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Argus Media viewpoint: US high sulphur distillates still in demand

03 Jan 2020

Editor: A correction for frequency has been made to paragrpah five in the following article on Wednesday (8 January)

Wendy Dulaney of global energy and commodity price reporting agency Argus Media on Thursday (2 January) issued a report highlighting US refiners continue finding buyers in Latin America for high-sulphur heating oil (HSHO) despite IMO 2020 new regulations on sulphur limit:

The International Maritime Organization capped marine fuel sulphur emissions at 0.5pc effective 1 January, down from the prior level of 3.5pc. As refineries have upgraded over the years to meet ever tighter sulphur regulations, few refiners aim to produce distillates above 15ppm sulphur, or 0.0015pc.

Nonetheless, a few US refiners have been able to maintain a stable rate of production for higher-sulphur distillates at a profitable margin since 2016 because of export demand.

Gulf coast refiners, which produce 80-90pc of all high-sulphur heating oil (HSHO) in the US, have averaged higher production over the past two years in response to export demand. HSHO is used in various parts of the world for power generation, marine fuel blending, and use in agricultural vehicles.

The Gulf coast has produced an average 5.4mn b/d bl/month of HSHO through 2018 and 2019, up from 4.6mn b/d for 2016-2017, according to data from the US Energy Information Administration (EIA). Most of this production is exported to Latin America. Brazil is historically the largest single taker of US HSHO, where it is used primarily for power generation and agricultural vehicle use in some areas. The average amount exported to Brazil has risen year over year, from 150,000 bl/month in 2017 to 280,000 bl/month on average in 2018 and 520,000 bl/month for the first nine months of 2019, according to EIA export data.

After Latin America, the next largest importer of HSHO is Singapore, where it is used as a marine fuel blending component in what is the world's largest bunkering hub. Exports to Singapore have been higher in 2019 than the previous year at an average of almost 540,000 b/month, despite preparations in Singapore for the new low-sulphur marine fuel regulations.

HSHO also makes its way to Gibraltar in large amounts, where it is re-exported to West Africa, largely for agricultural use.

While agricultural demand for HSHO will continue in Latin America and West Africa, the continued profitability of HSHO may depend on how the marine fuel industry chooses to solve the complex problem of meeting IMO 2020 regulations.

Scrubber systems may allow the use of marine fuels that meet or even exceed the previous maximum of 3.5pc sulphur. In this case, HSHO may continue to be a viable option for blending, as HSHO produced in the US typically ranges from 0.05pc to 0.2pc.

The complexity for blending marine fuels using HSHO comes from its molecular properties. Distillates like HSHO create condensates when they are blended with residual fuel oils, unless they are held in suspension with additives. The economic viability of blending with additives is specific to routes, ports, and even individual types of ships.

One example of route and port complexity is that scrubbers are banned from many large ports, such as Singapore. Even in ports where scrubbers are allowed, the coastal seawater is often too acidic for scrubbers to work properly. Scrubbers rely on water such as is found in the open ocean. Ships may be forced to switch to fuel blends for entering and leaving coastal areas — or may choose to be out of compliance. The International Energy Agency (IEA) estimates that more than 700,000 b/d of non-compliant fuel will be used world-wide in the first year of IMO 2020.

HSHO is most easily blended with other distillates, making it an option for blending with ultra-low sulphur diesel (ULSD) or with marine gas oil (MGO). HSHO is not a good option for use as a fuel on its own despite being within IMO 2020 regulations, as it is no longer profitable enough to be produced in economical quantities but still remains too expensive for large-volume fuel use.

Gulf coast HSHO on the Colonial pipeline averaged $1.76/USG for the fourth quarter of 2019, down from $1.97/USG in the fourth quarter of 2018. Margins for HSHO against Western Canadian Select crude have been steadily increasing for several months, near 20¢/USG in late December, up from 11¢/USG in early April. Margins for HSHO have historically been higher during the winter months but spiked to all-time highs of 30¢/USG for the first times during the fall of 2018 and 2019.

Photo credit and source: Argus Media
Published: 3 January, 2020 

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