This week’s blog is by Stuart Ehrenreich, director of Cascade Resources and Consulting.
Petroleum coke…when I mention that is the business I’m in during a cocktail party conversation I get some puzzled looks. Some Hollywood types think it’s some sort of new recreational drug. A father, whose son was working during the summer as a roughneck in the Permian, thought it might be some sort of souped-up energy drink to help the workers get through a hot summer day. But for those of us in the oil industry, we know that petroleum coke (or “petcoke” as it is commonly known) is a dirty, black, solid byproduct of oil refining which refinery managers usually hate to deal with.
There are about 145 million metric tonnes of petroleum coke produced annually as of 2016. About 30 to 35 million tons are what is termed “anode grade,” used primarily in the production of aluminum (more about that later). The balance is usually used as a fuel blended with or substituted for coal in the cement and lime industry, thermal power plants, chemical and metallurgical applications, refractory manufacturing and in the steel industry as a substitute for PCI coal.
When it comes to producing primary aluminum, there is no alternative method for production other than by using green petroleum coke, which has been calcined and blended with coal tar pitch to form anodes. It takes about 0.5 kg of green petroleum coke to produce 1 kg of aluminum. This has been the technology for the past one hundred years or so, despite all the efforts to find alternative methods to produce primary aluminum, not reliant on petroleum coke. Green petroleum coke has to meet certain quality standards which usually include the structure being sponge, not shot, fairly low in metals (such as vanadium, nickel, iron, silicon, sodium, and calcium) and with the sulfur content averaging 3.5 % or less. Many calcining operations have been forced to resort to blending different grades of anode grade and sometimes non anode grade petroleum coke in order to meet these specifications.
Refineries that produce petroleum coke find themselves in a bit of a dilemma. For the most part, it is considered a byproduct and in the LP models, it has little or no value. Therefore, the quality may vary depending on the crude slates that are chosen on a month-to-month basis. However, we have a case here of the last hair of the tail wagging the dog. Although of little value when compared to gasoline, diesel and jet fuel, most refineries have limited storage capability and have to move the petcoke out on a ratable basis. Unlike liquid products, which can easily be moved by pipeline and stored in clean-looking white tanks, petcoke has to be handled in much the same way as coal. Many refineries are loath to invest in the storage and equipment necessary to handle petcoke, which has spawned an industry dominated by traders who specialize in moving the petcoke from the refinery on a ratable basis to offsite storage areas from which the petcoke is transported by barge, rail, or ocean-going vessels to end-users or other storage sites located near end users. This means the petcoke may journey from the U.S. Gulf to storage yards as far away as India to await consumption by end-users such as cement kilns and refractory plants.
Unlike liquid products, it is very rare for refiners to trade or swap petcoke to manage inventory or sales commitments. Why refiners are loathe to do this is difficult to understand, other than petcoke is a solid, non-fungible commodity unlike gasoline and distillates, and not a well understood market by most refiners.
This leads to a peculiar market dynamic with the traders actually having to sell their services to the refineries in order to obtain the petcoke. Reliability of the trader to remove the petcoke is extremely important to refinery management. Since it is a byproduct, from a Keynesian economic standpoint, it is supply inelastic, meaning that if the market price goes up due to an increase in demand, supply will not go up as it would for traditional liquid petroleum products. Conversely, if supply increases relative to demand, prices will drop until a “clearing price” is reached and the petroleum coke is moved out of the refinery. One major refiner presented this slide a few years ago at a conference…Rule 1.a. and b. says it all….
When demand for petcoke falls, prices plummet. During the financial crisis in 2009, some refiners were actually forced to pay traders to take the petcoke so the inventory buildup within the refinery gates could be mitigated.
The supply/demand dynamics sometimes lead to some peculiar paradoxes. For example, when gasoline and distillate demand are high with strong pricing, increased coker utilization rates lead to increased production. If demand does not increase then petcoke prices can become soft and actually fall while gasoline and distillate prices are rising. The reverse is also true. With decreased coker utilization rates, petcoke production falls and prices may in fact increase while product prices are softening. Suffice it to say; predicting petcoke price movements is very difficult.
