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Platts Gasoline, Naphtha and LPG conference 2019: Assessing Gasoline Supply and Demand, Pricing and Inventory Levels Neil Watt
- 1. Assessing gasoline supply and demand, pricing and inventory levels Neil Watt Crude and Refined Products, B.B Energy Platts Gasoline, Naphtha & LPG Conference November 2019
- 2. Overview 1. Crude and Gasoline dynamics 2. Demand Fundamentals in Key Regions 3. Key Capacity Additions 4. Octane and Sulphur 5. Comments on market and conclusion 6. Sources and Appendices November 20192
- 3. 1. Crude and Gasoline dynamics November 20193
- 4. Crude, Gasoline Structure and Storage: Part I • Relatively strong structure • Gasoline structure has not weakened over Q4; generally more in sync with Brent November 20194
- 5. Crude, Gasoline Structure and Storage: Part II • Octane has generally been strong this year. Trend for higher premium grade differentials1 • Supporting factors- Tier 3, light/heavy imbalance, higher efficiency vehicles November 20195
- 6. Crude, Gasoline Structure and Storage: Part III November 20196 • Utilisation of available storage is low; there is a lot of ullage available in ARA and U.S2,3,4
- 7. Crude Flat Price and Gasoline Pump Prices • Fall in flat price has been significant and fed into pump prices, to varying degrees1,5,6,7 November 20197 YoY Change (%) U.SAverage Retail Prices PADDI Average Retail Prices ChinaRetail Prices IndiaRetail Prices BrentFOB Price Q1 -9.3% -11.0% -10.8% -9.6% -8.1% Q2 -2.1% -4.6% -16.5% -8.4% -5.5% Q3 -6.2% -7.6% -18.1% -7.7% -16.0% Q4(to11/11) -6.4% -9.6% -19.1% -6.3% -24.8%
- 8. U.S Crude Exports and RBBR and RBOB/WTI: Part I • Increased linkage between WTI and Brent as US crude exports increase7,8 • RBOB cracks to Brent moving more in sync with RBOB cracks to WTI November 20198
- 9. U.S Crude Exports and RBBR and RBOB/WTI: Part II • Permian debottlenecking9-15; improving export economics and MEH/Midland narrowing • Increasing competition between export outlets and PADD II refiners for barrels November 20199
- 10. Lightening Crude Slate: Part I • Cuts to medium/heavy (mainly OPEC) and increases in light production (mainly U.S)3,7,8,16 November 201910
- 11. Lightening Crude Slate: Part II • Higher API gravity; more lightends3 • Lack of incremental reforming capacity till 2020 (Appendix A), higher utilization3,8 • Limitations on refinery volume gain and secondary unit bottlenecks November 201911
- 12. 2. Demand Fundamentals in Key Regions November 201912
- 13. U.S: Pump Price/Demand Dynamics • Pump prices1 have remained below critical range over last two years • Flat price drop has not been a significant demand8 stimulator (unlike 2014-2015 drop!) November 201913
- 14. U.S: Efficiency Improvements: Part I • Substantial increases in efficiency of new vehicles driven by CAFE17,18 standards • Dislocation between mileage19 and gasoline demand8 November 201914
- 15. U.S: Efficiency Improvements: Part II • SUV sales and SAFE rulemaking can only slow gains to a limited extent3,18-24 • Efficiency of new SUVs higher than that of the current fleet (Appendix B)3,18 November 201915
- 16. China: Distribution of Traffic • Significant share of growth in traffic relates to rail not car travel3,5,25 November 201916
- 17. China: Fleet Development • Falling car sales5 and licence plate restrictions26 limiting fleet growth • Relatively high proportion of EV sales5 and anti-pollution agenda27 November 201917
