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By Jack Wittels and Alex Longley (Bloomberg) –For almost three years, the oil industry has been puzzling over how to supply merchant ships with fuel that will meet tough new environmental standards. Turns out part of the solution was sitting in the ground and under ocean floors all the while: crude oil.
Oil from off the U.K.’s coast, which requires blending — but no refining — before being used as a ship fuel, is now being marketed as just that. Similar crudes from places like West Africa and Australia can also be used with little modification. Suitable supplies are ideally low in sulfur and not too flammable.
Using crude to power vessels isn’t entirely new. Back in the 1980s, oil tanker owners would illicitly run pipes from their vessels’ cargo tanks to their engines, according to Per Mansson, a retired merchant seaman and shipbroker. Provided the engineers on the ships were experienced and knew how to deal with the combustibility of the crude — known as its flash point — it was a safe operation, he said.
What’s happening now is different. Certain crudes can go — almost directly — into vessels’ fuel tanks with very little adjustment. It all depends on a few key parameters, including sulfur content and density of the oil, and how flammable or combustible it is. Rather than going to a refinery, such grades can simply be blended with other products to make something suitable for powering ships.
The U.K. grade that fits the bill is called Kraken — pumped from a field in the North Sea operated by EnQuest Plc. Its sulfur content is a little over the 0.5% required under new ship fuel rules, and it will only ignite at a high temperature, making it potentially good for ship fuel.
“A cargo has already been sold to a ship owner and thus we remain very optimistic regarding Kraken’s utility in this market,” says Russell Wall, a commercial and marketing manager at EnQuest. “We have received positive market feedback.”
That shipment was bought by Euronav NV, which plans to use the crude as part of a mix to produce fuel that complies with next year’s rules. The barrels are part of a massive 420,000 ton cargo being hauled to the Singapore area by one of the biggest oil tankers on the planet, the Oceania.
Traders looking for suitable crudes from which to make ship fuels will typically prefer those that are dense, low in sulfur, and have a high flash-point, said Cosmo Kedros, a senior trading specialist at Vortexa, a shipping analytics firm.
“Shipowners are highly motivated by price and not messing up their engines,” he said. “If they have the infrastructure and the capital to blend their own bunkers — whether with heavy crudes or not — they should consider doing it.”
Hotbeds of so-called heavy-sweet crudes — which represent a small portion of the market — include West Africa, Australia and Brazil. Australian grades have traded more than $10 a barrel above Brent this year, around a fourfold increase versus two years ago.
Different types of crudes will be blended in particular ways to meet the marine fuel specification. Kraken, for instance, contains slightly too much sulfur. The Republic of the Congo’s Yombo, on the other hand, is low enough in sulfur but is very viscous, or thick.
Other crudes simply need to be “topped,” one of the simplest refining processes where the raw oil is heated until the lighter components are burned off. What remains, with its higher flash point, can in some cases then be used to make ship-fuel.
There are other challenges, too. Anybody looking to buy crude for blending into a marine fuel will have to compete with a normal refinery that wants to turn that oil into other products like gasoline and diesel. With no certainty on the future price of shipping fuel — or other products for that matter — it’s hard to say which will be more profitable in 2020 and so to what extent crudes will be used as vessel fuel ingredients.
As the world’s shippers gear up for IMO 2020 — the name of the regulations forcing reduced sulfur emissions — an armada of supertankers being used to store oil has built up off the coast of Singapore, according to Vortexa. Though the ships are filled with a mix of products, they do hold some crude, showing that it may well have a future as a ship fuel. The giant Oceania will also soon join their ranks.
“You can do it,” Rudolph Kassinger, who has more than half a century of experience of refining and petroleum quality testing, said of using crude as ship fuel. “It’s all going to be a question of economics.”
–With assistance from Prejula Prem and Samuel Dodge.
© 2019 Bloomberg L.P
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