Petroleum coke prices plummeted in late 2008/early 2009 due to the worldwide recession, but rallied later in 2009 and throughout most of 2010. In 2009, India and China began purchasing US Gulf Coast (USGC) petroleum coke, and this new demand fuelled the recovery in petcoke prices. As 2010 proceeded, new demand from Latin America and rising coal prices allowed US Gulf Coast (USGC)/Caribbean petroleum coke prices to increase, and exports to Asia declined. With a ‘wave’ of new coking capacity about to enter the market, where is petroleum coke headed next?
Petroleum coke (petcoke) is produced as a by-product in many — though not a majority of — oil refineries. Traditionally, cokers are installed in oil refineries to convert vacuum tower bottoms (residuum) and other heavy residual oils into higher- value light transportation products (e.g., gasoline, jet fuel, and distillate). A coker almost invariably increases refinery profitability because the yield of high-value transportation fuels is maximized and production of low-value residual fuel oil (RFO) is minimized. While the coking process has been in use since the 1930s, petcoke production has seen its largest growth since 1990 because worldwide light petroleum products demand has grown faster than residual fuel oil demand. Cokers have been, and continue to be, the preferred refining technology that allows the refining industry to reduce its production of residual fuel oil per barrel of crude oil processed, and bridge the gap between light product and RFO demand growth.
Additionally, beginning in the late 1990s, two new factors have been driving the construction of cokers:
* crude oil purchase cost reduction — coking units allow a refinery to process lower cost, heavy, sour crude oils. This was the driving force for the nine new or expanded cokers installed on the US Gulf Coast from 1996–2004 and for many other coker projects currently under construction; and
* ultra-heavy crude oil production — cokers are used in upgraders that produce various grades of synthetic crude oil (SCO) from bitumen or ultra-heavy crude oils. This type of upgrader exists in Venezuela where ultra-heavy Orinoco Belt crude oil is upgraded and exported as lighter crude oils, and in Canada where upgraders are used to produce SCO from the bitumen derived from Alberta oil sands.
There are two general applications for petcoke: one as a carbon source and the other as a heat source. The former requires better quality (e.g., low sulphur and metals) and commands higher prices. Green1 petcoke 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). By far 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), and as a recarburizer in the steel industry. While there are a variety of value-added markets for higher-quality petcoke, about 75% of petcoke is sold into the fuel market, where it competes with coal.
PETCOKE PRODUCTION RECOVERS FROM RECESSIONWorldwide petcoke production increased 7% in 2010, to a record 108mt (million metric tonnes) due to more production at existing cokers plus some coking capacity additions. The year 2010 marked a strong recovery compared with 2009. In 2009, for the first time since Jacobs Consultancy began tracking worldwide petcoke production, production decreased 3%. Petcoke production at existing cokers is typically not impacted by recessions because refineries equipped with cokers are generally more profitable than those without coker(s). Thus, during a recession, refineries without cokers generally reduce their production much more than refineries with cokers to balance refined product supply with demand.
However, this recession proved to be the time when ‘the exception proves the rule’, as the recession impacted coking and non-coking refineries. The combination of weak refined product demand — especially diesel — and a relatively strong RFO market negated the traditional advantage of coking refineries. However, as the economic recovery has proceeded, coking economics, while below historical levels, have improved and production at existing cokers has begun to recover.
PETCOKE — A SEABORNE MARKETWith its cost advantages, water is the primary transportation mode for petcoke, given its need to be transported significant distances to reach end consumers. The United States, the world’s largest petcoke producer, exported almost 75% of its fuel-grade production in 2010. Additionally, virtually all of the petcoke produced by Caribbean
2 cokers is exported. The US and Caribbean producers account for 90+% of the fuel-grade
petcoke that is involved in seaborne trade because petcoke produced in other parts of the world (e.g., Europe, India) is almost always used domestically. In addition to green petcoke exports, 60+% of US calcined petcoke (CPC) production was exported in 2010.
