BUNKER FUELS BUSINESS

By Michaela Girling 29th March 2007

What is the aim of this presentation?

To learn about the existing bunker fuels business
What exactly are bunker fuels? What is bunkering? Current market for bunker fuels? Future prospects for bunker fuels?
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Presentation structure
PART 1
What is bunker fuel oil? What is bunkering intended to do?

PART 2
What are the environmental considerations?

PART 3
Bunker market structure and economics

PART 4
Port profiles & market share (Worldwide and European)

PART 5
Outlook for the bunker fuels market

PART 1 - What is bunker fuel oil?

Bunker fuels - fuels consumed by ships engines (technically any type of fuel oil used on board a ship) Name came from when ships originally ran on coal hence BUNKERS Post WW1 slow-speed oil-burning steam engine became main propulsion unit for merchant ships
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Things to be considered when you think about bunkers / bunkering

Bunkers are the largest single variable operating cost Bunker consumption factors Deviating for bunkers Bunker spot market pricing factors Bunker fuel futures & risk management Optimum ship routing Voyage estimating Credit lines to customers Bunker surveying services and testing Bunker pricing different grades Environmental considerations Bunkering operations how to bunker safely safety of ship and crew

Fuel oil used as bunkers

Fuel oil - Is a fraction obtained from petroleum distillation either as a residue or distillate Residual oils what is left after the production of gasoline, kerosine, gas oil and other high-end products
Residual oils are generally the lowest priced product to come from refineries
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Types of bunker fuel oil?

Intermediate Fuel Oil (IFO)
80% of bunker fuel consumed by the worlds oceangoing merchant fleet is IFO (blend of residual oils and distillate oils)

Distillates
Account for other 20%. More expensive than IFO as they include high-end refinery products. Distillate fuels tend to be used to run auxiliary engines and sometimes for use in port Used for blending i.e. to bring residual product into line with the specifications of the IFO bunker market (Gas oil + 380cst material to make 180 cst more later on this)
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Specification
Defining characteristic of IFO sold on the bunker market is VISCOSITY
Viscosity measures an oils resistance to flow, i.e. what temperature does the oil stop flowing freely (a viscosity measurement is relevant for pumping and fuel injection) The HIGHER the centistoke (cst) number, the more viscous the fuel (heavy oils have to be heated to get them to flow, i.e. high viscosity fuels)
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Specification / Viscosity
Most common viscosity for IFO supplied to ships is 380 cst @ 50 deg C Fuel with a lower viscosity (e.g. 180 cst) generally carries a premium (reflecting higher % of distillate fuel used as blending material)

Types of Fuel Oil

In USA 6 classes
1, 2 and 3 fuel oils referred to as being: Distillate fuel oils Diesel fuel oils Light fuel oils Gasoil Distillate

4 fuel oil usually a blend of distillate and residual fuel oil

5 and 6 are called residual fuel oils or heavy fuel oils

5 and 6 are what remains of the crude oil after the gasoline and distillate fuel oils are extracted through distillation
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Types of fuel oil for maritime purposes

MGO MDO IFO MFO HFO Marine gas oil Marine diesel oil Intermediate fuel oil Medium fuel oil Heavy fuel oil

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Fuel oils in the UK

In UK, 1st British standard for fuel oil came in 1982 Latest standard is ISO8217 from 2005

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What is bunkering intended to do?

To deliver the correct quantity of the correct grade of fuel into the correct tanks on the ship in a safe and environmentally secure manner at a cost which is acceptable to both the supplier and the buyer
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The bunkering operation

Safety first!
Is the vessel safely and securely moored or anchored? Is there safe access to the vessel for the bunker supply personnel Have all personnel appropriate personal protective equipment (PPE) If cranes / derricks are required to lift hoses, are they correctly rigged and are personnel adequately trained? Is all the lifting equipment, including slings, appropriately sized and certified? Have warning signs been posted, e.g. NO ENTRY, NO SMOKING etc

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The bunkering operation

Environmental protection
Are connections in good condition? Are hoses in good condition? Is primary spill containment in place on vessel Have booms been deployed if required? Is there sufficient ullage in the ships tanks to receive the product?
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The bunkering operation

