approaching the shift in bunker fuel change 2020 - middle east response

KBC ADVANCED TECHNOLOGIESProprietary Information

SUPERIOR RESULTS. SUSTAINED.

How to Respond Quickly to the IMO 2020 RegulationRefining Response to Low Sulphur Bunker Fuel Regulations

11 April 2017

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Before We Get Started…

• All lines have been muted on entry to avoid any noise interference

• The webinar is approximately 45 minutes

• A follow up email will be sent out with the webinar slides

• Please submit all questions through the Questions pane on the right hand side of your screen – they will be answered at the end of the webinar in the Q&A session

KBC ADVANCED TECHNOLOGIESProprietary Information 11 April 2017

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Your Host Speakers Today

KBC ADVANCED TECHNOLOGIESProprietary Information

Stephen GeorgeChief Economist

Arjan BaksOperations Manager IMENA

11 April 2017

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Background

• The current maximum specification for ocean going vessels is emissions equivalent to burning 3.5 wt. % sulphur bunker fuel (HSFO) with no abatement. ECA regions have and will continue to have more stringent standards, with

current bunker fuel at just 0.1% sulphur equivalent

• A 2015 study by CE Delft commissioned by the International Maritime Organization (IMO) determined that it was feasible for the global shipping industry to adopt lower shipping sulphur emissions from the earlier proposed date

• The IMO meeting on 27 Oct 2016 adopted sulphur emissions at 0.5% sulphur equivalent starting 1 January 2020. The time window for response is very short to meet this challenging target


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Critical Questions

What is the Refiners Position?

• Remain a producer and supplier of HS fuel oil?

• Reduce exposure to Bunker market?

What is the future of the refining industry?• Response to additional

ME / Asian complex capacity coming on line

• Market access, CO2 and competition issues?

11 April 2017KBC ADVANCED TECHNOLOGIESProprietary Information

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Middle East Fuel Oil Demand

• Middle Eastern fuel oil demand split roughly evenly between demand for power, for bunker and forother industrial uses.

• Gasoil for bunker a very small share of total pool today and not expected to grow considerably• “Big Five” markets: UAE, Iran, Saudi Arabia, Oman and Kuwait – account for over 90% of total FO

demand

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East of Suez Fuel Oil Balances

• Rising demand for fuel oil in the Middle East has led to a decline in exportable surplus, while Asiandemand has continued to grow strongly, especially for bunker fuel

• Asian demand expected to reach a short-term peak in 2020 and then to fall as higher prices andovercapacity slow demand for bunker fuel in the intermediate period

• In the long term, rising absolute levels of international trade and stack scrubbing will lead to a recoveryof bunker fuel oil demand in Asia

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East of Suez Product Balances

Strong demand growth in India and slowing butstill strong demand in Asia drive large regionaldeficits to 2030

Recent and new ME capacity additions spuradditional exports from ME until demand increasesin longer term soak up more ME refinery output

Inter-regional trade in crude and refined products is expected to continue to grow, with fuel oil remaining a key traded product

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Overview Shift

Today • Crude purchases to

produce the highest value of regulated products at the “lowest” cost given the asset configuration• Bunker fuel is a by

product• If the refiner could make

high value product they would

Tomorrow • On purpose bunker

production means• Higher priced, low

sulphur crude• Major capital investment

for bottoms upgrading and desulfurization

• Capacity rationalization• Its cost build or buy


CE Delft Proposal for formulating Middle East compliant bunker

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Challenges: Marine Bunker Will Reset Price Relationships

• Compliant fuel formulation will lead a re-ordering of the demand barrel

• An order of precedence will emerge with the lowest value sweet blending components forming the base of the pool

• Thereafter, competition for higher value blendstocks will eventually extend to VGO, straight run distillates and even hydrotreated distillates.

We expect the marginal components to set the price of compliant bunker

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-25.00

-20.00

-15.00

-10.00

-5.00

0.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

ICE Low Sulphur Gasoil vs Brent & CME 3.5% Fuel Oil Rott Crack Swap ($/bbl)

1 Sept 16 Gasoil vs Brent 1 Nov 16 Gasoil vs Brent3 Jan 17 Gasoil vs Brent 1 Sept 16 CME FO Swap crack1 Nov 16 CME FO Swap Crack 3 Jan 17 CME FO Swap crack

IMO Impact on Product Cracks

HSFO price breakdown leads bunker spec change by about a year

Gasoil/diesel cracks strengthen steadily through forecast period

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Total HS Fuel Demand


0%

2%

4%

6%

8%

10%

12%

14%

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6

7

8

9

10

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2005 2010 2015 2020 2025 2030

Share %mil bpdGlobal Fuel Oil Demand Outlook

Global Fuel Oil Demand Share of Total Oil Product Demand (RHS)

The rate of demand decline averaged 250k bpd between 2006 and 2016

Global residual fuel demand has been declining for decades. The pace and nature of decline vary across the regions.Structural decline in fuel oil consumption:• Increasing switch from fuel oil to natural gas in

power sector• A switch from fuel oil to crude oil among China’s

teakettle refineries• Alternative fuels and fuel saving technologies –

LNG bunkering, green ships, more frequent hull cleaning, etc.

