Bottom of the Barrel: An Updated Outlook for Residual Fuel Oil

About "Bottom of the Barrel"

This study expands on, and brings up-to-date, a similar PIRA study issued in 2007. Although the broad outlook trends addressed in the 2007 study generally are still true, much has changed since then: the global recession and its aftermath, the IMO's approval of bunker sulfur regulations, the rise of oil production from shale, the increase in world oil prices — to name a few. These changes, along with a broad-based interest by PIRA's clients, led to this new updated, expanded study.

"Bottom of the Barrel 2012" shows how a detailed and nuanced look at the underlying trends builds up to robust conclusions for the future. The study answers these important questions:

  • To what extent will the global balances for residuum tighten, and what will be the new marginal refining steps that drive margins and crude differentials?
  • How will bunker fuels sulfur regulations impact demand and price? Will scrubber technology be a major factor?
  • How are the balances for low-sulfur expected to be different from high-sulfur fuel oil?
  • What are the changes in trade patterns and arbitrage relationships that can be expected?
  • How will fuel oil blending components change in different regions?
  • What will be the impact on light-heavy product prices, low sulfur-high sulfur fuel oil prices, and light-heavy crude differentials?
  • What would be the impact if the global economy grows more slowly than expected in the Reference Case? Or if it grows more robustly?
  • Will the changes in heavy product demand, supply, and refining be fundamentally different in the developing world versus the mature industrialized world?

Key Features of “Bottom of the Barrel”

In 2007, PIRA issued a “Bottom of the Barrel” study that made some bold predictions — especially about sharply narrower light-heavy spreads — that ultimately proved to be very close to the mark. Now, PIRA has created an updated and expanded outlook for residual fuel oil and the rest of the “bottom of the barrel.”

How 2012’s Version Differs from 2007:

  • The global recession, rapidly growing shale crude production, and recent developments in the Middle East, Japan, and elsewhere are assessed.
  • Demand forecasts for fuel oil, asphalt, lubes, and petcoke are updated and extended to 2025.
  • New demand scenarios will be developed.
  • A detailed look at the impact of recently enacted bunker specification regulations.
  • Updates on regional refinery capacity, utilization rates, and runs by grade.
  • The impact of increasing conversion capacity and high absolute price levels.

A Comprehensive Written Report

In addition to a robust database and a recorded slide presentation with audio accompaniment, “Bottom of the Barrel” features an extremely insightful and comprehensive written report. Below is its table of contents.
 

Introduction............................................................................................................................................................ vii

        Study Contributors................................................................................................................................................ ix

1      Executive Summary................................................................................................................................................ 1

        Key Points............................................................................................................................................................... 1

        Total Oil Demand.................................................................................................................................................. 4

        Heavy Oil Product Demand................................................................................................................................. 5

        Alternative Scenarios for Demand................................................................................................................... 10

        Crude Supply....................................................................................................................................................... 11

        Refining................................................................................................................................................................. 14

        Fuel Oil Quality and Blending.......................................................................................................................... 15

        Heavy Product Pricing........................................................................................................................................ 17

        Crude Price Differentials.................................................................................................................................... 18

        Product Price Outlook for Demand Scenarios............................................................................................... 18

        Fuel Oil Trade...................................................................................................................................................... 19

        Asphalt Trade....................................................................................................................................................... 20

2      Economics and Demand Overview..................................................................................................................... 23

        Key Points............................................................................................................................................................. 23

        Total Oil Demand and the Economy............................................................................................................... 23

        Global Oil Product Demand.............................................................................................................................. 25

        Alternative Demand Scenarios......................................................................................................................... 31

3      Heavy Product Demand ....................................................................................................................................... 35

        Key Points............................................................................................................................................................. 35

        Global Heavy Product Demand........................................................................................................................ 35

        Resid Demand by Product for Key Sectors – Reference Case.................................................................. 37

        Regional Heavy Product Demand Summaries.............................................................................................. 42

4      Heavy Oil Demand for Power Generation........................................................................................................... 49

        Key Points............................................................................................................................................................. 49

        Global Perspective.............................................................................................................................................. 49

        United States Power Generation...................................................................................................................... 52

        Western European Power Generation............................................................................................................ 56

        Japanese Power Generation............................................................................................................................ 58

        Chinese Power Generation............................................................................................................................... 61

        Middle East Power Generation......................................................................................................................... 62

        Latin American Power Generation................................................................................................................... 64

        Power Generation in Other Regions............................................................................................................... 67

5      Bunker Fuels Demand.......................................................................................................................................... 69

        Key Points............................................................................................................................................................. 69

        Bunker Demand Drivers: World GDP and Trade.......................................................................................... 70

        Bunker Demand Drivers: Fleet Composition and Utilization...................................................................... 71

        Regional Bunker Demand: Sales Location Set Along Trade Routes Near Refining Centers.............. 75

        Bunker Quality Dictated by Changing IMO Regulations............................................................................. 76

