Summary
Refiners without VGO and residuum conversion capacity are going to face a difficult future. Gasoline and diesel sulfur specifications have been reduced in many parts of the world and will continue to be more restrictive. Bunker fuel will also have lower sulfur specifications in the future forcing refiners to invest in upgrading capacity or trying to find new uses for residual fuel. What seems like a time far out in the future is much closer when one considers optaining permitting, financing and completing construction of new processing units.
Analysis
Refiners big or small that produce a significant amount of straight run resid, VGO or residual fuel will have to consider their strategy to remain in business in the future.
The advent of ultra low sulfur products in Japan, North and South America, and the EU had forced refiners to invest in deuslfurization capacity.
Refiners who pricess high sulfur crude and blend the residuum back into fuel have found that these types of operations are barely profitable. The advantage in the discount that one receives for high sulfur crude versus low sulfur varieties is just about lost from the poor revenue of the bunkers that are sold. Bunkers also require the use of a cutter stock such as dieselfuel to meet API gravity and viscosity specifications
Meanwhile, the last bastion of high sulfur product, namely bunker fuel (setting aside asphalt for the moment) will see a major change in the next decade. IMO Marpol is reducing sulfur specs in SECA regions to 1% on March 1, 2010 and to 0.10% after Jan 1, 2015. Meanwhile worldwide bunker specs will decline to 3.5% after Jan 1, 2012 and to 0.50% after Jan 1, 2020.
Refiners must make a choice. If the bunker market requires lower sulfur products, that requires investments in desulfurization, hydrogen production and sulfur recovery. One might as well spend the incremental capital and build a coker to take advantage of the resid to diesel price spread. That's where the profitability currently lies.
Similarly refiners without VGO upgrading capacity are looking for either catcracking or hydrocracking outlets as well. The high sulfur VGO will no longer be acceptable as a bunker fuel blendstock. The European refining industry has been resonding with significant hydrocracking capacity being added to increase diesel production. Expansions in the USA seem to be leaning towards more diesel production, ie hydrocracking, rather than gasoline production, ie catcracking.
The refiner with no resid conversion capacity will have a difficult time in the future placing their product. But don't tell that to Nustar who just purchased two asphalt topping plants from Citgo. They are betting that all the added coking capacity will produce an asphalt feedstock shortage.