MARKET UPDATEPetcoke prices have been relatively stable during the first half of 2011, following a significant price recovery during the last three quarters of 2009 and throughout 2010. Petcoke prices plummeted in late 2008 and the first quarter of 2009 as demand — especially demand by the key European cement industry — fell sharply due to the worldwide recession. Cement demand is particularly important to the petcoke market because the cement industry is the largest market for fuel-grade petcoke. Just as despair was setting in as to where to market petcoke, Indian buyers began to purchase significant quantities of US Gulf Coast (USGC) petcoke in late first quarter 2009. Shortly thereafter, China also began to buy USGC petcoke and increase purchases of US West Coast (USWC) petcoke. This new demand from Asia put in a ‘bottom’ for petcoke prices.
One might think that coal and petcoke prices are closely correlated because fuel-grade petcoke is typically used as a substitute for coal. Moreover, coal and petcoke prices bottomed in March/April of 2009, followed by stronger pricing for both commodities. While there is an apparent correlation between steam coal cost and the price of petcoke, petcoke prices do not move in lockstep with coal prices. Petcoke is not fungible with coal due to its higher sulphur content, inferior combustion characteristics, different ash characteristics, and various peculiarities of environmental regulations/permits.
If petcoke prices were entirely determined by coal prices, then the petcoke discount to coal would be constant (i.e., a straight line); however, this is not the case
3 (see the ‘USGC/Caribbean Petcoke vs. Coal Alternative’ chart above). In reality, fuel-grade petcoke prices are determined by supply and
demand for petcoke operating in a solid fuel pricing environment determined by coal. To put it another way, it is possible to sell petcoke at $80/metric tonne when coal prices are $100/tonne, but it is not possible to sell petcoke at $80/tonne when coal prices are $50/tonne. However, there is no guarantee that petcoke can be sold for $80/tonne when coal prices are $100/tonne.
When the fuel-grade petcoke market is weak, petcoke prices tend to fall relative to coal and the discount for petcoke compared to coal increases. One can see that when the USGC/Caribbean market was at its nadir in March/April of 2009, the petcoke discount relative to coal in the Mediterranean ($/MMBtu basis) was close to 70%, providing a strong incentive to utilize petcoke instead of coal. Then, as the petcoke market recovered, the discount to coal tumbled.
In the fourth quarter of 2009, the European power industry stopped buying petcoke for blending with coal as the petcoke discount was not large enough to offset increased costs associated with burning petcoke (e.g., higher limestone consumption for SO2 scrubbers, increased CO2 emissions cost, more handling costs). However, increased demand from Latin America, especially Brazil, offset the loss of European power demand.
While the petcoke discount to coal has remained around 20% since the end of 2009, petcoke prices rose in 2010 due to increasing coal cost.
Transportation costs become more important as petroleum moves to more distant markets. For example, ocean freight cost can equal, or even exceed, the FOB (free on board) load port price of USGC petcoke into China, India, or other distant locations. As petcoke prices increase, it becomes harder for USGC petcoke to compete against coal in distant markets like India or China.
For decades, Europe was the primary market for USGC petcoke production, and Japan was the primary market for USWC petcoke production. In 2009 the market share for Asia (excluding Japan) increased to 24% as China and India became key markets for USGC petcoke. Then, increased Latin American demand, especially from Brazil, allowed petcoke prices to
continue to increase. These higher prices made petcoke less attractive to buyers in Asia (especially India), and Asia’s market share decreased (see chart, left, comparing the distribution of US exports in 2009 and 2010).
