By Ben Ziesmer & Frank Wilson, Jacobs Consultancy
Transportation cost, especially ocean freight transportation cost, is becoming increasingly important to the petroleum coke (petcoke) market as more of this material is transported greater distances to reach customers. While petcoke has been exported by many countries1, the United States is, by far, the world’s largest exporter, providing petcoke to Asia, Europe, MENA (Middle East North Africa), and Latin America.
PETCOKE – A SEABORNE MARKET
Shipping is the primary transportation mode for petcoke, given its need to be transported significant distances to reach end consumers. The United States, the world’s largest petcoke producer, exported over 75% of its fuel-grade production in 2013. Additionally, virtually all of the petcoke produced by Caribbean cokers2 is exported. The US and Caribbean producers account for 90% of the fuel-grade petcoke that is involved in seaborne trade, because petcoke produced in other parts of the world (e.g. Europe, India) is almost always used domestically. In addition to uncalcined — or ‘green’ — petcoke exports, about 60% of US calcined petcoke (CPC) production is typically exported.
Canada illustrates how the economics of seaborne transportation dominates versus rail transportation. Eastern Canada is a net petcoke importer, with the vast majority of this imported petcoke coming from the United States. Western Canada is a net petcoke exporter because it is much lower cost to transport petcoke from Alberta and Saskatchewan to Asian petcoke consumers than to move this petcoke across the North American continent by rail to eastern Canadian customers.
While the Middle East has been a net importer of petcoke, it is about to become a net exporter with the start-up of two refineries in Saudi Arabia that are equipped with large cokers: SATORP, located on the western shore in Jubail, and YASREF, located on the eastern shore in Yanbu. SATORP started up in the fourth quarter of 2013, but only began shipping petcoke in June due to delays in completing a 26km-long conveyor belt system to transport petcoke from the refinery to the export terminal in the Port of Jubail. YASREF is scheduled to start up in late 2015 or early 2016.
Before discussing the changing transportation dynamics of petcoke, some background regarding petcoke production and use is necessary to provide context to this discussion.
Petcoke is produced as a by-product in many — though not a majority of — oil refineries. Crude oil is first processed in an atmospheric distillation unit, followed by a vacuum distillation unit. The heavy residuum exiting the bottom of the vacuum tower (i.e. vacuum tower bottoms, or VTB) can be used to make asphalt, blended with some light products such as diesel to produce residual fuel oil (RFO), or used as coker feed.
Traditionally, cokers are installed in oil refineries to convert
VTB and other heavy residual oils into higher-value light transportation products (e.g., gasoline, jet fuel, and diesel fuel). Until recently, a coker almost invariably increased refinery profitability because the yield of high-value transportation fuels is maximized and production of low-value RFO is minimized. While the coking process has been in use since the 1930s, petcoke production has seen its largest growth following 1990 because worldwide light transportation petroleum product demand has grown faster than RFO demand. Cokers have been and continue to be the preferred refining technology that allows the refining industry to reduce its production of RFO per barrel of crude oil processed, and bridge the gap between light product and RFO demand growth.
Additionally, beginning in the late 1990s, two new factors have been driving the construction of cokers:
- crude oil purchase cost reduction — coking units allow a refinery to process lower-cost, heavy, sour crude oils. This was the driving force for the nine new or expanded cokers installed on the US Gulf Coast from 1996–2004, and for many other coker projects currently under construction; and
- ultra-heavy crude oil production — cokers are used in upgraders that produce various grades of synthetic crude oil (SCO) from bitumen or ultra-heavy crude oils. This type of upgrader exists in Venezuela where ultra-heavy Orinoco Belt crude oil is upgraded and exported as lighter crude oils, and in Canada where upgraders are used to produce SCO from the bitumen derived from Alberta oil sands.
There are two general applications for petcoke: one as a carbon source and the other as a heat source. The former requires better quality (e.g. low sulphur and metals) and commands higher prices. Green3 petcoke is usually upgraded by calcination when it is used as a carbon source. Petcoke that has been calcined is referred to as calcined petcoke (CPC). The largest market for CPC is in the production of anodes for aluminium smelting; other uses for CPC are in the production of carbon electrodes for electric arc furnaces, titanium dioxide (TiO2) production, and as a recarburizer in the steel industry. About 25% of the petcoke produced is sold into these higher value-added markets for higher-quality petcoke; the remainder of the petcoke is sold into the fuel market, where it almost always competes with coal.
