Petcoke - market buffeted by economic uncertainty

Petroleum coke (a.k.a. petcoke) prices have been volatile over the last four years, 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 pxx). Then emerging markets in India and China brought in new demand causing petcoke price to recover in 2009 and 2010. As 2010 proceeded, increased demand from Latin America and Turkey combined with rising steam (thermal) coal prices helped buoy US Gulf Coast (USGC)/Caribbean petcoke prices while high ocean freight costs made it difficult for petcoke to compete against Asian steam coal. In 2011 supply outpaced demand in traditional markets, again driving petcoke prices lower so USGC petroleum coke could once again compete in Asia. Thus, a pattern has emerged: if
there is sufficient demand in traditional markets, then USGC/Caribbean petroleum coke prices will rise to levels that are uneconomic for Asian customers, but if supply exceeds demand in traditional markets, then USGC petcoke prices must decline to become attractive for Asian customers.
BACKGROUND
Cokers are installed in many – though not a majority – of oil refineries. Petroleum coke is a by-product because the purpose of a coker is not to produce petroleum coke but to increase the production of higher value liquid products. 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 (see Simplified Coker Process Flow diagram on p19).
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 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 transportation petroleum product 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.

• 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.

PRODUCTION
Worldwide petroleum coke production increased 6+% in 2011, to a record 113mt (million metric tonnes) due to more production at existing cokers and coking capacity additions. Petroleum coke 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, since
2008/2009, the combination of weak refined product demand— especially diesel — and often relatively strong alternate markets for coker feed (i.e. production of RFO and/or asphalt) has left petcoke production much more susceptible to relatively small shifts in refining and coking economics.
This more uncertain economic environment for cokers was clearly illustrated as two refineries with large cokers — Valero Aruba and Hovensa St. Croix US Virgin Islands — were shuttered during the first half of 2012. Another indication is that many USGC refiners were running their cokers at 20–30% below rated capacity during the first half of 2012, as it was often more profitable to divert coker feed to RFO or asphalt production instead of operating their cokers at full capacity.
PETCOKE — A SEABORNE MARKET
MARKET UPDATE
The petroleum coke market’s recent roller-coaster ride began in 2008, as energy prices sky rocketed in the period leading up to the economic crisis and collapse. 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 petroleum coke. Then, just as petroleum coke marketers despaired that prices might be heading below zero, Indian buyers began to purchase significant quantities of US Gulf Coast (USGC) petroleum coke 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 and fuelled the recovery in petcoke prices in 2009 and 2010.
As 2010 proceeded, increased demand from Latin America and Turkey combined with rising steam (thermal) coal prices allowed US Gulf Coast (USGC)/Caribbean petroleum coke prices to increase, and exports to Asia declined as high ocean freight costs made it difficult for petcoke to compete against Asian stream coal. Then, in 2011 supply began to outpace demand in traditional European/Mediterranean, Latin America, and North American markets and it was once again necessary for USGC petroleum coke to go to Asia in search of additional customers. USGC/Caribbean petcoke prices had to drop to compensate for higher ocean freight cost associated with the much longer distances to Asia.
Thus, a new paradigm has emerged: when there is sufficient demand in traditional markets, USGC/Caribbean petroleum coke prices rise to levels that are uneconomic for Asian customers, but, when supply exceeds demand, USGC/Caribbean petcoke prices decline to levels attractive for Asian customers.
One might think that coal and petroleum coke prices are closely correlated because fuel-grade petroleum coke 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 petroleum coke, petroleum coke prices do not move in lockstep with coal prices. Petroleum coke 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 value ($/MMBtu basis) of petroleum coke compared to coal would be constant (i.e., a straight line); however, this is not the case3 (see USGC/Caribbean petcoke vs. steam coal chart, above). In reality, fuel-grade petroleum coke prices are determined by supply and demand for petroleum coke operating in a solid fuel pricing environment determined by coal. To put it another way, it is possible to sell petcoke at $80/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 $100/tonne.
When the fuel-grade petroleum coke market is weak, petroleum coke prices tend to fall relative to coal and the value of petcoke compared to coal decreases. One can see that when the USGC/Caribbean market was at its nadir in March/April of 2009, the value of petcoke relative to coal in the Mediterranean ($/MMBtu basis) was below 40%, providing a strong incentive (60+% discount) to utilize petcoke instead of coal. Then, as the petcoke market recovered, the value compared to coal increased. In 2010 petcoke prices rose to the level where petroleum coke was no longer economically attractive for Asian customers, and USGC petcoke sales to Asia plummeted. In 2011, demand in traditional European/Mediterranean, North American, and Latin American markets was not sufficient and petcoke prices dropped so petcoke could be sold to Asia. At the beginning of 2012 USGC/Caribbean market petcoke prices staged a rally due to reduced petroleum coke production and some restocking by European cement producers. Since then, the market has been stable as reduced production has been counterbalanced by weak demand.
Transportation costs become more important as petroleum moves to more distant 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 like India or China.
VENEZUELA PETCOKE KEY MARKET DRIVER
There 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 performed poorly, loading far fewer vessels than they had in the past. This caused a shortfall in petroleum coke supplied to the market, which helped support prices even as European demand remained
4. Production increases throughout this article will be compared to 2011, unless
otherwise noted.
5. Coking capacity additions that start-up during a year (e.g. 2011) will contribute to increased production in the following year (e.g. 2012) when they are operating for a full year.
weak and US petroleum coke exports increased.Venezuelan petroleum coke 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).
A ‘WAVE’ OF PETROLEUM COKE

• significant coking capacity additions are proceeding, especiallyin Brazil, India, and China, and we expect coking capacity additions to continue into the foreseeable future;
  
• significant coking capacity additions in the United States recently completed  or currently under construction will be coming on line during 2012 through 2013. Consequently, Jacobs Consultancy projects that US petcoke production will increase ~25% by 2014;
• 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
• coking capacity additions recently completed or being installed in Brazil, Spain, and the Middle East will displace some USGC/Caribbean petroleum coke 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.
SUMMARY
In the first half of 2012, as the result of struggling economies in Europe and the US, the USGC/Caribbean petroleum coke market has been in a state of dynamic balance, wherein anaemic demand in traditional markets has been offset by sluggish production in the US. The near term future direction of the market will depend on the performance of the world’s economies economies (especially cement and steel demand in the key European and Latin American markets), how refining/coking economics drives petroleum coke production, and how the start-ups of various coking capacity additions are executed. We expect a period of rapid production growth in 2013–2015, as new coker capacity starts up and production at existing cokers returns to more normal levels. 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.
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