- 18. India: Rapid organic growth • Demand growth28 in line with expansion of two-wheeler fleet and sustained3,29-31 • Slowdown in GDP growth and infrastructure development pose minor challenges32 November 201918
- 19. 3. Key Capacity Additions November 201919
- 20. Capacity Additions: East increasingly key November 201920
- 21. Capacity Additions: Maintenance Offsetting November 201921
- 22. Capacity Additions: Highlights • Dangote (650 kbd CDU, ~ 250 kbd gasoline), sophisticated refinery; potential for exports to PADD I3,33-35 • Much of the new Chinese capacity is configured for medium/heavy grades with significant petrochemical capacity36-40 • Chinese capacity additions come as sulphur restrictions41-43 coming into place elsewhere and gradual (slow) E10 growth pressure • MOPS and WAF will increasingly be MTBE (Appendix C) and sulphur dumping grounds, to lesser extent Latam November 201922
- 23. Chinese Exports: Part I November 201923
- 24. Chinese Exports: Part II • Incremental exports this year only a shadow of incoming production additions • Potential for consolidation in Asian refining industry44-46 November 201924
- 25. 4. Octane and Sulphur November 201925
- 26. Tier III: Part I • In 2018, VWA sulphur in refined and imported U.S gasoline was 20.54 ppm...47 • Catgas sulphur concentration, lack of octane capacity3…But refiners adapting48,49 • Implications for olefins and octane sensitivity November 201926
- 27. Tier III: Part II • Sulphur credits have been rising…after years of anticipation; higher compliance costs November 201927
- 28. Tier III: Part III • Projected compliance costs are generally far higher than anticipated by EPA41 • Small refinery/small volume refiner waivers expiring end of current compliance year42 November 201928
- 29. 5. Comments on market and conclusion November 201929
- 30. Market: Part I • If Winter structure does not weaken; risk is to the upside on summer gasoline • Summer structure already moving up November 201930
- 31. Market: Part II • There is some upside potential from Tier 3 • Yet, forward arbs relatively high (even adjusting for freight curve and considering RVO) November 201931
- 32. Market: Part III • RBBRs have moved up over Cal 2020, but RVOs are also more expensive November 201932
- 33. Market: Part IV • Massive Asian capacity expansions • MOPS will become sulphur and eventually (with eventual E10) MTBE dumping ground November 201933
- 34. 6. Sources and Appendices November 201934
- 35. Sources: I November 201935 1. EIA. (2019, November 18). Weekly Retail Gasoline and Diesel Prices. Retrieved from www.eia.gov: https://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm 2. EIA. (2019, May 31). Working and Net Available Storage. Retrieved from www.eia.gov: https://www.eia.gov/petroleum/storagecapacity 3. B.B Energy. (2019, November 20). London. 