Ben Ziesmer & Jesus Cabello, Jacobs Consultancy 

Many factors have buffeted the seaborne fuel-grade petroleum coke market during the last 18 months, causing substantial price volatility. These factors include changing government regulations, severe weather, and unexpected production problems. Beyond recent short-term events, new marine fuel environmental regulations and the Keystone XL pipeline will affect the petroleum coke market longer term.

Before discussing various factors affecting the petroleum coke market, it is important to provide some background information.

BACKGROUND

Petroleum coke (a.k.a. petcoke) 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 (see Simplified Coking Refinery Flow Diagram).

Traditionally, cokers are installed in oil refineries to convert vacuum tower bottoms (VBT) 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 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.

During the last two decades, two additional factors have driven the construction of cokers:

  • Provide assured outlet for heavy crude oil: 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 U.S. Gulf Coast from 1996–2004 when more heavy crude oil entered the market, and heavy crude oil producers signed long-term crude supply agreements to induce refiners to install additional coking capacity.
  • 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: as a carbon source and 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 (a process which removes moisture and volatile matter and improves critical physical properties) when it is used as a carbon source. Petcoke that has been calcined is referred to as calcined petcoke (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. Almost 30% of the petcoke produced is sold into these higher value-added markets for higher-quality petcoke; the remainder of the petcoke is sold into the fuel market, where it almost always competes with coal. 

Petcoke exports from the U.S. Gulf Coast (USGC) and the Caribbean (primarily Colombia and Venezuela) provide approximately 65% of the seaborne fuel-grade petcoke trade. The sulphur content of fuel-grade petcoke in this market varies from 4.0% ‒7+%. Some USGC refineries produce much lower sulphur petroleum coke, but this petcoke is used by calciners to produce calcined petroleum coke (CPC). Petcoke sulphur content is determined by the sulphur content of the crude oil being refined. Refiners primarily running Venezuela and U.S. domestic crude oil tend to produce 4.0–5.0% sulphur petcoke whereas refiners running Canadian, Mexican, or Middle Eastern crude oils tend to produce ≥6.0% sulphur petroleum coke. It used to be that the clearing market for USGC/Caribbean petroleum coke was Europe, Middle East/North Africa (MENA), and Latin America. However, since early 2009, the clearing market for ≥6.0% sulphur USGC petroleum coke has been Asia (primarily China and/or India).

Looking back at 2016 and this year, it is clear that, while there may be some correlation between steam coal and petroleum coke prices, petcoke prices are not closely correlated with coal prices (see USGC/Caribbean Petcoke Market – Coal & Petcoke Prices chart, above). For example, from February through May 2017 petroleum coke prices increased while coal prices decreased. This is because petroleum coke prices are determined by petcoke supply demand (i.e. Econ 101), operating within a solid fuel pricing environment determined by coal. The seaborne steam (thermal) coal trade volume is 20+ times larger than petroleum coke seaborne trade volume, so petcoke cannot meaningfully affect the seaborne coal market.

Many factors drove USGC/Caribbean petroleum coke prices during 2016 and 2017. The decision in February 2016 by China’s National Reform and Development Commission (NRDC) to restrict coal mines to 276 operating days/year was a significant factor that drove coal prices higher as 2016 proceeded. Initially, the coal market did not react to this decision because there were excess inventories throughout China. However, inventories levels reduced as 2017 proceeded, and China’s coal  import volumes increased substantially. These increased import volumes drove international steam (thermal) coal prices higher. Eventually, rapidly escalating coal prices drove China’s electricity prices higher, hurting the competitiveness of industry, and the NRDC was forced to rescind its coal mining production limits.

USGC/Caribbean petcoke prices had been depressed in late 2015 due to concerns that China was going to ban imports of petroleum coke >3.0% sulphur. Depressed petroleum coke prices compared to coal prices offered strong economic incentives to use petcoke instead of coal, and Indian buyers leapt into the petroleum coke market. Petroleum coke prices more than doubled from February to August 2016 while coal prices only increased by about 25%, and the economic advantage of using petcoke shrunk. Consequently, Indian petroleum coke purchasing reduced. However, petroleum coke prices continued to increase, partly due to market momentum and partly due to continued coal price increases. On 8 November 2016, the Government of India suddenly announced the demonetization of all ZAR 101 and ZAR 203 bank notes. The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism. The sudden nature of the announcement and the associated cash shortages that followed as the economy transitioned to credit based transactions caused cement demand to drop by ~30%. Consequently, Indian demand for petroleum coke weakened further.