Receipt of bunkers via barge - probably most common delivery method for bunkers
Barge comes alongside vessel at a predetermined location and will be secured alongside in the appropriate location for the bunker manifold Vessel is then connected using flexible hoses

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Standard documentation required

Bunker requisition form
Nominated quantity and grade(s) Agreed pumping rate Basic specifications to meet (e.g. viscosity, density, flash and water)

Pre-delivery checklist (to assist receiving vessel and delivery agent)

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Standard documentation required

Bunker delivery note (BDN) (more on this later!)
Official receipt for the product (should contain details of the quantity delivered along with the main characteristics of the fuel supplied)

Sample receipt
There should always be some form of receipt for samples in order to document the sampling event in case of a quality dispute at a later date
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Quantity and quality concerns

Is the quantity and delivery rate in line with the bunker requisition form? Does receiving vessel have sufficient space on board to receive the quantity being delivered? Does the documentation indicate the correct grade of fuel? Is the sampling method agreed and acceptable to all?
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Calculating the quantity delivered?

Need to ensure measurements are as accurate as possible
This includes not only delivered volume but also temperature and density measurements The exact weight of the product to be determined, i.e. converting litres into Metric tonnes

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What can go wrong?

Language difficulties between delivery agent and receiver Wrong grade being supplied Incorrect quantity being supplied which could lead to overflow Delivery agent unable to connect due to location or size of the manifold Leaking hoses and spillages Errors in measurement of volume, temperature or density Contamination Wrong product in the wrong tank
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PART 2 Environmental Considerations

What we will cover in this section
Marpol Annexe VI What is it and what does it tell us? Sulphur Emissions Control Area (SECA) what is it and where / how does it operate? Challenges facing the bunker industry

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Marpol 73/78 Annexe VI

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Environmental Considerations
Worldwide, the bunker business is made up of approx. 1000 bunkering ports with oil refineries in 100 countries with up to 500 oil companies and traders supplying 50,000 deep sea ships with 150 million tonnes of bunkers per annum in 20 30 grades of internationally regulated qualities
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Bad press!
Press very quick to report casualties and oil pollution from bunkers Pollution statistics tend to report bunker pollution by number of incidents rather than the quantity actually spilled

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MSc Napoli 18th Jan 2007

Flooding to engine room during severe weather UK registered vessel Intention to tow to Portland not feasible Ship beached in shallow water Lyme Bay Small leakage of fuel oil booms deployed / dispersant used Cargo 2300 containers (157 hazardous, perfume, pesticides, batteries) Approx. 2600 MTs bunker FO on board

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BACKGROUND
Shipping is now the dirtiest form of transport when considering Sulphur Oxide (SOx) emissions
Road <0.05 grams per ton KM Rail <0.05 grams per ton KM Shipping >0.25 grams per ton KM

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History of Marpol 73/78

The main international convention for the prevention of pollution, both accidental and that from routine operations, of the marine environment by ships Two treaties adopted in 1973 and 1978
1973 treaty : Oil pollution, chemicals, harmful substances in packaged form, sewage and garbage 1978 treaty : tanker design and operation

Updated by amendments through the years

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Marpol 73/78 technical annexes

Annexe I prevention of pollution by oil Annexe II regulations for the control of pollution by noxious liquid substances in bulk Annexe III prevention of pollution by harmful substances carried by sea in packaged form Annexe IV prevention of pollution by sewage from ships Annexe V prevention of pollution by garbage from ships Annexe VI prevention of air pollution by ships

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IMO MARPOL ANNEXE VI

Enforcement by Port State Control (PSC) Currently 34 countries have ratified (as at April
2007)
Azerbaijan Croatia Germany Marshall Islands Saudi Arabia Bahamas Cyprus Greece Norway Singapore
Bangladesh

