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Oil | Shipping

South Korean refiners best prepared in Asia for low sulfur marine fuel market

Agriculture | Energy | Coal | Electric Power | LNG | Natural Gas | Oil | Metals | Steel | Petrochemicals | Shipping

Commodities 2020

Shipping | Marine Fuels

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Oil | Refined Products | Fuel Oil | Shipping | Dry Freight | Marine Fuels | Tankers

Middle East Bunker Fuel Conference

Coal

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South Korean refiners best prepared in Asia for low sulfur marine fuel market

Highlights

SK Energy, S-Oil, Hyundai complete upgrades, install new units

Sweet crude import strategy aids straight-run LSFO output

Scrubber installations lag on strong freight rates, industry concerns

Singapore — South Korean refiners are the best prepared in Asia for the low sulfur marine fuel market next year after completing rigorous upgrades to maximize cleaner oil products output, while their flexible sweet crude procurement stance bodes well for the ample production of straight-run low sulfur fuels.

Commodities 2020 | S&P Global Platts

Refineries in Japan and China are more limited in their capacity to upgrade existing facilities, and the upgrades at South Korean refineries mean they are better equipped to supply 0.5% sulfur bunker fuel from January 2020 when IMO 2020 or the International Maritime Organization's new sulfur cap for marine fuel kicks in.

South Korea's biggest refiner SK Innovation says its subsidiary SK Energy will start up a new 43,000 b/d vacuum residue desulfurization unit at its 840,000 b/d Ulsan refinery next April to increase low sulfur oil products output.

This will enable the refiner to produce up to 200,000 mt/month of LSFO, S&P Global Platts reported earlier. It currently supplies about 100,000 mt/month of LSFO, a company source said.

S-Oil completed a new residue upgrading complex last November and has since been supplying around 80,000 mt/month of blended low sulfur fuel oil via term contracts.

Hyundai Oilbank has upgraded all of its secondary units and has been operating a solvent deasphalting process at its Daesan plant, and is currently supplying around 100,000 mt/month of the low sulfur bunker fuel, a company source said. It also started supplying very low sulfur fuel oil from early November as it readies for IMO 2020.

"Hyundai Oilbank [already] has some contracts for VLSFO supplies," the source said. Based on the technology used in its VLSFO manufacturing process, the refiner "can win many more long-term contracts," he added.

The refiner "has used the world's first new technology to completely remove asphaltenes that hinder the stability of mixed oils through its own solvent treatment method," he said.

STRAIGHT-RUN FUEL ADVANTAGE

South Korean sweet crude imports

The flexible sweet crude oil procurement strategy of South Korean refiners also puts them in the driving seat of the regional LSFO market as shipowners have recently expressed a preference for straight-run over blended LSFO due to compatibility issues.

"We buy most of our LSFO on term contracts, and we check the origin of the fuel. It is especially crucial during this transition period to purchase LSFO with stable specifications so as not to damage the engines," a shipowner based in Taiwan said.

"The stability and compatibility of straight-run LSFO is very different from blended and shipowners prefer straight-run products," a refinery source said.

Sweet crudes would typically serve as the most ideal feedstock for straight-run LSFO. South Korea's ongoing efforts to diversify refinery feedstock supply sources beyond Middle Eastern sour crude producers works in favor of ample production of such fuel, a Korea Petroleum Association official based in Seoul said.

South Korea's refinery feedstock imports from major sweet crude suppliers in Southeast Asia, Africa, Oceania, Europe, Russia and North America totaled 194.6 million barrels over January-September, accounting for around 25% of its total crude imports in the period, latest data from state-run Korea National Oil Corp. showed.

To meet compliant fuel supply, Hyundai Oilbank said it is importing more low sulfur crude oil and producing straight-run LSFO from its secondary residue desulfurization unit.

In contrast, Japanese refiners remain heavily dependent on Middle Eastern sour crudes for their feedstock requirements and import little low sulfur crude.

Japan imported 223,160 b/d from its major sweet crude suppliers Russia and the US over January-September, comprising only 7.3% of the country's total crude oil imports in the period.

Japan received more than 2.8 miilion b/d of sour crude from Middle Eastern producers including Saudi Arabia, UAE, Qatar, Bahrain, Oman and Ecuador over January-September.

"There is no straight-run LSFO in Japan as refineries are not equipped for it," a trader in Japan said.

SCRUBBER INSTALLATIONS DELAYED

S&P Global Platts Analytics predict around 2,400 vessels fitted with scrubbers will be operational worldwide by January 1, rising to more than 3,500 by the end of 2020, Platts Analytics said.

Still, the industry remains divided over the feasibility and effectiveness of the use of scrubbers for compliance with IMO 2020.

Some industry sources argue that open loop scrubbers do not address the environmental issues of using high sulfur fuels, as they simply take sulfur out of the air and put it into the ocean.

Others say this is an oversimplification that ignores the fact that the IMO has set out guidelines for cleaning systems -- washwater discharge and monitoring criteria-- to safeguard against environmental damage.

In addition, even some shipowners who favor scrubbers have deferred scrubber retrofit plans to avoid drydocking ships at a time of windfall profit gains as freight rates remain strong, sources said.

This means demand for low sulfur fuels is unlikely to be greatly impacted by the take-up of scrubber technology and South Korean refiners remain confident their low sulfur output will be able to meet the impending surge in the coming year, market sources said.

Commodities 2020 | S&P Global Platts

-- Su Ling Teo, su.ling.teo@spglobal.com

-- Gawoon Philip Vahn, Philip.Vahn@spglobal.com

-- Surabhi Sahu, surabhi.sahu@spglobal.com

-- Edited by Wendy Wells, wendy.wells@spglobal.com