4. EIA. (2019, November 20). Weekly Petroleum Status Report. Retrieved from www.eia.gov: https://www.eia.gov/petroleum/supply/weekly/ 5. NBS. (2019, November). National Bureau of Statistics China. Retrieved from data.stats.gov.cn: http://data.stats.gov.cn/ 6. PPAC. (2019, November 21). Prices. Retrieved from www.ppac.gov.in: https://www.ppac.gov.in/content/149_1_PricesPetroleum.aspx 7. Reuters (2019) 8. EIA. (2019, October 31). Petroleum Supply Monthly. Retrieved from www.eia.gov: https://www.eia.gov/petroleum/supply/monthly/ 9. Plains All American. (2019, November 5). Investor Relations. Retrieved from ir.paalp.com: https://ir.paalp.com/ 10. P66. (2019, October 25). Phillips 66 Reports Third-Quarter Earnings of $712 Million or $1.58 Per Share. Retrieved from phillips66.com: https://investor.phillips66.com/financial-information/news-releases/news-release-details/2019/Phillips-66-Reports-Third-Quarter-Earnings-of-712-Million-or-158- Per-Share/ 11. Chapa, S. (2019, March 27). Magellan scraps plans for Permian Gulf Coast Pipeline amid talks to combine it with another project. Retrieved from /www.chron.com: https://www.chron.com/business/energy/article/Magellan-scraps-plans-for-Permian-Gulf-Coast-13717439.php 12. Davis, C. (2019, August 6). Permian Wink-to-Webster Oil System Gains Three More Sponsors. Retrieved from naturalgasintel.com: https://www.naturalgasintel.com/articles/119194-permian-wink-to-webster-oil-system-gains-three-more-sponsors 13. Jupiter MLP. (2018, November 30). Open Season. Retrieved from http://www.jupitermlp.com/: http://www.jupitermlp.com/open-season 14. EPIC. (2019, August). Citi 1:1 Midstream / Energy Infrastructure Conference. Retrieved from epicmid.com: https://epicmid.com/wp- content/uploads/2019/08/Citi-MLP-8.9.19.pdf 15. Randy Fowler. (2019, November 20-21). RBC CAPITAL MARKETS MIDSTREAM CONFERENCE (Enterpise Products Partners L.P.). Retrieved from ir- west.enterpriseproducts.com: https://ir-west.enterpriseproducts.com/static-files/8473156b-9e7f-4349-9637-7b0b885cf70a
- 36. Sources: II November 201936 16. OPEC. (2019, November). Monthly Oil Market Report. Retrieved from opec.org: https://www.opec.org/opec_web/en/publications/338.htm 17. NHTSA. (2012). Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel. Retrieved from nhtsa.gov: https://www.nhtsa.gov/corporate-average-fuel- economy/documents-associated-mys-2012-2016-rulemaking 18. EPA. (2019, March). Automotive Trends Report. Retrieved from www.epa.gov: https://www.epa.gov/automotive-trends/download-data-automotive-trends-report 19. FHWA. (2019, October 25). Travel Monitoring. Retrieved from fhwa.dot.gov: https://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm 20. BTS. (2019). Number of U.S. Aircraft, Vehicles, Vessels, and Other Conveyances. Retrieved from https://www.bts.gov/: https://www.bts.gov/content/number-us-aircraft-vehicles- vessels-and-other-conveyances 21. BEA. (2019, November 4). Auto and Truck Seasonal Adjustment. Retrieved from bea.gov: https://www.bea.gov/docs/gdp/auto-and-truck-seasonal-adjustment 22. FHWA. (2019, September 25). Highway Statistics 2017. Retrieved from https://www.fhwa.dot.gov/: https://www.fhwa.dot.gov/policyinformation/statistics/2017/ 23. EPA. (2018, August 2). MYs 2021-2026 CAFE Proposal -by the Numbers. Retrieved from nepis.epa.gov: https://nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P100V26H.pdf 24. EPA. (2018, August 2). NHTSA and EPA Proposed SAFE Vehicle Rule . Retrieved from nepis.epa.gov: https://nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P100V26I.pdf 25. Chinese Government Customs. (2019, November). 