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Big_Orrin @Big_Orrin
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1. @anasalhajji @HFI_Research @pisgahpartners #Crude_Quality_Matters
Please bear with me this is another long Tweet Thread. This is about IMO and how I think refineries will react. The narrative suggests shale becuase is sweet will be more demanded. I dont think that will happen
2. The standard way of reducing the sulphur levels in your Fuel Oil would be to make the diet of your refineries sweeter, not lighter. You would change the crude that contains the sulphur for one with much lower levels or you blend with a less sulphurous crude.
3. Changing the crude: Now sulphur mostly comes in the medium and Heavy crudes. The problem in changing them for sweeter barrels is that there is not many produced. Medium has some but Heavy have very little.
4. Changing the crude: The only Heavy sweet barrels are produced in West Africa (Dalia, Pazflor, etc) and in Brazil. It is forecast that once IMO begins Dalia will increase in price from dated Brent-$1.00 now to Dated Brent+$4.00 in 2020. Therefore maybe too expensive to swap
5. Changing the crude: Adding to that is the fact is that much of this heavy and medium sweet crude is in the hands of Chinese companies makes it very difficult to change from sour medium/heavy to sweet medium/heavy.
6. Changing the crude: Now thew shale argument has moved to running shale oil in a simple refinery. The question is why would a simple refinery not be running a light sweet crude oil anyway to maximise margin and minimise residue.
7. Changing the crude: A barrel of residue is a loss maker for a refinery so simple refineries tend to run as little residue out the bottom as possible, which would be a light sweet crude. So for simple refiners, shale in most cases is just a displacement not a replacement.
8. Changing the crude: Further many of the simple refineries are very small in size compared to the complex ones. These refineries wont be taking a 1mb load of shale oil. They take the most local crude to them because it is cheap and delibvery time is quick.
9. Changing the crude: So only way would be like what Vitol do in west africa and that is buy crude and sell small packages to the refiners. But nobody is doing that and the distances in Asia may make it prohibitive.
10. Changing the blend: Now the next argument I keep hearing is that by blending shale you reduce the sulphur levels, therefore by blending more light sweet with the heavy sour you bring the fuel oil into the correct specification.
11. Changing the blend: Let me put it simply. High Sulphur Fuel Oil (HSFO) has 3.5% sulphur content. The new specification has LSFO 0.7% sulhpur content. That means the blend has to have 5 times less sulphur than before. That would mean changing to a blend of 80% Shale/20% Heavy
12. Changing the Blend: Not going to happen. Added that shale oil has significantly less residue than a heavy crude (Bakken has 45% less residue than Arab light) it means that you will reduce the sulphur content but reduce the amount of middle distillate and LSFO you produce.
13. Changing the blend: So by reducing Sulphur you also reduce the amount of product you produce. This makes no sense at all.
14. So what will refiners do? In @OilSheppard FT column today ENI gave the best indication - they wont do anything much 8my opinion too). They will recycle as much HSFO through their crackers/cokers to maximise LSFO and Diesel production. But apart from that nothing will change
15. The excess HSFO will be sold at a discount to other markets e.g. asphalt, burning in power stations instead of crude oil or coke, etc. There will be still many small ports around the world and small vessel owners that will run HSFO outside the IMO specs due to cost.
16. They will be fed by Trading Houses who have the contacts and can make large profit by selling it to them. Some boats will install scrubbers as prices of LSFO and disel increase and it makes sense to do so.
17. Refiners will make less money on the HSFO than before but will make it up on distillates and LSFO prices. Therefore, it will not be in their interests to change much from now particulalrly if the sweet/sour differential opens.
18. What other options do the have? They could install a desulphurization unit on the fuel oil. the problkem is that it is expensive and the process is far less efficient than the ones used on gasoline and diesel.
19. Add a flash unit at the beginning of the refinery. But again refiners want certainty and shale is an uncertain parameter for them. refiners are naturally conservative and improvements are usually incremental rather than large ones. So expect most refiners to not do anything.
20. this means that refiners will probably ignore shale as indicated by ENI. Refiners have known for decades about the quality of 40 API crudes and they have ignored them, so why do you think they will change now just because analysts and suppliers say they will?
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