“I’d Love to Change the World” – Multiple TM&C Studies Analyze Impacts of Rapidly Changing Petroleum Markets on Industry Participants

By John Auers and John Mayes

The past year was truly an eventful one for the oil industry, with major and potentially trend-setting developments in all segments of the business.  In thinking about this rapidly evolving environment, the early 70’s tune, “I’d Love to Change the World,” (recorded by the otherwise forgettable British band, Ten Years After), comes to mind.  It certainly appears that a variety of forces are working to “Change the World” for companies involved in producing, transporting and refining crude oil.  Among these are: government policies, geopolitical turmoil, natural disasters, market shifts, and technological advances.  Certainly, the changeover from the Obama to Trump Administration created a very different (and more positive) dynamic in the world’s most important petroleum industry, and the year ended with the passage of a tax bill which could be the most impactful force of all.  However, while regulators in the U.S., at least on the federal level, have temporarily moved away from an “interventionist” mode, this has not been the case on a global basis.  We are now less than two years away from a new and much more stringent sulfur specification for bunker fuel which will cause major disruptions in fuel oil, distillate and crude markets.  Governments around the world continue to tighten specifications on other products and in many cases, particularly in Europe and even on a state level in the U.S., policy makers are looking to eventually do away with petroleum usage entirely.

In an effort to help the industry understand the impacts of some of the most important regulations, trends and developments, TM&C is in the process of completing three important reports – the 2018 Crude and Refined Products Outlook (C&RPO), the 2018 Worldwide Refinery Construction Outlook (WRCO), and Anode Coke Supply – The Gathering Storm.  The first two reports, the C&RPO and WRCO, are publications which we issue on a biannual basis, while the Anode Coke Supply study is the second special edition of a report which we first published in 2015.  In each case, we have attempted to forecast how markets will look “Ten Years After (or 5 or 20 years for that matter).”  For a brief glimpse of the analysis which was conducted in each of the reports, please read on.

Crude and Refined Products Outlook (C&RPO)

The Crude and Refined Products Outlook has the broadest scope of the three TM&C reports.  The C&RPO covers the entire spectrum of the petroleum products markets, from crude oil through finished products, and has been in publication for well over a decade.  The overall purpose of the report is to provide a comprehensive, independent price deck which can be used as a basis to evaluate capital projects or other strategic initiatives, including acquisitions.   Our forecasts are supported by analysis of key drivers and background information on critical assumptions.

Our forecast of global petroleum markets, includes over two dozen crudes in seven geographic regions. Pricing relationships are developed to evaluate light/heavy spreads, comparisons between North American and global marker grades, and sweet/sour spreads.  Commentary is provided in multiple report sections which describe how pricing relationships will react over time in response to key market and regulatory developments.  Product prices are also provided in the same seven geographic regions and include not only on the dominant trends of gasoline and distillates, but also on minor products which can have a significant impact, such as the IMO requirements on low sulfur bunker fuel.

In order to develop the price sets, we prepare refined products demand forecasts for the U.S., Europe, Asia Pacific, and the Rest of the World.  A list of probable global refining projects, which were factored into our regional supply/demand balances is also included. Appendix tables detail global Alternative Fuels production growth, a forecast of RIN prices through 2030 and data on the California Low Carbon Fuel Standard Program.  A key feature of the C&RPO is the commentary in the Breakout Topics.  In this year’s edition, featured are analysis on Peak Demand – The Why and When, Global Refining Construction, and Crude Takeaway Capacity Constraints (focused on Canada and Permian/Cushing).

We have just completed the 2018 edition of the C&RPO, and it is being issued today (February 20).

Worldwide Refinery Construction Outlook (WRCO)

Each year, numerous global refining projects are announced, generally with the best of intentions and with a keen desire to see the projects come to fruition.  Many of these projects are complete refineries while others are expansions to existing facilities. If all were to be completed, the world would be awash in surplus product and the margins for all would be poor.  TM&C catalogues each of these announced projects and forecasts which will be actually constructed in the biannual WRCO.

Critical metrics are determined for each refining project including location, owners, construction timing, capacity additions, downstream unit capacities and cost. Crude slate changes and product yields are estimated for each project. Our assessment of each project results in the determination of a Probability Index for the project.  Each is assigned a ranking of one to five based on our judgement of the likelihood for completion.  Projects with a one or two are deemed as unlikely to be constructed while a five has the highest probability and is generally already in the construction phase. The probability rankings are based on the economic rationale, regional crude and product balances and the financial standing of both the project and sponsors and the owners’ past track record for project completions.

The soon-to-be-released study (before the end of February) details 244 announced projects which include 94 new refineries.  If all were constructed, they would add 25.5 million BPD of new crude processing capacity in the next five years.  As this would far exceed global demand growth, the TM&C probable list (projects rated as a three or higher) has been pared down to 112 projects which would add eight million BPD of new capacity.  This “probable list” includes 23 new refineries and would require approximately $300 billion of new investment.  The WRCO provides a listing of each refinery on the project lists as well as the associated downstream units and capacities.

Anode Coke Supply – The Gathering Storm

Anode coke is a critical component in the production of aluminum.  Unlike other metal processing which can utilize multiple techniques, there are no alternate processes for aluminum manufacturing which do not require the use of anode coke.  Turner, Mason & Company is in the process of completing a new multi-client study of the anode coke market in conjunction with AZ China and Cascade Resources.  This study analyses the past, current, and future supply of anode coke and compares this to our forecast of increasing demand resulting from rising aluminum consumption.

Petroleum coke is often described as a byproduct of the refining process which is primarily focused on the production of transportation fuels.  While this may be an accurate depiction of refiners’ objectives, petcoke, and especially anode petcoke, have many important uses.  Anode coke generally has a lower sulfur and metals content than conventional, or fuel grade, coke and is more highly valued due to its requirement for aluminum production.  Only about 10% of the U.S. petcoke production is of anode quality, but approximately half of the petcoke produced in China is used to make anodes.

Because global aluminum consumption is rising rapidly while anode coke production is forecast to remain relatively flat (at best), a shortage of this vital product appears imminent.  Driven by ever-increasing aluminum consumption, global anode coke demand is forecast to increase by over 10% between 2017 and 2020.  By 2025, demand is expected to accelerate and could rise by as much as 30% or more.  This imbalance is expected to bring considerable opportunities and challenges to both the refining and aluminum industries.  This study assesses anode production by refinery and quantifies the yearly imbalance between supply and demand.  The study also discusses potential solution paths as well as evaluates the impacts of several related stimuli; such as the IMO shift to low sulfur bunker fuel.

This study is expected to be released in the next two weeks (by early March).

Turner, Mason & Company is continually monitoring developments in the global petroleum markets and assessing how they will impact the industry.  Considering the dynamic events experienced over the past year and upcoming happenings such as the start of IMO LS bunker limits, the future landscape of the petroleum industry is as uncertain as ever. As it warrants, TM&C conducts comprehensive multi-client studies such as the ones described in this blog.  We also use the findings of these studies and our expertise to assist clients in all segments of the petroleum supply chain in specific and focused consulting engagements.   For more information on our subscription studies or our consulting capabilities, please call Cindy Parker at 214-754-0898 or visit our website at turnermason.com.