        Greenhouse Gas Emissions and the Bunker Market................................................................................... 78

        Alternative Methods to Sulfur Emission Regulation Compliance............................................................... 80

6      Other Heavy Product Demand............................................................................................................................. 83

        Key Points............................................................................................................................................................. 83

        Asphalt................................................................................................................................................................... 84

        Lubricants............................................................................................................................................................. 88

        Petroleum Coke................................................................................................................................................... 90

        Crude Burning...................................................................................................................................................... 92

7      Use of Fuel Oil in Other Industries/Sectors....................................................................................................... 95

        Key Points............................................................................................................................................................. 95

        Refinery Own Use............................................................................................................................................... 95

        Resid Used in Other Industries......................................................................................................................... 97

8      Global Oil Raw Supply........................................................................................................................................ 101

        Key Points........................................................................................................................................................... 101

        Global Oil Supply.............................................................................................................................................. 101

        Oil Production Trends by Region/Country: United States......................................................................... 106

        Oil Production Trends by Region/Country: Canada.................................................................................. 107

        Canadian Oil Sands / Heavy Crude Production and Need for Diluent to Enable Production............ 109

        Other Heavy Crude Producers....................................................................................................................... 113

        Mideast and North African OPEC Producers............................................................................................... 116

        Former Soviet Union........................................................................................................................................ 118

        More on Crude Quality..................................................................................................................................... 119

        Non-Crude Supply............................................................................................................................................ 120

9      Refining and Residual Product Production.................................................................................................... 123

        Key Points........................................................................................................................................................... 123

        Refinery Capacity Growth............................................................................................................................... 124

        Conversion Capacity........................................................................................................................................ 127

        Refinery Capacity Utilization........................................................................................................................... 131

        Refining Outlook – Refinery Closures.......................................................................................................... 136

        Refinery Capacity Utilization Scenarios....................................................................................................... 139

        Refining Operational Path to 2025................................................................................................................ 140

        Regional Refinery Runs and Product Trade Overview............................................................................. 142

        Regional Crude Run Outlook......................................................................................................................... 145

10    Fuel Oil Quality and Blending............................................................................................................................ 151

        Key Points........................................................................................................................................................... 151

        Introduction and Definitions............................................................................................................................ 152

        Bunker Quality................................................................................................................................................... 153

        Fuel Oil Quality for Power Generation and Industry.................................................................................. 156

        Supply Sulfur Level........................................................................................................................................... 158

        Low Sulfur Balances......................................................................................................................................... 160

        Residual Fuel Oil Supply Blending Components....................................................................................... 162

        Regional Fuel Oil Blending............................................................................................................................ 164

        Blending to Meet Sulfur Targets..................................................................................................................... 166

11    Product Prices and Refining Margins............................................................................................................... 169

        Key Points........................................................................................................................................................... 169

        Price Overview: Market Level......................................................................................................................... 169

        Product Price Spreads: Light Product vs. Heavy......................................................................................... 175

        Product Price Cracks and Spreads................................................................................................................ 181

        Fuel Oil Price Spreads: Regional Differences............................................................................................ 184

        Product Price Spreads: Low Sulfur vs. High Sulfur..................................................................................... 185

        Feedstock Prices............................................................................................................................................... 189

        Refining Margin Trends................................................................................................................................... 191

        Crude Price Differentials.................................................................................................................................. 192

        North American Crude Prices Distorted by Logistical Bottlenecks.......................................................... 194

        Forecasts for Alternative Scenarios............................................................................................................... 197

12    Fuel Oil Trade....................................................................................................................................................... 201

        Key Points........................................................................................................................................................... 201

        Global Trends.................................................................................................................................................... 201

        Fuel Oil Regional/Country Balances............................................................................................................ 205

13    Feedstocks and Asphalt Trade......................................................................................................................... 215

        Key Points........................................................................................................................................................... 215

        Feedstock Balances and Trade..................................................................................................................... 215

        Asphalt Balance and Trade............................................................................................................................ 219

        Appendix.............................................................................................................................................................. 223

        Appendix 1: Refinery Project Ratings Used by PIRA................................................................................. 223

        Appendix 2: Refinery Definitions.................................................................................................................... 224

        Appendix 3: Gasoline Blendstock Definitions............................................................................................. 226

        Appendix 4: Middle Distillate Blendstock Definitions................................................................................. 228

        Appendix 5: Residual Fuels Blendstock Definitions.................................................................................. 229

        Appendix 6: Fuel Oil Desulfurization Technology...................................................................................... 231

        Appendix 7: Supply Definitions...................................................................................................................... 232

What Do Study Subscribers Receive

Companies purchasing the study are entitled to have three users to each of the following deliverables (licensing options are available to add extra users):

Written Report

Spells out the findings of the study and the bases underlying those results, and provides a discussion of the key uncertainties that impact the major findings. Approximately 200 pages long, the report includes an executive summary, as well as detailed discussion and illustrative charts on: Demand, Supply, Quality, Price, Trade, and Alternative Scenarios.