26. Gabriel Collins, J. (2019, March). China’s Gasoline Demand Growth: Is Recent Deceleration Near-Term Noise or. Retrieved from https://www.bakerinstitute.org/media/files/files/147628cc/ces-collins-china-gasoline-demand-032819.pdf 27. Buckley, B. a. (2018, March 13). China Unveils Superagencies to Fight Pollution and Other Threats to Party Rule. Retrieved from www.nytimes.com: https://www.nytimes.com/2018/03/13/world/asia/china-xi-jinping-congress-pollution-corruption.html 28. PPAC. (2019, November). Consumption. Retrieved from www.ppac.gov.in: https://www.ppac.gov.in/content/147_1_ConsumptionPetroleum.aspx 29. SIAM. (2019). Domestic Sales Trends. Retrieved from http://www.siamindia.com/: http://www.siamindia.com/statistics.aspx?mpgid=8&pgidtrail=14 30. The Economic Times. (2018, December 2). The enormous test that awaits India as the date with mandatory vehicle scrapping nears. Retrieved from https://economictimes.indiatimes.com/: https://economictimes.indiatimes.com/industry/auto/auto-news/the-enormous-test-that-awaits-india-as-the-date-with-mandatory-vehicle- scrapping-nears/articleshow/66897364.cms?from=mdr
- 37. Sources: III November 201937 31. OGD PMU Team. (2017, April 25). Registered Motor Vehicles in India as on 31.03. 2015. Retrieved from https://community.data.gov.in/: https://community.data.gov.in/registered- motor-vehicles-in-india-as-on-31-03-2015/ 32. IMF. (2019, October). World Economic Outlook, October 2019. Retrieved from www.imf.org: https://www.imf.org/en/Publications/WEO/Issues/2019/10/01/world-economic-outlook- october-2019 33. OTL Week. (2019). OTL Week. 34. Hydrocarbons Technology. (n.d.). Dangote Refinery, Lagos. Retrieved from www.hydrocarbons-technology.com: https://www.hydrocarbons-technology.com/projects/dangote-refinery- lagos/ 35. The Chemical Engineer. (2017, June 15). DuPont provides tech for Dangote refinery. Retrieved from www.thechemicalengineer.com: https://www.thechemicalengineer.com/news/dupont-provides-tech-for-dangote-refinery/ 36. Saudi Aramco. (2019, Feb 22). Saudi Aramco. Retrieved from Saudi Aramco signs agreements to acquire stake in Zhejiang Integrated Refining & Petrochemical Complex: https://www.saudiaramco.com/en/news-media/news/2019/saudi-aramco-signs-agreements-to-acquire-stake-in-zhejiang 37. Xu and Zhou. (2019, May 9). China's Hengli Petrochemical seeks spot crude as it looks to raise run rates. Retrieved from www.spglobal.com: https://www.spglobal.com/platts/en/market- insights/latest-news/oil/050919-chinas-hengli-petrochemical-seeks-spot-crude-as-it-looks-to-raise-run-rates 38. Hengli. (2018). Introduction of Hengli Refinery. 39. Argus. (2019, June 11). Argus. Retrieved from China's Shenghong starts work on 320,000 b/d refinery: https://www.argusmedia.com/en/news/1919424-chinas-shenghong-starts-work- on-320000-bd-refinery?backToResults=true 40. Aizhu, C. (2019, January 31). Reuters. Retrieved from Exclusive: PetroChina to drop PDVSA as partner in refinery project - sources: https://uk.reuters.com/article/us-cnpc-refinery-pdvsa- exclusive/exclusive-petrochina-to-drop-pdvsa-as-partner-in-refinery-project-sources-idUKKCN1PP0Y4 41. EPA. (2014, April 28). Control of Air Pollution From Motor. Retrieved from https://www.govinfo.gov/: https://www.govinfo.gov/content/pkg/FR-2014-04-28/pdf/2014-06954.pdf# 42. EPA. (2014, March). EPA Sets Tier 3 Motor Vehicle. Retrieved from nepis.epa.gov: https://nepis.epa.gov/Exe/ZyPDF.cgi/P100HVZV.PDF?Dockey=P100HVZV.PDF 43. TransportPolicy. (2019). INDIA: FUELS: DIESEL AND GASOLINE. Retrieved from transportpolicy.net: https://www.transportpolicy.net/standard/india-fuels-diesel-and-gasoline/ 44. Downs, E. (2017, September). The Rise of China's Independant Refineries. 45. Tan, M. T. (2017, September 27). Dongming steps up crude purchases in 2017 for Shandong oil refiners: executive. Retrieved from reuters.com: https://www.reuters.com/article/us-asia- oil-appec-refiners/dongming-steps-up-crude-purchases-in-2017-for-shandong-oil-refiners-executive-idUSKCN1C20HU