• Russian upgrading investments have slowed, but have the potential to resume in response to weak global demand

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Bunker Fuel Demand By Region (2015-2030)


In thousand bpd

302295

274 275

2015 2020 2025 2030

N.America

252 252258

272

2015 2020 2025 2030

Latin.America

700

667 664

688

2015 2020 2025 2030

Europe

412

418

407 405

2015 2020 2025 2030

Middle East

1,469

1,582

1,477 1,465

2015 2020 2025 2030

Asia Pacific

93109 117 123

2015 2020 2025 2030

Africa

94 94

105108

2015 2020 2025 2030

FSU

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Markets are Global / Nothing in Isolation

• Crude Oil flows freely in the world • LNG exports are changing the entire

fuel sourcing industryGlobal Interaction

• Carbon Tax being implemented • Lower emissions allowances with lower

tolerances

Regulatory Changes

• Access to capital, subsides are all shifting to manage profit and debt Competition

Abounds


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Topping Refining (very few left in the world)• Generally no fuel oil product (rationalisation)

Hydro-skimming (rationalisation)• Makes fuel oil product as high as 50%

VGO Cracking (number of plants are declining as not profitable)• Does make fuel oil product as high as 30% of crude

Full Conversion Complex Coking Refinery• No on purpose fuel oil production

Refining Reaction / Response – Who is at risk?


Profitability Questionable

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• FO crack drops from –($10/bbl) to ($20/bbl) under Brent

• At a - $10/bbl on a production of 5 million tonnes/year => $330 million per year (loss)

• Cracker Feed (gasoil not diesel) is a premium of $15/bbl over Brent

• Tapis to Dated Brent ≈ $3.0 to $3.5 / bbl premium to Brent

• Sour Heavy to Brent ≈ -$8.5 to - $10/bbl discount to Brent

• Moving from Heavy Sour to light sweet may be $11.5 to $13.5/bbl swap

• For every 1 bbl of 3.5 wt% S bunker 7 bbls of ULSD 10 wt. ppm S Diesel are required

• Even if only half of the HS bunker (80 Million MT/yr) would be blended the result would increase the total Bunker fluids to greater than 2 times the demand.

Exposures to Market


FO and Gasoil shifts Crude Consideration Dilution is not the solution (neither is

concentration)

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Low Sulphur Bunker Impacts


Bottoms ConversionDelayed Coking, Residue HydrocrackingOther

CO2 Impact0.5 wt% S Bunker higher price

Distillate Supply ImpactHydrotreating Capacity to 0.5 and or 0.1 wt% S

What is outlet of HS Fuel Oil Production?

H2 Addition

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Crude Switch – Low Sulphur for High Sulphur


Loss of Competitiveness

Limited crude basket

Counter to crude supply quality trend

Limit Operating Flexibility

LS crude demand opens out HS/LS differential

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Capital Options

Technology Crude

Flexibility?

Secondary Processing Required?

Commercially Proven?

Specific Bottoms Stream Cost

Coking ++ Yes Yes Coke $$RFCC + Yes Yes Decant Oil $$

SDA ++ Yes YesHigh Viscosity

Residue $$$

Slurry Hydrocracking + Yes NoResidue w/Metals $$$$

Residue Hydrotreating + Yes Yes Residue $$$$Gasification ++ Yes (flue) Yes None $$$$

$ Relative cost including secondary system investments


• Take a carbon rich stream and either produce coke or attempt to add hydrogen to upgrade

Hydrogen addition on slurry or residua systems are 210 to 310 barg without accounting for additional hydrogen demand, metals on catalyst and cycle length and other aspects

• Sulphur recovery systems upgrades

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Balancing Supply / Demand / Price


Shortage of Distillate

Price Increases

Marine Fuel Balance Price stability

Cause Effect

Rebalance – When?

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A Body in Motion Tends to…. Looking Beyond IMO

History Lesson • Nothing is constant and

entropy is ever increasing • Emissions targets are more

stringent today than 10 years ago

Why stop at 0.5 wt.% S• History teaches that once the

balls is rolling down hill, just keep it moving • IMO monitoring CO2 and NOx

for additional controls


Investment considers long haul

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Summary


• The oil industry is resilient with the capability to adjust hardware and catalyst to meet the challenges of clean fuels to lower emissions.

• The technology solution is present, no innovations are required to meet low emissions in SOx and CO2 compliance for bunker fuels.

Two questions1. Can a facility remain profitable at low refining complexity?2. Will the market bear the cost increases needed to produce?

• There is still time to analyse specific situations / asset mix to determine the best course of action…… but this should be done as a matter of urgency

• Risk analysis based upon various pathways provides input to the refiner to support decisions

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KBC Difference – For The Future

Independence • KBC provides

unbiased assessment with clients best interest first

People• Global Experience

and knowledge with Local focus in all major elements of refinery processing including energy

Petro-SIM • Reaction models

kinetically based to provide accurate assessment of change

Customisedsolution • The inputs that are

specific to client, location and market


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What’s Next?


• Each Refinery is different• Each with its own unique set of problems with unique solutions• No “one size fits all” approach to success• KBC recognises these differences• Good at evaluating various scenarios• Please do contact us individually to enable us to help you.

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Questions?

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Thank you for joining us!

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approaching the shift in bunker fuel change 2020 - middle east response

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