Now waiting for the new normal to introduce itself

The petroleum coke market has been roiled by unprecedented production decreases and soaring prices. Governments imposed lockdowns in response to the Covid-19 pandemic, resulting in huge economic disruptions; global GDP shrank by 3.3%, by far the largest decrease in global GDP since the Second World War1. Almost simultaneously, there was a historic crash of oil prices followed by unprecedented oil production cuts by OPEC+2. These events impacted petroleum coke production and trade flows. However, before delving into these issues, let us give a brief background on petroleum coke.

COKING BACKGROUND Petroleum coke is produced as a by-product in many 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, residual fuel oil (RFO)3, or used as feedstock for a coker (see Figure 1— Simplified Coking Refinery Flow Diagram on p14) or other bottoms upgrading technology.

For decades, the refining industry has faced the problem that demand growth for transportation fuels (i.e., gasoline, diesel, jet fuel) has been, and continues to be, much greater than for RFO. To put it another way, people are buying cars and trucks and flying on airplanes, but no one is building RFO fuelled power plants or industrial facilities. In response to this problem, the

Ben Ziesmer, Pedro Mackay & Rituraj Jha, Advisian

1.“The ISA Global Economic and Risk Outlook”, Michael Weidokal, Advisian webinar “5 Things to Watch for in 2021”, June 15, 2021 2. OPEC+ is a combination of the 13 members of OPEC (Organization of Petroleum Exporting Countries) and a Russian led coalition of 10 additional petroleum exporting countries. 3. Typically, about 30% high value diluent such as light cycle oil needs to be added to meet RFO viscosity and density specifications.

refining industry developed various technologies to upgrade VTBs to produce more valuable light products and eliminate the need to produce RFO.

Cokers have been, and continue to be, the dominant bottoms upgrading technology. They allow refiners to reduce production of RFO per barrel of crude oil processed and bridge the gap between the growth in demand for light products and RFO demand growth. To summarize, the primary purpose of a coker is to reduce the production of residual fuel oil by converting heavy VTBs into high value transportation fuels (gasoline, diesel, jet fuel, etc.) with petroleum coke produced as a by-product of the coking process.

It is also important to recognize that the

percentage of VTBs produced as a result of refining crude oil increases dramatically as the crude oil gets heavier (i.e. lower specific gravity). For example, about 10% (by weight) of light Arabian crude oil becomes vacuum tower bottoms, whereas, almost 40% of very heavy Mexican Maya or Alberta crude oils become vacuum tower bottoms. Consequently, the percentage of crude oil that becomes petroleum coke increases dramatically (see Figure 2 – Impact of Crude Oil Type/Weight on Petroleum Coke Production), and refineries that are designed to process heavy crude oils are much more likely to have coking capacity (or other VTB upgrading technology) than refineries designed to refine lighter crude oil.

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, diesel fuel). Until recently, a coker almost invariably increased refinery profitability because the yield of high-value transportation fuels is maximized and the production of low-value RFO is minimized4 . While the coking process has been in use since the 1930s, petroleum coke (petcoke) production has seen its largest growth since 1995 (production: 1995= ~30 million WMT, 2018 = ~140 million WMT) principally because light transportation petroleum product demand grew faster than RFO demand worldwide and the overall global crude slate got heavier. Consequently, petroleum coke production grew much faster than crude oil demand (1995-2018 CAGR = 6.6% for petcoke vs. 1.6% for crude oil).

Refineries run a blend of different crude oils (known as the crude slate), and choices of crude oils which are in the crude slate very significantly impact the quantity of petroleum coke that is produced per barrel of crude oil that is processed (see Figure 2). It should be pointed out that the selection of the crude slate is driven by a complex series of factors including the capacities and capabilities of the various processing units within the refinery, the expected operating state of various processing units, crude oil pricing and availability of different qualities of crude oil, and demand for refined product production.

PETROLEUM COKE MARKETS Petroleum coke (petcoke) is unusual because it is used not only as a heat source (i.e. fuel) but also as a carbon source in metal production and chemical processes. Petroleum coke that is used as a carbon source requires better quality (e.g. low sulphur and metals content) and commands higher prices, driven by different factors than fuel-grade petcoke prices.