Buying interest by China and South Korea increased as 2017 began. Then, Brazilian buyers of domestically produced petroleum coke were suddenly informed that shipments would be curtailed due to petcoke production problems, and they were forced to quickly look for prompt cargoes. These two events put a ‘bottom’ in the market and started a price rally. Increased petroleum coke purchases by Indian buyers also supported prices as the country acclimated to demonetization, and cement demand began to recover.

Recently, two factors weakened the petroleum coke market. First, Chinese interest in petroleum coke suddenly came to almost a complete halt. Second, on Tuesday 16 May, India’s National Green Tribunal (NGT) called for a nationwide end to petcoke use by industries that do not have permission to use petroleum coke as a fuel. The NGT directed the Ministry of Environment and Forests (MoEF) and all state governments to decide within two months if petcoke was “an approved fuel” or a hazardous waste. Even though the NGT does not have direct regulatory power, it can heavily influence regulatory policies.

Subsequently, the Rajasthan state government decided that petroleum coke, which is widely used as fuel in the lime industry, is an approved fuel. This appears to have been a bellwether decision as several other state governments have decided to follow Rajasthan’s lead. Thus, the worst fears of the petcoke market have not been realized, but there remain concerns as to how much of India’s petroleum coke demand will be lost due to environmental regulation.

U.S. AND CANADA WEST COAST PETCOKE MARKET DEVELOPMENTS
This market consists primarily (85%) of U.S.West Coast plus Canadian West Coast petroleum coke exports. This is a more complicated market than the USGC/Caribbean petcoke market because:

  • Petroleum coke sulphur content is much lower (i.e. 1.5‒5.0), which makes much of this petroleum coke potentially attractive to the steel industry. Thus, coking coal as well as thermal (steam) coal prices influence petcoke prices.
  • It is much smaller (~15% of seaborne trade) than the USGC/Caribbean petcoke market, so the actions of individual refineries or large customers can have meaningful impacts;
  • It is much more concentrated geographically with close to 80% of the petroleum coke exported to two countries — China and Japan.
  • Niche applications are much more important due to the combination of the petroleum coke having lower sulphur content and much smaller market size.
  • California requires covered storage of petroleum coke, so there are much fewer days of inventory storage available to absorb short-term market perturbations due to the cost of covered storage facilities.
  • Fort McMurray, Alberta, Canada area oil sands upgraders are located approximately 2,000km (1,931 kilometres) from the most commercially viable port (Prince Rupert, British Columbia), and it is practical to return petroleum coke into the open cast (strip) bitumen (oil sands) mines supplying the upgraders. Thus, this petroleum coke only enters the seaborne market when petroleum coke prices are high enough to cover the substantial logistics costs to move this petcoke to a port. These complex interactions are illustrated by the U.S. &

 

Canada West Coast Petcoke Market –Coal & Petcoke Prices Chart. During the second half of 2016,West Coast petroleum coke prices, especially <2% sulphur prices, had a limited response to rapidly escalating coking coal prices. One the factors that contributed to this muted response may have been the return of PBF Energy’s (formerly Exxon Mobil’s) Torrance refinery to full petroleum coke production. The Torrance refinery is the largest producer of <2% sulphur petcoke in this market.

In December 2016 Beijing and other Chinese cities experienced severe air pollution. The ‘red alerts’ caused the Chinese government to pursue emissions enforcement with new vigour. Consequently, various petroleum coke consumers, especially glass producers, were forced to reduce the sulphur

content of the petcoke they were using. This increased buying interest pressured West Coast, especially <2% sulphur, petcoke prices higher. Sharply higher coking coal prices as result of Cyclone Debbie, which severely damaged Australia’s Queensland coal mining logistics infrastructure, also helped support higher prices.