Where does that lead us so far as future trends? Two of the biggest drivers are environmental constraints on coal (and coke) usage and sulfur limits on the fuel. The other is the impact of MARPOL VI, which will come into effect 2020 or 2025 (as yet to be determined).
Petcoke is the poor cousin of coal. It sells at a discount to coal of between 10–30% per tonne even though it has higher energy content (roughly 20–25% greater than bituminous steam coal and 40%+ greater than sub-bituminous coal). The reason for the price discrepancy is due to a number of factors, the largest being that it is known by traders and end-users as a byproduct which carries little intrinsic value. Many refiners value it at zero. Another black mark against petcoke is that it is usually sold without any quality guarantees, unlike coal. But what happens to coal and the environment is sure to impact petcoke as well.
With the continued environmental pressures on coal usage, petcoke is dragged along under the bus for the ride. Petcoke looks like coal to some, handles like coal, is transported like coal, is dusty and dirty. Witness the recent push by Chicago and Detroit to severely limit or even ban the transloading of petcoke in their cities as an example of what can happen when the environmental movement focuses their attention on petcoke. It is a smaller target compared to coal and an easy one to rally support around since it isn’t the poor coal miners that are being punished, it is big bad oil. Increasing environmental pressure may force some refiners to rethink how they handle VTB’s (Vacuum Tower Bottoms) going forward. Hydrocracking may indeed be an alternative to delayed coking in the future since it produces no solid byproduct, only more saleable gasoline and distillate.
MARPOL VI will add another wrinkle to the demand picture. Once it is implemented, there will be a limit on the sulfur used to fuel ocean-going vessels globally. This leaves ship operators with a dilemma and three possible solutions:
- Install scrubbers on ships;
- Switch to lower sulfur, less efficient low sulfur MDO (Marine Diesel Oil); or
- Switch to LNG as a fuel source.
Each choice has its pros and cons, the discussion of which is beyond the scope of this blog; however, any of the choices will have an impact of petcoke production since:
- Installing scrubbers will put large volumes of high sulfur fuel oil on the market. Will this be coked or hydrocracked?
- Switching to lower sulfur MDO will require more delayed coking capacity adding to the volume of this byproduct in the global market and depressing prices; and
- Switching to LNG as a fuel for low RPM marine diesels will have the same impact as installing scrubbers.
Either way, the refining industry will have to cope with major changes in the market once MARPOL VI is implemented.
So one has to ask, “Do Things Really Go Better With Coke?”
Turner, Mason & Company collaborates with partners across the industry to incorporate the best knowledge and experience on critical but niche areas for our clients. We collaborated with Mr. Ehrenreich of Cascade Resources as well as AZ China on an Anode Coke Study: Demand Outlook to 2025. We have taken and incorporated this knowledge when evaluating global supply and demand markets as part of our Outlook products and other engagements. For more information on these publications or other services we provide, please feel free to visit our website, send us an email, or give us a call.
Stuart Ehrenreich is the Managing Director and founder of Cascade Resources and Consulting in 2012. He has been in the petcoke, coal, and natural resource extractive industries for over 40 years, and has bulk energy commodities experience trading internationally with emphasis on Asia, North America, Latin America, India and MENA. He also has product knowledge of solid fuels such as coal, anthracite and petroleum coke, petroleum products, metallurgical coke, cement, clinker, gypsum, limestone and bauxite. He has experience in operating bulk shipping terminals, logistics and ocean shipping and holds expertise in business process improvement for a cross-section of businesses and industries emphasizing operations, business development, market research and new market entry strategies. Mr. Ehrenreich is knowledgeable on financial feasibility analysis for new ventures, ongoing operations improvement, and exit strategies for mature ventures. He is also a Former expatriate employee of both US and foreign owned companies in China and Southeast Asia and is specialized in energy & bulk material product trading, hedging, risk mitigation strategies, shipping and distribution of dry bulk commodities, terminal operations, mid and back office operations, international export and import terms and finances including INCO and ICC. He previously served as Group Leader & Strategic Raw Material Manager for Petroleum Coke for Alcoa. His profile can be found on LinkedIn at: https://www.linkedin.com/pub/stuart-b-ehrenreich/6/98a/322