Green5 petcoke is usually upgraded by calcination when it is used as a carbon source. Calcination is a process that uses heat to remove moisture and volatile matter from petcoke, improves critical physical properties, and converts green petcoke into an electrically conductive form of carbon. Green petcoke that has been calcined is referred to as calcined petroleum coke (CPC). The largest market for CPC is in the production of carbon anodes for aluminium smelting. Other uses

4. Since the early 1990’s cokers have also been used in upgraders that produce various grades of synthetic crude oil (SCO) from bitumen or ultraheavy crude oils. This type of upgrader exists in Venezuela where ultra-heavy Orinoco Belt crude oil is upgraded and is exported as lighter crude oils, and in Canada where upgraders are used to produce SCO from the bitumen derived from Alberta oil sands. Upgrading economics are driven by crude oil economics, not refining and coking economics. 5.Technically, all petcoke that has not been calcined is green petcoke (GPC). However, within the petcoke industry, the term GPC is usually only used for petcoke that is used as calciner feedstock.

for CPC are in the production of carbon electrodes for electric arc furnaces, titanium dioxide ( TiO2) production, and as a recarburizer (i.e., carbon raiser) in the steel industry. Almost 30% of the petcoke produced is sold into these higher valueadded markets for higher quality petcoke; the remaining production is used as a fuel source.

Fuel-grade petroleum coke is used in a variety of industries (see Figure 3 – Global Petcoke Demand Segments), primarily as a substitute for coal, but sometimes for fuel oil. Petroleum coke has higher calorific value (i.e., kcal/kg) and much lower ash content than coal. However, it is more difficult to burn, has higher sulphur content, and is more difficult to pulverize6 so it typically sells at a discount to coal.

The cement industry is the largest consumer of petroleum coke because cement kilns are particularly well suited to burn petroleum coke, and cement kilns inherently capture approximately 90% of the sulphur oxides (SOX) emissions resulting from burning petroleum coke. The ‘other industry’ category includes lime7, brick, calcium carbide, and glass production plus gasification of petroleum coke. The ‘long-term storage’ category refers to petroleum coke produced as a by-product of upgrading bitumen (primarily Western Canadian oil sands) where the petcoke is placed underground as part of the reclamation process associated with the open cast (open pit) mining of bitumen.

2020 – A YEAR OF UNUSUAL CHALLENGES Going into 2020, the refining industry was expecting that bunker demand for the consumption of high-sulphur residual fuel oil (HS RFO) would plummet to comply with MARPOL 20208. The maritime industry consumed around 3.2–4.0 million barrels per day (180–230 million tonnes/year) of high-sulphur residual fuel oil (HS RFO) in 2018 and 2019 — this market is important to many refineries as an outlet for their HS RFO. It was expected this reduced HS RFO demand would cause a glut of HS RFO, and the price discount of HS RFO as compared to crude oil would increase significantly. Since coking economics tends to improve when the discount of HS RFO to crude oil increases, it was expected that coking economics would be very favourable and petroleum coke production would be robust. This turned out to be the case as US Gulf Coast (USGC) petroleum coke production rose significantly during the fourth quarter of 2019 and in January and February of 2020 (see Figure 4 – USGC Refinery Utilization Rates & Petcoke Production).

However, then governments around the world began implementing lockdowns to control the Covid-19 pandemic. This caused refined product demand to decrease significantly, though, at first it was not entirely clear just how much demand was going to drop overall. As commercial passenger air travel plummeted, automobile use fell (especially for commuting), freight slowed, and export markets for US refined products decreased, the demand for US refined products rapidly fell. Consequently, US refinery utilization rates plunged in April and May 2020, and USGC refinery utilization rates followed the same trend (see Figure 4 – USGC Refinery Utilization Rates & Petcoke Production).

USGC refining utilization rates began to recover during the summer of 2020 until Hurricane Laura hit east Texas and western Louisiana in late August. Recovery from Laura was delayed when Hurricane Delta hit nearly the same area six weeks later. Weather events affecting the USGC are particularly important because more than 50% of US refining capacity is located within the USGC region and approximately 75% of US petroleum coke exports depart

7. Lime kilns are very similar to cement kilns and have the same inherent capabilities to successfully burn petcoke like cement kilns 8. MARPOL 2020 refers to the International Maritime Organizations’ MARPOL (International Convention for the Prevention of Pollution from Ships) Annex VI, Regulation 14 rule limiting sulfur oxide (SOX) emissions globally from seaborne vessels that went into effect 1 January 2020.

from the USGC. Just as utilization rates were recovering from hurricanes, Arctic Storm Uri hit Texas in February 2021 causing refineries to shut down due to lack of power and/or natural gas. Utilization rates for the week ending February 26 plunged to the lowest levels since the US EIA began tracking refinery utilization rates in 1990. Some refineries experienced extensive damage due to frozen pipes and other equipment, delaying restarts. The last time a similar arctic storm hit Texas was in 1899.