Barbados Estonia Liberia Poland Spain

Belgium Finland Lithuania Saint Kitts & Nevis Sweden

Bulgaria France
Luxembourg

Denmark Japan Panama Slovenia

Samoa Tuvalu

United Kingdom

Vanuatu

Albania

UAE
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IMO MARPOL ANNEXE VI

Marpol Annexe VI sets limits on sulphur oxide (SOx) and nitrogen oxide (NOx) emissions from ship exhausts and prohibits deliberate emissions on ozone depleting substances Aim of Annexe VI - lower the sulphur content / sulphur oxide (SOx) emissions in bunker FO Marpol Annexe VI originally adopted in 1997 Came into force in May 2005 To sum up MARPOL ANNEXE VI is a series of regulations governing the prevention of air pollution from ships
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Sulphur Oxide Emissions control Area (SECA)

Annexe VI contains provisions which allows for special SOx Emission control areas (SECAs) Ships entering this area will have to consume marine fuels with a sulphur content not more than 1.5% Master may have to deviate to pick up this low sulphur fuel Alternative ships must fit an exhaust gas cleaning system (scrubber technology) or use any other technological method to limit SOx emissions
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MARPOL ANNEXE VI
4.5% Global cap with effect from 19 May 2005 and IMO to monitor worldwide average sulphur content of fuel First Sulphur Emissions Control Area (SECA) effective 19 May 2006 A 1.5% sulphur limit in the Baltic Sea and for passenger vessels sailing within EU ports Second SECA effective 21 November 2007
Vessels required to use 1.5% S fuel in the North Sea and English channel

Bunker delivery Note (BDN)

Copy retained on ship and by supplier for 3 years Ship to retain representative sample for 1 year
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Compliance issues
In states that have not ratified Annexe VI, there is no requirement on suppliers to provide a compliant BDN Buyers must insist that suppliers provide a BDN and sample to demonstrate compliance at other ports IMO is focusing on guidelines to harmonise enforcement globally
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Marpol Annexe VI
Marine Environment Protection Committee (MEPC) is a committee set up within IMO who continue to review Annexe VI Adopt amendments as and when necessary based on information that they continually collate and update Study on 2004 Review worldwide sulphur content in fuels oils Period 02 04, worldwide av. Sulphur content in fuel oil was 2.67%!
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Marpol Annexe VI
Ongoing review of Annexe VI Aim is to further reduce SOx emissions and NOx emissions Nearly 60 ports are currently reported to be supplying low sulphur fuel oil see
attached map

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Taken from 27th International Bunker Conference 27 April 2006 Robin Meech - Marine & Energy Consulting Limited

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Sample location
Marpol Annexe VI states: The bunker delivery note (BDN) shall be accompanied by a representative sample of the fuel oil delivered, taking into account guidelines to be developed by the Organisation

MEPC states regarding sampling location

For the purpose of these guidelines, a sample of the fuel delivered to the ship should be obtained at the receiving ships inlet bunker manifold and should be drawn continuously throughout the bunker delivery period

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Fuel Oil Sampling

Marpol sampling point

Cubitainer
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Bunker delivery Note (BDN)

Name and IMO number of receiving ship Port of delivery Date of delivery commenced Name, address and telephone number of the fuel supplier Product name(s) Quantity supplied (metric tonnes) Density @ 15c (kg / m3) Sulphur content A declaration signed and certified by the fuel suppliers representative that the fuel oil supplied is in conformity with regulation 14(1), 14 (4)(a) and 18(1) of Marpol Annexe VI
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Background on air pollution

Noxious gases from ship exhausts
Most acid rain caused by airborne deposits of sulphur dioxides and nitrogen oxides
Coal and oil burning power plants biggest source of sulphur dioxides Car, truck and ship exhausts biggest source of nitrogen oxides

1980s New discussions on air pollution. Concern about global warming and depletion of the ozone layer
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Low sulphur fuel oil (LSFO)

Challenges facing the bunker industry
Demand for LSFO increasing and premium for LSFO is also increasing Shipowner will pay - pass on the costs to his customers Will there be enough LSFO to go around? More countries will legislate and with increasing stringency Development of abatement / scrubbing technology will accelerate (i.e. alternatives to LSFO)
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Outlook
The bunker industry will seek the lowest cost solution
That usually complies with the regulations Whilst improving our environment

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Compliance with a 4.5% global cap on SOx emissions / operating in a SECA (1.5% cap)
How can shipowner comply?
Use LSFOs only Carry duel bunkers and switch Not trade in the SECA Not comply with regulations

Factors to encourage compliance

Desire of professional ship operators to comply Ferry operators will not wish to identified as polluters The fuel testing companies will encourage / assist ship operators to comply

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What might delay compliance?