- 38. Sources: IV November 201938 46. Meng, C. A. (2018, May 28). China independent oil plants face closure under new tax rules, competition- exec. Retrieved from reuters.com: https://af.reuters.com/article/commoditiesNews/idAFL3N1SZ484 47. EPA. (2019, November 10). Sulfur Averaging, Banking, and Trading (ABT) Credit Data. Retrieved from epa.gov: https://www.epa.gov/renewable-fuel-standard-program/sulfur-averaging- banking-and-trading-abt-credit-data 48. BusinessWire. (2019, April 30). Phillips 66 Partners Reports First-Quarter 2019 Earnings. Retrieved from businesswire.com: https://www.businesswire.com/news/home/20190430005292/en/Phillips-66-Partners-Reports-First-Quarter-2019-Earnings 49. Valero. (2019, July 25). Valero Energy Reports Second Quarter 2019 Results. Retrieved from valero.com: https://www.valero.com/en- us/Documents/Newsroom/2Q19%20VLO%20Earnings%20Release%20and%20Tables.pdf
- 39. Appendix A: CDU and Reforming Capacity • Ratio of reforming capacity to CDU capacity increasing marginally from 2020 onwards November 201939
- 40. Appendix B: Efficiency of vehicles by model year • The efficiency of car SUVs built in 2018 at 26.8 mpg is significantly higher than the weighted average of the fleet as a whole • There is also a bias towards older less efficient vehicles being scrapped first November 201940 Estimated Real-World Fuel Economy by Vehicle Type, U.S (EPA) Model Year Sedan/Wagon Car SUV Truck SUV Minivan/Van Pickup 2007 24.1 20.6 17.7 19.5 16.2 2008 24.3 21.2 18.2 19.8 16.5 2009 25.3 22 19.3 20.1 16.9 2010 26.2 23 19.7 20.1 16.9 2011 25.8 23.5 19.8 20.9 17.2 2012 27.6 23.3 20 21.3 17.2 2013 28.4 24.3 20.8 21.1 17.5 2014 28.4 24.4 21.6 21.3 18 2015 29 25.1 21.9 21.8 18.8 2016 29.2 26.2 22.2 21.7 18.9 2017 30.2 26.2 22.4 22.2 18.9 2018 30.8 26.8 23 22.9 19.3
- 41. Appendix C: MTBE and Ethanol Comparison • High degree of interchangeability of ethanol and MTBE (mainly from octane perspective) • Eventual E10 implementation should displace MTBE from domestic Chinese gasoline sales November 201941 Ethanol and MTBE Specifications (B.B Energy) Ethanol MTBE Density (SG) 0.791 0.746 Sulphur (ppm) 0 1 Aromatics (vol %) 0 0.01 Olefins (vol %) 0.0% 1.0% IBP (deg C ) 80 55 RON 113 117 RVP (kpa) 180 60
Hinweis der Redaktion
- Winter structure has been relatively strong this year and more linked to brent structure. Dec/April EBOB was at -24.7 $/t on Thursday, which compares to -55 $/t the same time last year. RBOB structure is not significantly different. This has implications for winter/summer storage.
- Octane has generally been relatively strong this year and over last year too, the LHS chart shows alkylate differentials in the USG. There is a general trend towards higher efficiency and imbalance of light and heavy material, which I’ll talk about in more detail later, helping drive demand for octane which to an extent we see reflected in alkylate differentials as well as premium differentials to mid-grade and regular gasoline in the U.S. (EIA, 2019) This is another factor that makes storage for summer relatively expensive compared to other years.