OPEC+ PRODUCTION CUTS — SURPRISINGLY IMPORTANT TO PETCOKE In April of 2020, OPEC+ members, consisting of 13 OPEC (Organization of Petroleum Exporting Countries) members and 10 non-OPEC oil exporting countries led by Russia, decided to curtail 9.7 million bbl/day of combined crude oil production during May and June of 2020, then from July to December OPEC+ agreed to reduce its combined crude oil production by 7.7 million bbl/day, followed by 5.8 million bbl/day of combined crude oil production cut from January 2021 until April 2022. This historic production cut followed the agreement between Saudi Arabia and Russia to increase international crude oil prices, which had cratered by the combined effects of the Covid-19 pandemic and the short-term price war between Saudi Arabia and Russia. In addition to the agreed production cuts, Saudi Arabia and few other OPEC members voluntarily contributed additional production cuts. The production cut agreement was successful, as the monthly average price of Brent and WTI roughly quadrupled from April 2020 until June 2021.

Recently OPEC+ members decided to slow their planned phase out of production cuts, delaying the end of the agreement to September 2022. After a brief stand-off between Saudi Arabia and UAE, the production cut amendment was approved, and OPEC+ will raise overall crude oil production by 400,000 bbl/day from August 2021 until April 2022. Thus, 3.6 million bbl/day of crude oil production is expected to be added back to the market between August 2021 and April 2022. From May to September 2022, the remaining 2.2 million bbl/day of crude oil production is expected to be restored. The members, however, kept a three-month buffer (i.e., OctoberDecember 2022) to further adjust production, if needed, because of the possible rise of Iranian supplies and/or a further Covid-19 wave of infections.

These oil production cuts are especially important to the petcoke market because OPEC producers tend to preferentially cut heavy oil (which trades at a discount to lighter crude oils) production to maximize revenue from reduced oil production. As we noted previously (see Figure 3 – Impact of Crude Oil Type/Weight on Petcoke Production) migration to lighter crude oil also means less petroleum coke will be produced from each barrel of crude oil. It took some time for this impact to work its way through the crude oil market as huge inventories were built in March before the OPEC+ production cuts impacted refinery crude slates. However, in time, USGC crude slates became lighter and less petroleum coke was produced. For example, USGC refinery utilization in March 2020 was 90.2%. Following Arctic Storm Uri, USGC refinery utilization had recovered to 87.5% by April 2021 but petcoke production was 10% less than in March 2020 (see Figure 4- USGC Refinery Utilization Rates & Petcoke Production).

TRADE FLOW CHANGES Petroleum coke trade patterns changed markedly during 2020. Initially, exports from the USGC to Asia (excluding China) were significantly higher during the first four months of 2020 on a month over month basis (e.g., January 2020 vs. January 2019). Then export volumes (month over month basis) were similar from May through August, followed by sharply lower export volumes in 2020 vs. 2019 during September through December (see Figure 5 – USGC Petcoke Exports to Asia [excluding China]). The reason these trade flows changed is that, unlike previous economic retractions, petroleum coke production decreased much more than did petroleum coke demand. European and Latin American cement producers were surprised at the strength of demand for cement. With reduced supply and resilient demand, petroleum coke prices rose. Eventually petroleum coke prices, FOB vessel USGC, rose to the level where USGC petcoke was no longer competitive versus coal ($/MMBtu CFR basis) in India, Pakistan, and many other Asian countries due to the much higher freight costs associated with the long voyage distances from the USGC to Asia as compared to coal exported from Australia, South Africa, or Indonesia. However, USGC petroleum coke was still competitive versus coal into Europe, Middle East/North Africa (MENA), and Latin America because the voyage distances are much shorter.