Then, during the second quarter of 2017, Chinese traders became very concerned with rising petcoke inventories and dramatically reduced petcoke purchases, pressuring prices lower. Sharply falling coking coal prices as a result of Queensland’s faster than expected recovery from Cyclone Debbie also contributed to downward pressure on petroleum coke prices.

MARPOL VI 0.5% SULPHUR BUNKER FUEL REGULATION
In October 2016, the International Maritime Organization (IMO) committee set a deadline of 1 January 2020 for the global implementation of regulations that limit the sulphur content of marine fuels used outside of sulphur emission control areas (SECA). This regulation, which is part of MARPOL2  Annex VI3, will require ships to use marine fuel with ≤0.5% sulphur or install exhaust gas clean-up equipment (i.e. SOX scrubbers). The dominant exhaust gas clean-up system technology utilizes seawater, which is alkaline, in a scrubber to capture sulphur oxides (SO2 & SO3) in the exhaust stream. The seawater, with the captured sulphates, is then returned to the sea. The choices of lower sulphur fuels range from utilizing low sulphur residual fuel oil (LS RFO), which requires virtually no vessel modifications, to using liquefied natural gas (LNG), which requires very substantial ship modifications. The IMO estimates that there are 50,000+ vessels of 5,000dwt or larger that will be subject to this regulation. Analysts estimate the additional costs for the container shipping sector alone could reach ZAR 455–40 billion.

The shipping industry consumes more than three million barrels per day (~170 million tonnes/year) of high sulphur residual fuel oil (HS RFO), and this market is very important to many refineries. It will be a challenging task for the refining industry to replace this fuel with much lower sulphur distillate fuel and find new outlets for HS RFO.

In the short to medium term, there is insufficient time for the shipping and refining industries to retrofit or install new equipment. For example, it typically takes five years for a refiner to install a new coker. Moreover, the response of the shipping and refining industries to this new regulation has been muted. We understand there have been many inquiries for SOX scrubbers by ship owners but limited commitments to install scrubbing equipment. The refining industry response has been even more restrained with only a few studies commissioned in response to the 0.5% sulphur bunker rule.

Therefore, the dominant fuel solution for the 0.5% sulphur bunker rule compliance in the short to medium term is likely to be marine gasoil (MGO)/marine diesel (MDO) and low-sulphur fuel oil (LSFO) rather than ships installing exhaust gas scrubbing or converting to LNG. If the shipping industry entirely relied on MGO/MDO for compliance, global MGO/MDO demand would increase by ~11%. However, some oil refineries that currently produce HS RFO will be able to shift to sufficiently low sulphur crude oil to produce compliant LSFO, so incremental MGO/MDO demand will be less than 11%. Nonetheless, MGO/MDO prices will be pressured higher. Refiners that currently produce HS RFO for the bunker market will have strong incentive to purchase lower sulphur crude oils so they can produce 0.5% sulphur compliant LSFO. Conversely, refineries that have coking capacity will have increased incentive to process heavy, sour crude oil and maximize production of MGO/MDO. Thus, as 2020 approaches, we expect that petroleum coke production at existing cokers will increase and petcoke quality will decrease (e.g. higher sulphur content).

Longer term, it is expected that the shipping industry will move towards exhaust gas scrubbing or LNG and away from MGO/MDO. Since there are large economies of scale to SOX scrubbing, the most likely evolution for the shipping industry will be some combination of SOX scrubbing on newer, larger vessels, and the use of ≤0.5% sulphur marine fuel for the remainder of the vessels.

It is unlikely that the shipping industry will exclusively utilize seawater scrubbing technology to achieve compliance with the 0.5% sulphur marine fuel rule. Thus, the refining industry will make some investments to reduce its production of HS RFO. While it is possible to remove the sulphur from high sulphur residuum directly, given the complex nature of these 

hydrocarbons, residuum desulphurization is a costly process, both in terms of capital and operating costs. An alternative path for the displaced high sulphur residuum is processing via delayed coking followed by distillate desulphurization. As was discussed earlier in this article, coking converts heavy residuum into light products (e.g., distillate fuel, similar to MGO, meeting the required sulphur limit of 0.5% maximum) and petroleum coke.