Lack of clarity in the wording of the regulations and inconsistent commencement dates Some countries are far less rigorous than others in enforcement Proving non-compliance is complex and time-consuming Numerous arrests / detainments in port does not attract traffic Penalties are not expected to be dissuasive

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PART 3 Bunker Market Structure and Economics

What we will cover in this section
Cost of bunkers today? Players? Customers?

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Cost of bunker fuels

Generally, as the price of crude oil rises and falls, so too does the cost of bunkers Bunkers are the largest single variable operating cost In various estimates, bunker fuel now accounts for 50% of the total operating costs on many types of vessel ranging from large container ships to smaller fishing vessels

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Cost of bunkers today (in USD / MT)

IF 380
SINGAPORE

IF 180 310.00 286.50 287.50 320.00

MDO 537.00 530.00 487.50 580.00

MGO 545.00

299.00 272.00 267.00 311.50

HOUSTON

RDAM

539.00 587.50
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FUJAIRAH

Source- BunkerWorld daily prices dated 9th March 2007

Economics
Econs for a large container ship
Approx. 220 Mts per day on a 35 day round trip 7700 MTS @ $300 MT = $2,310,000 This does not include lube oils / generator fuels
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Cost of bunkers today

Bunker prices vary from port to port and region to region Singapore and Rotterdam major bunker supply ports and as fuel trading hubs, tend to provide benchmark prices for Asia and Europe Most critical variable in selecting a port for bunkering is the price of the fuel leads to competition between ports for bunker sales

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Rising cost of Marine Fuels

As reported by Bunker World (article dated June 2006) Mitsui O.S.K (Japans second largest shipping company A $1 / MT rise in bunker fuel would equate to a $2.7 million fall in Mitsuis profits (based on a yearly average price)

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Cost of bunkers for the shipowner

Rely on buoyant freight rates to counteract rising bunker prices
When freight rates are put under pressure (e.g. capacity outpacing demand), high bunker prices are not offset and then cut into ship owners profits

Use of sophisticated models to check best locations for bunkering:

Bunker prices Trends in spot prices Financial consequences of foregoing cargo to carry extra bunker fuel
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Fuel oil market

Fuel oil market is the wholesale market for the bunker industry
Parcels of 30,000 80,000 MTs

Fuel oil cargoes generally have to be blended to meet bunker fuel specifications
Bunkers parcels sold in smaller parcels of 500-3000 MTs

Bunker parcels carry a premium to cover transportation and blending

Size of premium varies according to market conditions (usually $3-$10 / MT above fuel oil cargo prices)
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Who are the players?

Suppliers
Generally major oil companies (ExxonMobil, BP, Shell, Chevron, Total)

Traders
trading cargoes is a high risk, high return activity involving major budgets although not necessarily fixed assets

Brokers
Supply contact between suppliers and buyers. Brokering is a low risk, low return activity undertaken by small companies with few assets beyond their staff
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Evolvement of the bunker market

1970s residual product tended to be sold directly into the marine fuel market by the major oil companies
High bunker prices forced changes Emergence of independent bunker suppliers and traders / credit facilitators

National Oil Companies Energy policy ensured that control was not relinquished
Continued dominance of national refiners / national oil companies
e.g. Brazil (Petrobras), Taiwan (Chinese Petroleum Company), Egypt (Egyptian General Petroleum Corp)

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Who are the customers?