One could say that in the later part of 2020, the USGC petcoke market went ‘Back to the Future’ in the sense that it reverted to pre-2008 petcoke market conditions. Prior to 2008, the clearing market for USGC petroleum coke was the Mediterranean market. However, when the great recession of 2008 hit, there was insufficient demand in traditional European, MENA, and Latin American markets, and petroleum coke prices crashed. In early 2009, Chinese and Indian buyers entered the market, halting the downward slide of prices. Even after the recession ended, the clearing market for USGC >6.0% sulphur petroleum coke remained Asia as USGC petcoke production grew faster than demand in traditional European, MENA, and Latin America markets.

However, 2021 has been more

complicated in that USGC petroleum coke exports to China have been sharply higher than in much of 2020 while the trend of sharply lower exports to the rest of Asia continued (see India discussion below for more details). Year-to-date through May 2021, USGC petroleum coke exports to China are up 73% versus the first five months of 2020. The increased volume to China is partially explained by the purchase of some quantities of higher quality USGC petroleum coke that can be used for its calcining industry. However, most of the increased exports was fuel-grade petcoke purchased by Chinese buyers willing to pay higher prices than other Asian buyers, possibly because of China’s serious coal shortage.

PETROBRAS PETCOKE MARKETING CHANGES AFFECT TRADE FLOWS Changes in the marketing of petcoke by Brazil’s state-owned oil company Petrobras have altered trade flow dynamics in different ways. In February 2021, Petrobras elected to not renew a long-standing marketing agreement with BR Distribuidora, the retail and distribution arm of Petrobras. Instead, Petrobras conducted a tender process and awarded petcoke marketing rights to two firms for the export business. As a result, there are now three companies marketing Petrobras petcoke, including Petrobras itself.

The move essentially unlocked Brazil’s a supply of low sulphur petcoke (calcinable grade GPC) that was previously virtually inaccessible to the outside world. Under the new marketing format, GPC exports are expected to surge, as overseas demand for premium GPC continues to grow in higher value industrial applications. In fact, 2021 GPC exports are set to more than double last year’s volume even though petcoke production at Petrobras refineries is expected to be lower as compared to 2020. On the other hand, Brazilian petcoke consumers will need to increase imports of fuel-grade petcoke or coal to compensate for the loss of Petrobras supply. The new dynamic will dramatically increase volumes of inbound and outbound seaborne petcoke into and out of Brazil for the foreseeable future.

SOUTH AMERICAN PETCOKE – BECOMING MORE IMPORTANT A combination of factors could elevate the role that South America plays in the petroleum coke market and potentially transform the region into a petcoke hub. Higher volumes of inbound and outbound petcoke of different qualities flowing through port terminals create opportunities in blending, screening, and sale to domestic retail customers. Furthermore, reliable sources of low sulphur GPC are becoming increasingly more important with growth in primary aluminum production and the resulting demand for carbon anodes.

South America has a relatively high concentration of low sulphur GPC supply which has been underutilized for many years as fuel-grade petcoke in Brazil and Argentina. Even though Argentina has a lower refining and coking capacity than Brazil, the potential also exists to unlock GPC supply from the domestic market for export. This would also result in larger quantities of imported fuel-grade petcoke or coal into Argentina. Finally, another possible development could be petcoke calcining capacity additions in South America. Petcoke calcining capacity close to coking refineries makes sense from both a strategic raw material perspective and efficient transportation as CPC has virtually no moisture content.

WHEN WILL INDIA RETURN TO PURCHASING USGC PETCOKE? India holds the world’s second largest cement production capacity after China, and, until very recently, was one of the biggest importers of USGC petroleum coke. With the devastating effect of Covid-19 pandemic on the Indian economy, especially in the construction sector, cement production in India during the financial year 2020-2021 (April 2020–March 2021) is expected to have dropped by 16% year over year. Before that, during the financial year 2019–2020 and 2018–2019, cement production in India was higher by 2% year over year and 13% year over year, respectively.

For years India has been a major export destination for USGC petroleum coke. For example, 21% of USGC petroleum coke exports went to India in 2019. This trend continued during the first four months of 2020 with 21% of USGC petcoke exports destined for India. However, India’s share of USGC exports dropped as 2020 proceeded with 14% of USGC exports going to India during May through August, and then further dropped to 9% for the last four months of 2020.

