSFO-HSFO spread is small compared to diesel-HSFO

LSFO volumes are small relative to bunker

Adding LS spec to bunker fuel will increase LSFO-HSFO spread

LSFO might move from being a “HSFO plus” product to a “diesel minus” product

Cost of Production

Current Situation

HSFO

LSFO

HSFO

LSFO

MGO/MDO

MGO/MDO

ComplianceScenario


Investments to produce lower sulfur bunker will raise cost to well above HSFO380

Premium to HSFO380 Bunker, $/T

Includes operating costs and investment return. Return set consistent with alternative fuels investment (coking to produce finished transportation products)

0

100

200

300

400

500

2001 2003 2005 2007 2009

Marine Diesel - HSFO380

MDO Coker Cost

Residue Hydrotreating Cost


In summary . . .

Primary demand driver for bunker fuel is globalization of trade and outlook is good for continued growth

Regional ECAs are most immediate quality change which will result in a shift to distillate-”like” fuels

Longer-term supply of bunkers depends on ship scrubbing developments

Refiners are reluctant to invest for bunker markets and have options

Ship owners face investment or significantly higher fuel costs

Our view is that main engine bunker fuels will cost significantly more but well below diesel prices


This analysis has been prepared for the sole benefit of Sustainableshipping Conference attendees. Any third party in possession of the analysis may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the analysis does not carry with it the right of publication.

Purvin & Gertz conducted this analysis utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY.

Some of the information on which this analysis is based has been provided by others. Purvin & Gertz has utilized such information without verification unless specifically noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in information provided by others.

About this presentation…


Residual Fuel Market Outlook Study Outline

Economy & Energy 13 World Regions Diesel/gasoil Stationary Fuel Oil

3 qualities Bunker Fuel

5 qualities Refining Capacity Refinery Supply

5 streams

Diesel/Residual Balances Prices & Margins Three world regions

Rotterdam

Singapore / AG

USGC

Scrubber economics

Refining LS bunker cost of production

Refining margins

Diesel pricing

Fuel oil/bunker pricing

Current and future grades

Crude differentials

Completed for two scenarios

Bunker Fuel: Supply, Demand and Pricing -...

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