Dwindling fuel supplies

-- Here's major confirmation for what we've been saying... and it is said more accurately than I have thus far. It is not Peak Oil or a shortage of oil (per se) that will mark the downfall of industrial civilization. It will be the availability of refined products and their allocation among various priorities that will tell us what to expect. Right now gasoline is winning because it's more profitable. Diesel is in short supply because of global use of diesel generators as grids fail. And fuel oil is getting short shrift. But that's what they need in Japan to keep Fukushima from going completely uncontrolled. At this point in time, how humans allocate what remains of the resource is one of the most important things we have to do. This is only making things worse than they have to be. -- MCR

Ships Vie With Japan Utilities as Fuel Supplies Dwindle: Freight

Oil refiners’ investment in more- efficient facilities is leaving shipping lines competing with Japanese power producers for a fuel that no one wants to make.

Bloomberg,

15 March, 2012

Refiners are upgrading plants to cut output of fuel oil, a byproduct from making gasoline and diesel, as it sells for less than the price of crude. Shipping lines are seeking more of the product -- known in the industry as bunker -- to fuel expanding fleets, while Japanese electric companies are speeding purchases as they close nuclear plants for checks after 2011’s tsunami.

“We have a bunker market that’s still growing, and we have no fuel,” said Fereidun Fesharaki, chairman of Singapore-based Facts Global Energy Inc. “Everyone is destroying the capability for fuel-oil production.”

The crunch means bunker has averaged 25 percent higher so far this year in Singapore trading than a year earlier, more than the 17 percent rise for Dubai crude. Container lines are unable to pass the increase to customers because of overcapacity, leaving AP Moeller-Maersk A/S’s cargo-box unit, the world’s largest, forecasting a 2012 loss and Orient Overseas (International) Ltd. predicting a “difficult” year.

“Shipping lines are in a very tight squeeze,” said Um Kyung A, a Seoul-based Shinyoung Securities Co. analyst. “Even with the recent rate increases, they’re not going to earn enough to cover costs.”

Container Lines

Bunker-fuel prices may reach $800 per metric ton this year, 11 percent more than last year’s high, amid a possible supply shortage, she said. Asian bunker demand may grow 3.4 percent this year, JBC Energy GmbH said in a March 8 report. It didn’t give a production forecast.

The price of 380-centistoke bunker fuel has traded at an average discount of 51 cents a barrel to Dubai crude this year in Singapore. Gasoline has traded at a premium of $12.

Container lines are more affected by fuel prices than operators of dry-bulk vessels and tankers as they run scheduled services that take place whatever the level of demand. Other vessels generally only operate when they have cargo. They also travel at slower and more fuel-efficient speeds, and customers are more likely to be contracted to pay for fuel.

Tighter environmental regulations have also increased fuel costs, as bunker has had to contain less sulfur since January, said Basheer Ahmed Sayeed, chief executive officer of fuel trader Chemoil Adani (Singapore) Pte. Meeting that requirement means fuel oil has to be blended with more expensive and cleaner types of refined oil, he said.

“Already the shipping industry is in such a tight spot, and this is an added pressure,” he said. “As a bunker supplier, whether to give credit lines to shippers is a big question.”

Japan Purchases

Japan is increasing fuel-oil purchases as power companies burn more of the substance to offset lost nuclear capacity. The country boosted imports 19 percent to 799,010 kiloliters in January, the highest since Bloomberg began tracking the data in 2001. Demand from local power plants may rise 7.1 percent this year, according to Vienna, Austria-based JBC Energy.

Fuel oil is among residual fuels that are the heaviest and most-polluting products created from refining crude. Refiners break down crude into four main types of products -- liquefied petroleum gas; light fuels such as gasoline; middle distillates including diesel; and residual fuels. The residuals also include bitumen and asphalt.

China, Russia

Governments are also discouraging fuel-oil production in favor of lighter fuels. China’s output fell 2.7 percent to 1.35 million metric tons in February, the lowest for the month in at least five years, according to data from the China Economic Information Network. Russia has increased export taxes on residual fuels, which may cut shipments this year by 7 percent, or 90,000 barrels a day, according to JBC Energy.

Fuel-oil output in Asia, the largest crude-consuming region, may fall to 2.25 million barrels a day in 2020 from 2.96 million barrels in 1995, according to Facts Global Energy.

Refiners upgrading plants include Mangalore Refinery & Petrochemicals Ltd., which has said it may stop fuel-oil exports this year following work at a facility in southern India. Reliance Industries Ltd. (RIL), operator of the world’s largest oil- refining complex, doesn’t produce any fuel oil at its second plant in Jamnagar, India, which started operations in 2008.

Hyundai Oilbank Co., a unit of Ulsan, South Korea-based Hyundai Heavy Industries Co., reduced bunker-fuel production in 2011 for at least a third straight year to 21.1 million barrels, according to its website.

“Korea used to be the largest supplier in Asia, now it makes almost nothing,” said Fesharaki.

Hydrocracking Investments

Refiners are also investing in hydrocracking and coking, a way of turning fuel oil into higher grade products such as diesel. Hyundai Oilbank last year started operating a 2.6 trillion won ($2.3 billion) plant that will almost double its high-end refining capacity to 120,000 barrels a day.

“You have gradually more demand from complex refineries that need to buy fuel oil to crack into diesel,” said Torbjoern Kjus, a senior oil analyst with DnB Nor in Oslo. “It is affecting bunker supply to the market.”

To cope with the rising fuel costs, container lines are slowing vessels, cutting capacity and adding larger, more fuel- efficient ships. The global fleet was traveling at an average 10.53 knots last month compared with 11.15 knots a year earlier, according to data compiled by Bloomberg. A 10 percent reduction in speed can cut fuel use by as much as 30 percent, according to Det Norske Veritas, which assesses seaworthiness of vessels.

Idled

There were also 115 vessels with a capacity of more than 10,000 boxes in service at the beginning of February, compared with three in 2006, according to Clarkson Plc data. Another 160 are on order. A vessel that can carry 13,000 20-foot containers will consume about 250 tons of fuel a day, according to Um. That compares with 495 tons for three vessels able to haul 4,000 boxes each, she said.

Container lines had also idled 289 vessels, able to hold a combined 840,000 boxes, as of Feb. 27, to pare overcapacity, according to Alphaliner. That could rise to 1.1 million containers by year-end, the shipping-data provider said.

“While lines are trying to take vessels out from existing routes in an attempt to boost rates, I’m not sure how effective that would be,” said Simon Wong, an analyst at Moody’s Investors Service in Singapore. It won’t help “if demand doesn’t improve or if fuel-oil prices continue to remain at high levels.”