This downward trend continued with only 5% of USGC exports doing to India during the first five months of 2021. Indian cement producers cut their USGC petcoke imports due to its relatively higher cost ($/MMBtu CFR basis) as compared to seaborne thermal coal (South African, Australian, and Indonesian) and domestic petroleum coke. India has the world’s second highest number of Covid-19 cases and recently saw a severe second Covid-19 wave, with the rolling seven-day average peaking at approximately 400,000 new cases per day in early May.

The number of cases subsequently subsided, averaging about 40,000 new cases per day in late July. However, as of July 22, only approximately 24% of the Indian population had received their first dose of a Covid-19 vaccine, while about 6% of the total population is fully vaccinated, and 3.8 million doses of vaccines are being administered per day.

Indian cement producers are facing a demand crisis due to Covid-19 lockdowns severely affecting utilization rates. Once Covid-19 related restrictions are lifted in certain parts of the country, especially on

the western side, demand will start to recover. If USGC petcoke prices fall sufficiently and cement demand in India recovers, cement producers probably will revert to importing USGC petroleum coke.

SHORT-TERM OUTLOOK Focusing on the rest of 2021 and into 2022, recovery of petroleum coke production depends on the pace of economic recovery. More specifically, how fast refined product (e.g., gasoline, diesel, jet fuel) demand will recover depends on how quickly the world can transition from Covid-19 being a pandemic to it being an epidemic (i.e., a manageable public health issue that does not result in restricted economic activity). However, increased petroleum coke production is not solely dependent on increased refinery throughputs; it also depends on the type of crude oil that coking refineries process. The crude oil available to the market depends on OPEC+ policy. Presently, current OPEC+ policy calls for a gradual phasing out of production cuts by September 2022, but the viability of this policy depends on crude oil demand, which is ultimately linked to economic growth.

LONGER-TERM OUTLOOK – PETCOKE MEGATRENDS Developments in specific industries as well as the evolution of the energy transition are expected to significantly shape the petroleum coke industry going forward. We refer to these developments as petcoke megatrends and are summarized as follows: v Repurposing of petroleum refining assets to renewable fuels. v Amount of permanent refined product demand destruction due to the accelerated transition to work-fromhome and virtual business conferencing as a result of COVID-19 restrictions. v MARPOL 2020-related changes in bunker fuel demand. v Electric vehicle adoption v Growth in aluminium production (primary and recycled). v Inert anode (also known as ‘carbon free’) aluminium smelting technology (eliminates current need for calcined petroleum coke in consumable anodes)

Each of these trends will have a different impact on petcoke production or consumption and the net effect will determine the future course of petroleum coke. These megatrends will be discussed in more detail at our upcoming 20th Annual Petcoke Conference.

Ben Ziesmer (Senior Adviser)

Ben is a widely recognized authority in global petroleum coke consulting. He successfully led Advisian’s Fuel Grade Petcoke practice for many years and now acts as a senior advisor to the team. Ben continues to be a key contributor to Advisian's Pace Petroleum Coke Quarterly, as well as providing support to single client consulting projects, the annual Advisian Petcoke Conference and other Advisian petcoke related publications.

About the authors

Pedro Mackay (Principal Consultant)

Pedro has 28 years of experience working in various energy-related fields such as oil exploration, solid fuel purchasing and trading including petroleum coke and coal, ocean freight chartering, consulting in the petroleum coke industry, and raw materials purchasing in the coke calcining industry. Through his career, Pedro has held responsibilities focused on purchasing and supply chain aspects related to solid fuels for cement plants and raw materials for calciners, solid fuel trading, ocean shipping, and consulting. He holds a bachelor’s degree in Mechanical Engineering from the University of Texas at Austin and a Master’s in International Management from Thunderbird.

Rituraj Jha (Consultant)

Rituraj is Mumbai-based consultant for Houston Market Services team (Advisian) and is a contributing author for Advisian’s Pace Petroleum Coke Quarterly© (PCQ) and Calcined Petroleum Coke Report© (CPC). He is also involved in numerous petroleum coke market studies and is team’s regional expert on Indian petroleum coke market. Background-wise, Rituraj is a chemical engineer from one of India’s top engineering colleges, with a specialization in petroleum refining and natural gas processing.

Advisian (formerly Jacobs Consultancy, Inc. and previously The Pace Consultants, Inc) has published the Pace Petroleum Coke Quarterly© since 1983. The report has been published monthly since January 1985 and is considered the global authoritative source of petcoke market information.