- With winter structure strong and alkylate relatively expensive utilisation of available storage is low and there is around 13 M bbls more ullage available YoY across the U.S and ARA This increases the upside potential for summer gasoline should the strength at the front roll up
- The fall in crude flat price this year has fed into pump prices to varying degrees across China, India and the U.S. In particular in China we’ve seen pump prices decline by 16% this year on average, actually more than the decline in crude. In the U.S pump prices have declined by 6% YoY. However, in the U.S I do not think that the fall in pump prices was anything like significant enough to be expected to stimulate demand given we were already in a relatively low flat price environment last year and will explain why later. In China, despite retail prices falling very dramatically that has not fed into consumption for various reasons which I’ll go into in a later slide
- Over the last 2 years U.S crude exports have increased by over 2 Mbd. And as U.S crude exports have increased and permeated into global crude markets RBOB cracks to Brent are trading much more in line with RBOB cracks to WTI; the market has got more efficient as a result. The upper and lower bounds of the 95 % confidence interval- denoted by the red and green lines lines on the LHS chart- draw attention to the fact that the difference in daily returns achieved from RBOB/WTI compared to RBOB/Brent have narrowed very considerably in recent years
- Additional Permian debottlenecking taking place should continue to lead to better export economics. Cactus II (with 670 kbd capacity) came online in August. P66 reported in October that linefill has started on Gray Oak (design capacity of 900 kbd). (P66, 2019) There is already evidence of competition between Midwest refiners and exports outlets for barrels, we’ve seen MEH/Midland differentials narrow considerably this year Ultimately, we have more capacity for export of light molecules to the global market
- With the OPEC cuts (primarily concentrated in medium/heavy grades) and additional U.S production, with the Permian debottlenecking taking place we’ve already seen a gradual lightening of the global crude slate even as the U.S slate becomes lighter (OPEC, 2019)
- Generally as the API of a crude increases, the lightends cut increases. While we have more light molecules the ratio of installed reformer capacity to CDU capacity globally is falling and a substantial proportion of new reforming streams are being redirected to petchems (B.B Energy, 2019) In the U.S we’ve also seen a trend towards higher reforming utilisation rates as octane has gotten more expensive. There are also issues related to limitations on achievable volume gain across a refinery as the crude slate lightends, in particular leading to lower utilisation of secondary unit capacity due to the distribution of light and heavy molecules Ultimately, there is less slack in the refining system to handle light molecules than there has been in the past. (EIA, 2019) (B.B Energy, 2019)
- Although pump prices have declined by an average 6% in the U.S YoY, I’d argue there are good reasons why this was not a significant stimulator for demand (EIA, 2019) (EIA, 2019) The chart on the right hand side shows two basic price-demand regimes of deseasonalised demand and pump price; one above and one below 3 $/GAL The relative change from 2018, generally below $ 3/gal to a lower flat price regime was not nearly critical as the move from 2014 to 2015
- In the PSM data through to August this year, U.S demand growth has averaged only -0.46 % YoY, which compares to a growth in Vehicle Miles Travelled having increased by 0.88 % YoY. (EIA, 2019) (FHWA, 2019) So, despite the fact that in the U.S people have driven more than they ever have before, we’ve had an absence of demand growth. This disconnect between distance travelled and actual gasoline consumption has been driven by efficiency gains in the fleet as result of CAFE standards, one of the stipulations of which included raising fuel efficiency cars and trucks by a combined average of 4.8 mpg from 2007 to 2018 or 23.3 %. (NHTSA, 2012)
- I expect that fleet efficiency will have increased by at least 0.7 %, most likely by more than that, this year given the distribution of sales that we’ve seen an the efficiency of new vehicles and scrappage Although we have seen a long-term trend towards a higher proportion of vehicle sales being SUVs, the efficiency of the average new SUV is around 26.8 mpg (as of 2018) This is still higher than the fleet as a whole at the moment which I estimate to be around 22.6 mpg and there will be a bias towards older less efficient vehicles getting scrapped each year. (FHWA, 2019) (BTS, 2019) (BEA, 2019) The SAFE rulemaking being brought in by Trump would freeze efficiency standards for 2021-2026 at the 2020 level; a significant change from what would have been implemented before. (EPA, 2018) However, even assuming that SAFE (Safer Affordable Fuel-Efficient) comes into place and the rate of suv sales and auto sales follows the trend of the last 5 years, efficiency would still be expected to grow significantly through to 2030s.