VENEZUELA PETCOKE KEY MARKET DRIVERThere are four projects in Venezuela—PetroMonagas (formerly Cerro Negro), PetroAnzoa´tegui (formerly Petrozuata), PetroCeden~o (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 Orinoco bitumen. Combined, these four projects can account for 25% of the USGC/Caribbean petcoke market seaborne trade through two petcoke terminals located at the Port of Jose. For several years, these terminals have performed poorly, loading far fewer vessels than they had in the past. This caused a shortfall in petcoke supplied to the market, which helped support prices even as European demand remained weak and US petcoke exports increased.Venezuelan petcoke tends to be lower sulphur (i.e., 4.0–4.5% S, dry basis) material, so Venezuelan exports are especially important for the lower-sulphur portion of the USGC/Caribbean petcoke market (typical petcoke sulphur ranges from 4.0 – 7.0%, dry basis).
There are indications that petcoke terminal performance may improve soon, which could be very significant. It was necessary for the Orinoco upgrading projects to place millions of tonnes of petcoke into storage while petcoke terminal performance lagged. This massive inventory of petcoke could put significant downward pressure on petcoke prices if Jose petcoke terminal performance improves to the point where this petcoke inventory starts to be drawn down.
A ‘WAVE’ OF PETROLEUM COKEWe forecast worldwide petcoke production will increase 40% by 2013
4. Petcoke production at existing refineries has been increasing due to increased production run rates at operating cokers plus the restart of several idled cokers (e.g.,Valero/Aruba and PBF Energy/Delaware City). We are also seeing coking capacity additions moving toward completion and starting up as expected. For example, the new coker at Total’s Port Arthur refinery began cutting coke in March and loaded its first vessel in May.
Several observations can be made by looking at planned coking capacity additions: y significant coking capacity additions are proceeding, especially in Brazil, India, and China, and we expect coking capacity additions to continue into the foreseeable future; y significant coking capacity additions currently under construction in the United States will be coming on line during 2011 through 2013. Consequently, Jacobs Consultancy projects that US petcoke production will increase ~25% by 2013; y two new 400,000bbl/day refineries, which include new delayed cokers in the configurations, are proceeding in Saudi Arabia to process heavy, sour Arabian crude oil. These two refineries could be the harbinger of more export-orientated refineries equipped with cokers being constructed in the Middle East; and y coking capacity additions being installed in Brazil, Spain, and the Middle East will likely displace some USGC/Caribbean petcoke from traditional Mediterranean and Latin American markets.
Chinese and Indian coking capacity additions are driven by rapidly growing light product demand (gasoline, jet fuel, diesel, etc.), whereas US coking capacity is driven by refinery upgrades to handle less expensive, heavy crude oils.
Sharply lower crude oil prices in 2008 caused many Alberta oil sands projects 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 natural gas liquids (resulting in a crude stream known as dilbit) or with SCO (producing a crude stream known as synbit) to produce a blended product that can meet pipeline viscosity and gravity specifications. The dilbit or synbit will be very heavy, requiring refineries to have substantial coking capacity to processthecrudeoil. ThisCanadianheavyoilisdrivingcoking capacity additions in the northern United States — BP (Whiting, IL); ConocoPhillips (Wood River, IL); and Marathon (Detroit, MI) — and may drive more coking capacity additions in the future. Even with these substantial coking capacity additions in the northern portion of the United States, the US Gulf Coast will continue to be the centre of US petcoke production, with production increasing 20+% by 2013.
SUMMARY
Following a period of slow growth, we opine petcoke production will experience rapid growth in the 2011–2013 time period. New coker construction will be concentrated in the United States, Brazil, China, and India. Additionally, the Middle East will become a significant new production area. Coking capacity
additions in the
United States and the Middle East will likely increase demand for seaborne
petcoke transportation services. As petcoke production rapidly increases, it may be necessary for more USGC/Caribbean petcoke to be exported to Asia, forcing yet another shift in where petcoke is transported.
ABOUT THE AUTHOR
Ben Ziesmer (Senior Consultant, Jacobs Consultancy Inc.) Contributing editor to Jacobs Consultancy's Pace Petroleum Coke Quarterly, with 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.
Jacobs Consultancy Inc. has been publishing 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