Petroleum coke (petcoke) prices have been surprisingly stable over the past 15 months, in contrast to the volatility of the preceding four years. Over 2008–2011, the petcoke market experienced extreme fluctuations, driven by various events, starting with the economic crisis in late 2008/early 2009 and the subsequent worldwide recession (see USGC/Caribbean Market Fuel-Grade Petroleum Coke Prices chart on p16). Starting in the second quarter of 2009, the emerging markets of India and China brought in new demand, causing US Gulf Coast (USGC)/Caribbean petcoke prices to recover. As 2010 proceeded, increased demand from Latin America and Turkey combined with rising steam (thermal) coal prices helped petcoke prices climb further. Late in 2010 petcoke prices rose to the point where, combined with much higher ocean freight costs of transporting USGC petcoke to Asia versus Europe, it was very difficult for petcoke to compete against Asian steam (thermal) coal, and export volume from the US Gulf Coast to Asia decreased. In 2011, supply outpaced demand in traditional markets, again driving USGC/Caribbean petcoke prices lower so petroleum coke could once again compete in Asia.

Since early 2012, the market has been in a state of dynamic equilibrium, in which anaemic demand in traditional markets has been offset by faltering supply. In this precariously balanced market, when there is sufficient demand in traditional markets, petroleum coke prices rise to levels that are uneconomic for Asian customers; when supply exceeds demand in traditional markets, petcoke prices decline to a point at which they become attractive for Asian customers.

Petroleum coke’s price volatility is due, in large part, to the fact that it is a by-product. Therefore, there is no supply-side response to its price. Petroleum coke production does not increase when petcoke prices are high; conversely, low petcoke prices do not cause producers to reduce production.

BACKGROUND

Petroleum coke 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.
  • 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. Green petroleum coke is usually upgraded by calcination when it is used as a carbon source. Petcoke that has been calcined is referred to as calcined petroleum coke (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 petroleum coke produced is sold into these higher value-added markets for higher-quality petroleum coke; the remainder of the petcoke is sold into the fuel market, where it almost always competes with coal.

 

PRODUCTION

Worldwide petcoke production increased ~3.5% in 2012, to a record 117mt (million metric tonnes), primarily due to coking capacity additions. However, production has been growing slower than would be indicated by new coking capacity additions, as many cokers during 2012 and early 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 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.

Prior to the recession that began in 2008, RFO prices were 50–80% of that of crude oil, but since 2009 they have been 80–95% of the price of crude oil.

  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.
  • 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 like 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 others are being decommissioned or reconfigured to fire alternative feedstocks. 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.

PETCOKE — A SEABORNE MARKET

Shipping is the primary transportation mode for petroleum coke, given its need to be 

 

transported significant distances to reach end consumers. The United States, the world’s largest petroleum coke producer, exported over 75% of its fuel-grade production in 2012. Additionally, virtually all of the petroleum coke produced by Caribbean cokers is exported. The US and Caribbean producers account for 90% of the fuel-grade petroleum coke that is involved in seaborne trade because petroleum coke produced in other parts of the world (e.g. Europe, India) is almost always used domestically. In addition to green petroleum coke exports, 60% of US CPC production was exported in 2012.

 

ASIA RISES!

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. Over the past year, China has displaced Europe as the second-largest market for USWC petroleum coke exports (see US West Coast Petroleum Coke Export Destinations chart below).

Similarly, Europe and Latin America historically were the dominant markets for USGC exports, but Asia has become increasingly significant, now rivalling Latin America as an outlet for USGC petcoke exports (see US Gulf Coast Petroleum Coke Export Destinations chart on p19).

TRANSPORTATION COST CRITICALLY IMPORTANT

Transportation costs have become more important as petroleum coke has moved to more distant Asian markets. For example, ocean freight cost can equal, or even exceed, the FOB load port price of USGC petcoke into China, India, or other distant locations. As petroleum coke prices 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 the traditional USGC/Caribbean petroleum coke export markets is also impacting the ability of this petroleum coke to compete in these traditional markets, pushing petroleum coke to new export markets in Asia. Repsol started up two new large cokers (Cartagena and Bilbao, Spain) that produce high-sulphur fuel- grade petroleum coke. This petroleum coke production can easily displace USGC material into the European/Mediterranean petroleum coke market due to its significant transportation cost advantage. Two new cokers are scheduled to start-up in Saudi Arabia in 2013 and 2014. These cokers will have significant transportation advantages compared to USGC cokers into the Mediterranean and Asian petroleum coke markets.

BURGEONING DEMAND IN INDIA

Petroleum coke demand in India could increase by as much nine million metric tonnes/annum (mtpa) 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 6mtpa of petroleum coke 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 petroleum coke and/or coal. Jacobs Consultancy calculates that these nine CFB boilers could burn close to 3mtpa of petcoke if they are all fuelled with 100% petroleum coke.

THE VENEZUELA ENIGMA CONTINUES

There are four projects in Venezuela — 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 petroleum coke 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 petroleum coke 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 petroleum coke 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 petroleum coke into storage. We continue to receive reports that petroleum coke terminal loading performance is going to improve because there is interest in reducing the petcoke storage piles to generate export revenue and to reduce fugitive petcoke dust concerns. However, terminal performance has not yet improved. In June there was hope that a third terminal, consisting of floating cranes for transloading petcoke from barges to vessels, would begin operations, but we now understand that this facility has been further delayed for additional permitting.

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 66 (Wood River, IL), and Marathon (Detroit, MI) — and may drive more coking capacity additions in the future. In addition, the controversial Keystone 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. Even with the substantial coking capacity additions in the Great Lakes area of the United States, the US Gulf Coast will continue to be the centre of US petroleum coke production and the source of exports.

SHALE OIL

US crude oil production has 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 petroleum coke 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.

SUMMARY

The Asian market has become a very important market for seaborne fuel-grade petroleum coke, and Asia’s importance is likely to grow in the future. There are a number of uncertainties that will either directly or indirectly impact the fuel-grade petroleum coke market. Some of these uncertainties are fairly typical and straightforward, such as economic growth, international steam (thermal) and coking (metallurgical) coal  pricing, and ocean freight rates. 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.
  • 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 petroleum coke production?

While small compared to many other dry bulk or energy commodities, the petroleum coke 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 has been the project manager for numerous studies involving the fuel-grade petroleum coke 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.

 
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.