- As gasoline demand growth has slowed in recent years, we’ve also seen the proportion of travel via highways gradually decline from 82.5 % of all travel in 2017 to 77.7 % in 2019 YTD as rail travel has increased. (NBS, 2019) Some reasons for this include local government initiatives to promote mass transit, congestion on the highways and the government’s anti-pollution agenda
- We’ve seen also a general trend towards lower car sales which have been hindered by licence plate restrictions with a 11.6 % decline over Q1 to Q3 this year when compared with the same period in 2018. (NBS, 2019) Figures compiled by the Baker Institute, using data from IEA and NBS, estimate that between 2016 and 2018 the car fleet has grown by an average of 27% per year while gasoline demand averaged around 6%, so there’s a clear disparity between growing vehicle ownership and outright demand. (Gabriel Collins, 2019) In the longer term the relatively high proportion of EV sales and the government’s anti-pollution agenda also pose challenges. So far this year EVs represent 4.8 % of total vehicle sales in 1H this year, considerably higher than elsewhere.
- In India we’re seeing fairly steady organic growth in line with the growth in the fleet as a whole. Indian demand growth has averaged YTD 9.16 % YoY with the latest October figure being +8.85 % or +55 kbd YoY. (PPAC, 2019) Over the last several years this has been generally in line with the gradual growth in the two-wheeler fleet which I estimate to have grown by an average of 10.57 % per year from 2011 to 2019 while demand has grown by an average of 9.42% over the same period. (SIAM, 2019) (The Economic Times, 2018) (OGD PMU Team, 2017) Although GDP growth has been slower this year and expected to average 6.1% (compared to 6.8% in 2018) the IMF forecast (from October 2019) a recovery in 2020 to 7% GDP growth. (IMF, 2019) (p16)
- Of the 2.2 Mbd gasoline production slated to come online from 2019 to end of 2021, 1.7 Mbd is in the East. Aside: The decline in U.S is due to the PES shut down, there’s always the possibility that starts up at some point in the future, recently various potential buyers have been touring the facility. (Kearney, 2019)
- Although we’ve had substantial capacity added this year worth bearing in mind that we have also had very substantial lost production too, in the 2H I estimate lost gasoline production to be approximately 350 kbd higher YoY to date. So would argue that there hasn’t necessarily been time for the market to fully absorb the potential of the new capacity additions.
- 1. Dangote refinery will be a highly sophisticated refinery with a 27 kbd alkylation unit, the refinery will benefit from being near a major demand centre and crude supply. (Hydrocarbons Technology) (The Chemical Engineer, 2017) Nominally the refinery is supposed to be completed by the end of 2020 with production starting in early 2021, however a number of milestones such as the assembly of the CDU and completion of the trucking racks and inland logistics remain to be passed. (OTL Week, 2019) Given the sophisticated nature of the refinery here’s real potential for exports to PADD I also considering the fact that the inland logistics aren’t complete yet and likely expensive transhipment costs would arise for transport to Lagos in the meantime 2. Of the 1.7 Mbd gasoline capacity additions in the East between 2019 and 2021, China has 1.5 mbd of that. The bulk of these additions are in highly sophisticated greenfield refineries configured for medium/heavy crude barrels, for example Hengli is designed to take 60% Arab heavy and 30% arab medium. (Hengli, 2018) In some cases- Hengli and Rongsheng Petrochemical – there are also term and/or equity arrangements with crude suppliers such as Aramco. (Xu, 2019) (Saudi Aramco, 2019) Much of the new Chinese capacity also has substantial petrochemical capacity and ability to whether losses on domestic refined product sales. 3. The capacity additions in China are also coming at a time when- theoretically- E10 is eventually supposed to being implemented. Given ethanol is more or less subsisted for MTBE from an octane point of view and we’re also seeing sulphur restrictions in other markets it’s likely MOPS and WAF will become a dumping ground for MTBE and sulphur which will weight severely on the quote. (TransportPolicy, 2019) To a lesser extent Latin America as well. The reason I saw to a lesser extent is Mexico city grade takes 30 ppm sulfur which is not really high but can take 5% MTBE, while Brazil is naphtha like E27 and not such a good fit.