Worldwide petcoke production increased by almost 7% in 2013 to a record 124 mt (million metric tonnes), primarily due to new coking capacity additions. However, production has been growing slower than would be indicated by new coking capacity additions, as many cokers during 2013 ran below capacity due to weak coking economics. Jacobs Consultancy calculates coking economics for different regions (e.g. US Gulf Coast, US West Coast, Northwest Europe) by comparing the margin generated by a refinery equipped with a coker and a refinery that does not have a coker, utilizing models that are representative of refineries in a particular region. These models are complex and many factors affect coking economics, but, as discussed previously, the primary purpose of a coker is to destroy VTBs, thereby reducing production of RFO (e.g. No. 6 fuel oil, bunker oil). Thus, the most important factor driving coking economics is the price of RFO relative to the price of crude oil. The RFO price determines not only the differential between light and heavy crudes, but also the incentive to upgrade the RFO to lighter fuels in a delayed coking unit.
Prior to the recession that began in 2008, RFO prices were 50–80% of that of crude oil; since 2009, they have been 80–95% of the price of crude oil (see High-Sulphur Residual Fuel Oil Price/Crude Oil Price chart).
Several factors have contributed to this changed pricing dynamic:
- in response to reduced global oil demand and to minimize the loss in revenues, oil producers preferentially reduced heavy oil production because heavy oil sells at lower prices than light oil. Light oil produces less VTBs; therefore, there is less residuum available to produce RFO or to be used as coker feedstock;
- China’s economy — and its demand for ocean shipping of imports and exports — recovered more quickly than the rest of world, comparatively increasing demand for bunker fuel;
- Japan increased its use of RFO for power generation as oil-fired electric power generation was ramped up to help compensate for the shutdown of the Japanese nuclear power industry in the wake of the Tohoku Tsunami and subsequent Fukushima Daiichi Nuclear Power Plant accident; and
- there is increased availability of light, sweet African and other crude oils in the world market as increased US shale oil production displaced these imported crude oils in the United States. The increase in light oil supply lowered its price relative to heavier oil, making it more widely used and thus reducing the amount of residual fuel that normally would be used as feedstock to cokers.
Longer term, we expect cokers to once again become profitable because demand for lighter fuels in developing countries such as China and India is continuing to increase. Further, the (non- coking) use of residual fuel oil will stagnate at best as there are virtually no RFO-fired power plants being constructed, and
US West Coast petroleum coke export destinations
others are being decommissioned or reconfigured to fire alternative feedstocks. Additionally, the use of RFO in marine fuels (bunker fuels) is expected to remain flat or, at best, increase at a rate less than that for lighter transportation fuels. Thus, light product demand will grow faster than RFO demand, and it is this demand growth imbalance that will ultimately cause cokers to once again become consistently profitable refinery production units.
For decades, the primary destination for US West Coast (USWC) petcoke production was Japan, followed by Europe. However, in the last few years the market has changed dramatically, with Asia — especially China — becoming an extremely important market. China has displaced Europe as the second-largest market for USWC Coast petcoke exports (see US West Coast Petcoke Export Destinations chart).
Similarly, Europe and Latin America historically were the dominant markets for US Gulf Coast (USGC) exports, but Asia — notably India — has become increasingly significant, now rivalling Latin America as an outlet for USGC petcoke exports (see US Gulf Coast Petcoke Export Destinations chart).
TRANSPORTATION COST CRITICALLY IMPORTANT Transportation costs have become more important as petcoke has moved to more distant Asian markets. For example, ocean freight cost can equal or even exceed the FOB (free on board) load port price of USGC petcoke into China, India, or other distant locations. As petcoke transportation costs increase, it becomes harder for USGC petcoke to compete against coal in distant markets such as India or China.
The start-up of new coking capacity in or near markets that have traditionally been importers of USGC/Caribbean petcoke is also impacting the ability of this petcoke to compete in these traditional markets, pushing petcoke to new export markets in Asia. Repsol started up two new large cokers (Cartagena and Bilbao, Spain) that produce high-sulphur fuel-grade petcoke. This petcoke production can easily displace USGC material into the European/Mediterranean petcoke market due to its significant transportation cost advantage. Similarly, the two new Saudi Arabian cokers will have significant transportation advantages compared to USGC cokers into the Mediterranean and Asian petcoke markets.