Worlds merchant fleets
50,000 ships growing at an average of 1% per annum for the last 10 years Large ships with equally large engine sizes may consume 150 MTs per day and above

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Pricing considerations
Spot purchase (single transaction) versus contract (purchase made using a forward contract to lock in a price) where contract price is based on a formula Large ship operator forward contracts (12-18 months ahead) to reduce sensitivity to price fluctuations Risk management techniques hedging (reduce financial exposure)
Risk management options provided by banks and financial institutions or by specialist companies
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PART 4 Port profiles and market share (Worldwide inc. Europe)

What we will cover in this section
Regions and major bunker ports in each region UK bunker business

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A regional perspective
North America Central and South America Europe Med and Black Sea Middle East Asia Africa
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Region by region
North America Houston LA (big volumes) Miami New York (big volumes) San Francisco Seattle Vancouver Central and S. America Montevideo, Uruguay Panama (big volumes) Santos, Brazil

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Region by region cont:

N. Europe
Antwerp (big volume) Rotterdam (huge!!) St. Petersburg

Med and Black Sea

Algeciras Canary Islands Genoa Gibraltar Marseille & Fos Istanbul Novorossiysk Piraeus (big volume)
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Region by region cont:

Middle East
Fujairah (huge!!) Suez

Asia
Busan (big volume) Hong Kong (big volume) Kaoshiung Shanghai / China Singapore (huge!!)

Africa
Cape Town Durban Lagos (offshore

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Regional examples
N Europe
Rotterdam bunker volumes of 13 million tonnes p.a.

Asia
Singapore bunker volumes of 25.5 million tonnes p.a.

Middle East
Fujairah bunker volumes of 13 14 million tonnes p.a.

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Rotterdam
Largest bunkering centre in Europe 2nd largest in world after Singapore 13 million tonnes in 2005 v. 12.9 million tonnes in 2005 Imports large volumes of FO from Russia and from other former Soviet states
N. Europe (Rotterdam)

Shell (25%) Frisol (25%) Lukoil Benelux (15%) Chemoil (15%) Others(20%)
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Singapore
Largest ship refuelling centre in the world 2005 Singapore port authorities reported bunker sales of 25 million MTs in 2005 8% growth on 2004 >75 suppliers of bunker fuels
S.E Asia (Singapore) (% estimates of mkt share)

BP Singapore (18%) Global energy Asia (8%) Shell Internat. (8%) XOM (8%) Others (many companies) (56%)
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Fujairah
One of the largest bunker markets in the world No stats available best estimates put volumes at 1315 million MTs p.a. in 2005 10% growth on 2004 if true Bulk of bunker demand comes from tankers
Middle East (Fujairah)

ENOC (50%) FAL Energy Co (35%) Warm Seas Internat. Co. (5%) Others (10%)

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UK bunker business
Major oil companies
Trend to constrain their bunker business around their refineries where their supply chain economics are favourable

UK coastline
Pembroke Liverpool Immingham Southampton
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UK
Fuel oil delivered to various locations around the UK in small coastal vessels (up to 3,000 MT parcels) Discharged into storage
Onward delivery by truck and barge
Ferry operators Small fishing vessels

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PART 5 Outlook for the future

The world bunker market is expected to grow (Ocean Intelligence report) Growth rate of 3.5% p.a until 2020 Predictions based on no. of vessels on order from shipyards worldwide and on strength of global economy World trade will be driven by high Chinese economic growth
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Regional demand
Regional variations
China and India big growth areas Chinas growth limited due to reluctance to open up its market to foreign competition

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SECAs (Sulphur Emissions Control Area)

Uncertainty about demand within a SECA Ships using LSFO in a SECA, higher cost of fuel to owner (as much as $30 / MT for LSFO) Will a shipowner / operator try to avoid SECA?
When SECA comes into force late 2007 in N.Sea, hard to see how Rotterdam and Antwerp could be by-passed
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SECA cont:
Likely outcome
Shipowner will only take the LSFO he needs to take them through a SECA. HSFO for rest of voyage

Will there be enough LSFO to go around? New SECAs

By 2012 Waters off N. America? By 2015 Med and Black Sea
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References
Tradewinds Lloyds List BunkerWorld Oxford Programme www.ibia.net Fairplay IBIA (The International Bunker
Industry Association)

Bimco Intercargo Intertanko Ocean Intelligence report Complete guide to the Bunker fuel Market 2006

IMO

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 Any questions? Email

michaelagirling@chevron.com

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