- So far this year we’ve seen Chinese exports head to homes such as WAF and Mexico which are generally filled by USG and Europe. So there is clear evidence that the incremental production is having some impact on the rest of the world. Point of note as well is that with E10 implementation planned in China, or at least the intention of it China will have a competitive advantage in actually filling those shorts as time goes on due to the MTBE implications it’s likely to have. MTBE can go into Mexican and WAF gasoline. WAF and MOPS are both MTBE and sulfur homes.
- However for most of the year exports have been generally flattish and we have not yet felt the weight of the upcoming production in terms of driving incremental exports. From this year to end of 2020 an additional 790 kbd of production is lasted to come online in China. There is some potential for consolidation in the refining industry as new more efficient capacity comes online, notably independent refineries tend to be build in a piecemeal fashion and lack benefits of integration. (Downs, 2017)
- 2018 the VWA sulphur of U.S gasoline was over 10 ppm higher than the 10 ppm tier limit. Given that most sulphur in gasoline is concentrated in the catgas stream one solution is to hydrotreat more severely, this has the effect generally of reducing the octane of the steam as molecules become saturated with hydrogen. There has been a general trend for lower olefins to correlate with lower sulphur up until last year where we’ve seen evidence of refiners adapting processes at the operational level to cope. Valero and P66 have recently made a number of capital investments in new alkylation and isomerisation capacity but in the grand scheme of things capacity additions are limited
- As of 15th November standard Tier II credits were 3175 $/Million Gallons according to Argus, that’s a 71.6 % increase since March this year. In terms of compliance costs that would be the equivalent of 3.2 cpg for a refiner 10 ppm over the limit. (B.B Energy, 2019)
- The current projected compliance costs are ultimately far higher than originally envisioned by the EPA. (EPA, 2014) The average refiner in 2018 would have been roughly 10 ppm over the limit and now paying a 3.2 cpg compliance cost, whereas the worst 15 % of production in the original EPA forecast estimated that at only 1.55 cpg; a substantial difference.
- I mentioned earlier in the presentation that winter structure has been relatively strong while alkylate and octane in general has also been on the strong side which we see reflected in low ullage. Ultimately unless winter structure comes off and storage increases the risk is to upside on the summer. You can see already that summer structure has begun to move up, with the April/May EBOB at +2 $/t on Thursday, that was trading -4 $/t in contango at same time last year.
- Tier 3 impact is to essentially increase the cost of production through the compliance cost mechanism, in theory with all things being equal forward TA arb should be higher than before, and they are RVOs are printing higher YoY, last week printing 0.81 cpg higher than same time last year. TC2 freight curve is implying freight at cpg higher YoY over May. Even factoring that in the arbs are still relatively expensive, which makes sense. Arguably they may be too expensive even with Tier 3
- The cost of compliance of tier 3 has increased by 1 $/bbl since the beginning of the year for an average refiner, we’ve seen RBBRs move up by slightly more than that over cal 2020, while to a lesser extent 2021 has also moved up. Albeit it’s not necessarily tier 3 driving this there has already been a significant move up in the cracks over cal 2020, to a lesser extent over 2021 too
- I previously mentioned the massive Asian gasoline production capacity additions taking place over the next 2 years, in particular we have 500 kbd being added next year At the same time sulfur restrictions elsewhere will make the East a more favoured dumping ground for high sulfur material that WAF does not take. The long term trend towards E10 implementation will also push out MTBE out of the blend pool. MOPS will become sulphur and eventually (with eventual E10) MTBE dumping ground This will also have implications for WAF as Nigeria can accept MTBE and has taken Chinese exports already E/W next year is about same level as traded this year, that seems much too low particularly in the long term Equally in the long term the cost of octane in the East should decline eventually as MTBE is pushed out of domestic Chinese sales, this should eventually be reflected in a narrowing of the 95/92 differential