A significant ($5–8mt) freight differential between Panamax vessels and Supramax vessels to Asia, notably India, developed during early 2014. To capture this large incentive, petcoke shippers were aggregating 65,000–70,000-tonne cargoes. Since Texas Gulf Coast petcoke terminals could not fully load a Panamax vessel due to draught limitations, shippers were forced to part-load Panamax vessels in the Texas Gulf Coast and then ‘top-off’ these vessels at terminals or mid-stream operations on the Mississippi River, where there is sufficient draft to fully load a Panamax vessel.
BURGEONING DEMAND IN INDIA
Petcoke demand in India could increase by as much as 9mt/year due to gasification and circulating fluidized bed (CFB) boiler projects. Reliance Industries Limited is constructing a $3+ billion petcoke and/or coal-fuelled gasification project adjacent to its Jamnagar refining and petrochemical complex. The gasification project will consume approximately 6.0mt/year of petcoke and/or coal. Additionally, India-based boiler manufacturer Thermax Limited has received an order for the design, manufacture, and commissioning of nine CFB boilers. The boilers, which will generate steam for power generation and process use at two petrochemical complexes located in India, are expected to be fully operational by 2015, and are being designed to burn petcoke and/or coal. Jacobs Consultancy calculates that these nine CFB boilers could burn close to 3mt/year of petcoke if they are all fuelled with 100% petcoke.
THE VENEZUELA ENIGMA CONTINUES
There are four projects in Venezuela [i.e. PetroMonagas (formerly Cerro Negro), PetroAnzoátegui (formerly Petrozuata), PetroCedeño (formerly Sincor), and PetroPiar (formerly Hamaca)] that produce SCO from super-heavy Orinoco Belt crude oil/bitumen. Each project has an upgrading plant, located in the Port of Jose, where coking technology is utilized to produce SCO from bitumen. The petcoke produced from these upgraders tends to be lower-sulphur (i.e. 4.0–4.5% S, dry basis) material and is exported through two petcoke terminals located at the Port of Jose. Combined, these four projects produce enough petcoke to account for 25% of the USGC/Caribbean petcoke market seaborne trade. However, these terminals have performed poorly for several years, loading far fewer vessels than they had in the past. This has caused a shortfall in petcoke supplied to the market, helping to support prices despite continued weak European demand. Due to their lower sulphur levels,Venezuelan exports are especially important for the lower- sulphur portion of the USGC/Caribbean petcoke market (the overall USGC/Caribbean petcoke market typically ranges from 4.0–7.0% sulphur, dry basis).
While petcoke terminal performance lagged, it was necessary for the Orinoco upgrading projects to place millions of tonnes of petcoke into storage.
ALBERTA OIL SANDS
Sharply lower crude oil prices in 2009, in the wake of the collapse in the energy and financial markets in late 2008, caused many Alberta oil sands projects in Canada to be delayed indefinitely or deferred. However, with the recovery in oil prices, many projects have restarted or are actively considering restarting. Many Alberta oil sands projects will blend the bitumen they produce with diluents such as hydrocarbon liquids recovered from natural gas processing (resulting in a refinery feed stream known as dilbit) or with SCO (producing a refinery feed stream known as synbit) to produce a blended refinery feed that can meet pipeline viscosity and gravity specifications. The dilbit or synbit will be very heavy, with high VTB content, requiring refineries to have substantial coking capacity to process the crude oil. This Canadian heavy oil is driving coking capacity additions in the US Great Lakes area — BP (Whiting, IL), Phillips 664 (Wood River, IL), and Marathon (Detroit, MI) — and may drive more coking capacity additions in the future. In addition, the controversial Keystone XL Pipeline, if built, will connect the Hardisty Terminal in Alberta, Canada, to Houston and/or Port Arthur,Texas, allowing 800,000+ barrels/day of heavy Canadian crude oil/refinery feed to flow to USGC refineries. As a result of the substantial coking capacity additions in the Great Lakes area of the United States, more petcoke is flowing down the Mississippi River for export. With these US Midwest coker expansions and debottlenecks in Texas and Louisiana, the US Gulf Coast will continue to be the centre of US petcoke production and the source of exports.