RFO typically contains 70% vacuum tower bottoms (residuum) and 30% diluent (e.g. kerosene), so currently approximately 2.1 million bbl/day (120 million tonne/year) vacuum tower bottoms (i.e. potential coker feedstock) is consumed by the maritime industry. If the refining industry selects coking to accommodate 50% of the residuum currently consumed as bunker fuel, then approximately 1.0 million bbl/day (~60 million tonne/year) of coking capacity will need to be installed. This new coking capacity will produce about 20 million tonne/year of petroleum coke; currently approximately 45 million tonnes/year of petroleum coke is traded in seaborne markets.

KEYSTONE XL HEAVY CANADIAN CRUDE PIPELINE

One of the first actions of Donald Trump after he became U.S. President was to approve the 98,969,615 l/day Keystone XL pipeline. This 1,897-kilometres (1,897km) pipeline, which runs from Hardisty, Alberta, Canada to Steele City, Nebraska, is the final link between heavy Alberta oil sands crude oil production and U.S. Gulf Coast refineries.

It is not a foregone conclusion that Keystone XL will be built as TransCanada, the pipeline developer, has just begun soliciting firm transportation commitments, and the economics of Alberta crude oil production are less attractive now than when TransCanada began developing the pipeline. TransCanada has said it will proceed if it gets firm commitments to transport 26,829,113 l/day through the Keystone XL pipeline.

If the Keystone XL pipeline operated at full capacity and exclusively displaced light, sweet crude oils at U.S. Gulf Coast (USGC) refineries, then USGC petroleum coke production could increase by 20%. On the other hand, Keystone XL would have no meaningful impact on USGC petcoke production if Alberta crude oil exclusively displaced heavy Mexican or Venezuelan crude oils as the yield of petroleum coke per barrel from these crude oils is virtually identical to Alberta crude oil petcoke yield. The reality is that the Keystone XL pipeline will probably cause some increased USGC petcoke production but not a 20% increase. 

In conclusion, the seaborne petroleum coke market has been  significantly affected by factors often outside of its control, and outside factors will likely continue to significantly impact the seaborne petroleum coke market. DCi

ABOUT THE AUTHORS

Ben Ziesmer (Group Manager)

Contributing editor to Jacobs Consultancy’s Pace Petroleum Coke Quarterly©. He has an in-depth background in the power sector, including experience in procurement, operations, environmental compliance, and engineering. He leads Jacobs Consultancy’s fuel-grade petcoke practices and has been the project manager for numerous studies involving the fuel-grade petcoke market, environmental issues, and power generation.

Jesus Cabello (Group Manager)

Jesus is a contributing editor to Jacobs Consultancy’s Pace Petroleum Coke Quarterly©. He has more than 36 years of experience in petroleum product marketing, refinery planning, operations, and technical support. He has conducted a number of configuration studies for heavy oil upgraders, refining and petrochemical facilities, optimization and debottlenecking of existing facilities, technology screening studies, and due

diligence for investors, and has strong experience developing operations best practices. Prior to joining Jacobs Consultancy, Jesus held a variety of technical and management positions a: PDVSA, CITGO, Shell, Lummus Technology, KBR, and Foster Wheeler. 

 

Jacobs Consultancy Inc. has published the Pace Petroleum Coke Quarterly© since 1983. The report has been published monthly since 1984 and is considered the worldwide authoritative source for petroleum coke market information. 

 
1. Technically, all petroleum coke that has not been calcined is green petroleum coke (GPC). However, within the petcoke industry, the term GPC is usually only used for petroleum coke that is being used as calciner feedstock.  

2. MARPOL ‒ International Convention for the Prevention of Pollution from Ships established in 1973, this code has been updated several times. Currently more than 180 countries are signatories.

3.MARPOL Annex VI – or colloquially MARPOL VI – Regulations for the Prevention of Air Pollution from Ships – was first enacted in 1997. Many people conflate MARPOL VI and the global 0.5% sulphur cap on bunker fuel even though MARPOL VI contains other regulations besides the global 0.5% S cap on bunker fuel.