Online Database

A comprehensive database providing historical data back through 1995 and forecasts through 2025 in Excel spreadsheets for:

  • Country-level demand by sector with quality breakouts
  • Regional crude production and refinery runs with quality breakouts
  • Regional resid supply, with the impact of refinery capacity changes on fuel oil blending
  • Inter-regional residuum trade flows
  • Price forecasts, both absolute and relative to crude/products, by region and quality

Study Presentation (recorded April 2012)

A slide show with accompanying audio — 3 hours long — that discusses the study's key findings and their implications.

Why the Time Is Right for this Study

A Fresh Look at Demand Trends

The long historical decline in fuel oil demand is expected to level off or even grow in some scenarios. Substitution to other fuels for power generation in the OECD, FSU, and other industrialized countries is nearing practical minimums. In the developing world, further growth in stationary uses is still likely, but not broadly based. Most expansions are concentrated in oil-exporting countries and in rapidly developing countries struggling to meet electricity demand growth.

Bunker demand, on the other hand, continues to grow robustly as the vessel fleet grows to meet expanding trade, and it will represent an increasing share of total fuel oil demand. However, tighter bunker sulfur specifications may drive demand further to low sulfur residual or even distillate based fuels, although the manner and schedule for implementation is still uncertain.

"Bottom of the Barrel 2012" examines demand trends for power generation, industrial use, bunkers, and asphalt/lubes/other specialties. Regional/country forecasts are included. Factors influencing these trends — including policy, substitution due to competitive prices, efficiency improvements, quality requirements, and the potential use of scrubbers for shipping — are also addressed. Demand scenarios that test the impact for a range of possible economic and regulatory factors provide bounds around PIRA’s Reference Case forecast.

A New Assessment for Fuel Oil Supply

With demand for light products growing much more rapidly than that for fuel oil, ongoing additions to fuel oil conversion capacity are required to balance supply and demand. Over the last few years, capacity additions have rapidly increased, and now exceed current requirements. This surge will continue for the next few years and will tighten straight run fuel oil balances and tend to keep light-heavy product price spreads narrow. 

Rapidly Changing Price Relationships

With these changes in demand trends and refining capacity will come dramatic changes in pricing relationships. The study addresses these impacts. Changes in residual fuel oil prices relative to other products and crude are quantified. Quality and regional differences are described.

These changes in product price spreads will fundamentally affect refinery margins, inter-regional arbitrage opportunities, and crude price differentials.

Who Will Benefit from this Study

The stakes are high when it comes to making decisions regarding future residual fuel oil/other heavy product supply, demand, and pricing. "Bottom of the Barrel: An Updated Outlook for Residual Fuel Oil, 2012 Edition" can help market participants keep ahead of the competition through a better understanding of the future interplay between regional residuum balances, regional pricing for different qualities, inter-regional trade, and the impact of these factors on refining margins. The following market participants will all benefit from this study:

  • Crude producers know the importance of product supply/demand balances, product values, and refinery capacity in setting crude price differentials. This study will help them identify and evaluate the future refinery value for heavy versus light crudes and heavy crude upgrading. 
  • Refiners need to plan capacity changes based on the outlook for product demand, feedstock supply, and relative pricing. By providing a firm basis in evaluating future changes in these factors, which define refinery fuel oil conversion margins, the study will help refiners evaluate the future profitability for different refinery configurations.
  • Trading companies want to anticipate regional supply/demand changes and price dynamics. This analysis will aid in planning terminal and shipping infrastructure needs to best capture future opportunities.
  • Shipping companies know that their single largest expense is for bunker fuel, and they face uncertainty both on its price and regulations on quality. Bottom of the Barrel will provide a residual fuel oil price basis under different demand/regulatory scenarios.
  • Policy makers need timely insight into how proposed changes in product quality regulations will affect supply, demand, price, and industry profitability. This study will enable them to better evaluate the impact of future regulatory changes.
  • Electric utilities and other end-users constantly consider how changing fuel oil price dynamics will influence service choices and future capacity decisions. The study will make end-users better equipped to adapt to supply and price shifts, and help new project developers make more effective evaluations of fuel supply options and project viability.
  • Financial institutions must make sound evaluations of how changing market conditions will affect the economics and financing of new refining and marketing ventures. This study will allow for more informed decision-making on potential projects.

Study Fees and Options

"Bottom of the Barrel: An Updated Outlook for Residual Fuel Oil, 2012 Edition" can be purchased by both PIRA retainer clients as well as non-clients.  Existing PIRA retainer clients receive a reduced price. Also, buyers of PIRA's 2007 study "Bottom of the Barrel: The Future for Residual Fuel Oil" receive an additional discount.

Additional users (beyond three),extra report copies and database passwords can also be purchased.