US crude oil production increased from 5 million bbl/day in 2008 to 6.5 million bbl/day in 2012.The US Energy Information Agency’s latest Short-Term Energy Outlook forecasts US crude oil production reaching 8.2 million bbl/day by the end of 2014, driven by continued rapid development of tight (shale) oil.
The tight oil produced to date has been almost exclusively light crude oil. Light crude oil produces very little VTBs, reducing the need for coking capacity. Through 2012, the impact of increased shale oil production on US petcoke production has been minimal, as new shale oil production has displaced light- sweet crude oil imports. However, as tight (shale) oil production increases, it is likely to displace imports of heavier crudes since light-sweet crude imports into the USGC have fallen below 80,000 bbl/day and there is little light-sweet crude import left to displace.
In a larger context, shale deposits are found in many locations around the world. However, recent experience in Poland indicates that not all shale oil deposits are economic to develop with current technology. Thus, there is a great deal of uncertainty regarding the impact of shale oil production on world petcoke markets.
Given the uncertainty of demand in traditional petcoke markets in Europe and Latin America, Asian markets have become a vitally important market outlet for seaborne fuel-grade petcoke. There are a number of uncertainties that will either directly or indirectly impact the fuel-grade petcoke market. We can estimate some of the more typical and straightforward uncertainties, such as economic growth, international steam (thermal) and coking (metallurgical) coal pricing, and ocean freight rates.
In these extremely competitive markets, ocean freight is often the deciding factor in determining the ultimate destination for petcoke exports from the US Gulf and West Coasts.
Other factors are less obvious and potentially more significant. These include:
- how many Japanese nuclear generating units return to service and on what time schedule?
It is our understanding that approximately 25% of Japan’s nuclear power generating capacity has applied for permission to restart with hopes they will be operating before the end of 2014;
- how much heavy Alberta crude oil will be able to be delivered to USGC refineries?
Approval of the Keystone XL pipeline is obviously a key factor, but rail transport and other pipeline options are being developed; and
- how fast will shale oil production increase?
How many other countries will be able to produce significant quantities of shale oil? What impact will increased shale oil production have on petcoke production?
While small compared to many other dry bulk or energy commodities, the petcoke field continues to evolve and provide business opportunities.
ABOUT THE AUTHORS
Ben Ziesmer (Senior Consultant)
Contributing editor to Jacobs Consultancy’s Pace Petroleum Coke Quarterly, with an in-depth background in the power sector, including experience in procurement, operations, environmental compliance, and engineering. He leads Jacobs Consultancy’s fuel-grade petcoke practices and has been the project manager for numerous studies involving the fuel- grade petcoke market, environmental issues, and power generation.
Frank Wilson (Senior Consultant)
Frank Wilson brings years of experience and an in-depth knowledge of the petroleum, chemicals, and energy industries to the Carbon Group. He is a contributing author for the Pace Petroleum Coke Quarterly and is involved with single-client studies of the global fuel-grade and anode-grade petroleum coke markets. Prior to joining Jacobs, he was a Petroleum Coke Marketing Manager for ExxonMobil.
1. Brazil, Canada, China, Egypt, Indonesia, India, Italy, Kuwait, Mexico, Saudi Arabia, Spain, Syria, United States, and Venezuela.
2. Hovensa St. Croix (US Virgin Islands),Valero Aruba, and six coking facilities in Venezuela. With the shutdown of Hovensa St. Croix and Valero Aruba in 2011, all current petcoke production is located in Venezuela.
3.Technically, all petcoke is ‘green’ when it is produced because all petcoke that has not been calcined is ‘green’. However, in the petcoke industry the term green petcoke typically refers to higher- quality petcoke used as calciner feedstock.
4.The refinery is owned by WRB Refining LLC, a joint venture of Phillips 66 and Alberta heavy oil producer Cenovus.
Jacobs Consultancy Inc. has published the Pace Petroleum Coke Quarterly© (PCQ) since 1983. The PCQ has been published monthly since 1984 and is considered the worldwide authoritative source for petroleum coke market information.