Viewpoint: US biofuels bunker demand seen muted

Market: Biofuels, Oil products, Petrochemicals
23/12/22

Biofuels used for bunkering could see an uptick in use in New York and California in 2023, driven by smaller, harbor vessel demand, but demand from larger, ocean-going vessels will likely remain muted from a lack of US biofuel bunkering subsidies and strong international competition.

Harbor supply vessels — including ferries, tug boats, bunker barges and dredgers, among others — ply US territorial waters burning ultra-low sulphur diesel (ULSD). They are also allowed to burn B30 biodiesel made from blending 70pc ULSD and 30pc US-price subsidized biodiesel.

Rising ULSD prices in New York could drive up interest in B30 blends this winter. A B30-ULSD blend was pegged at $8.80/t discount to outright ULSD in New York in November, Argus data showed.

In October and early November, US Atlantic coast distillate inventories dropped to their lowest levels since May and April this year and approached their prior multi-decade lows of April 1996, amid steep backwardation that discouraged storage. Global diesel supplies have been tight because of Russia's ongoing conflict with Ukraine. The EU ban on Russian petroleum products imports set to take effect on 5 February should tighten US Atlantic and Gulf coasts distillate inventories in the first half of next year.

Separately, California will require commercial harbor craft vessels in the state to burn renewable diesel (R99) instead of ULSD starting on 1 January. The state's environmental agency California Air Resource Board (CARB) forecasts harbor craft vessel demand for R99 in California at 3,562 b/d in 2023. In November, Argus assessed R99 at a $213.60/t premium to ULSD in Los Angeles.

Little to no large ship demand

Despite the expected uptick in New York and California demand, demand for US biofuel for bunkering by ocean-going vessels is expected to remain muted next year.

Globally, interest in biofuels as low-carbon bunker fuels alternatives has grown, because unlike methanol, ammonia and LNG, biofuels are plug-and-play fuels that do not require vessel retrofitting. But ocean-going vessels such as container ships, dry bulk carriers and oil tankers are currently not allowed to purchase US-tax payer subsidized biodiesel. This is because ocean-going vessels would burn the bulk of the fuel in international waters, instead of in US territorial waters.

In November, B30, a blend of 30pc un-subsidized biodiesel and 70pc VLSFO was pegged at $1,133/t in the US Gulf coast, compared to $762/t in Amsterdam-Rotterdam-Antwerp. If ocean-going vessels were allowed to buy US-subsidized biodiesel, B30 in the US Gulf coast would have cost them $785/t in November, Argus data showed. Rotterdam sold 522,167t of biodiesel blends in the first nine months of 2021 compared with the US, where ship owners have been only occasionally trialing burning biodiesel. The lack of biodiesel bunker demand in the US is expected to remain in 2023.

Another low-carbon marine fuel option deemed feasible by the marine shipping industry is green methanol, which includes bio-methanol and e-methanol. Bio-methanol is made from sustainable biomass feedstocks and e-methanol is derived from renewable electricity and CO2.

Currently, green methanol prices are not competitive with conventional marine fuel prices. But grey methanol — produced using natural gas and coal — has been cheaper than marine gasoil (MGO). Grey methanol was assessed 26pc cheaper than MGO, or $264/t below MGO in November in the US Gulf, Argus assessments showed. Burning grey methanol does not significantly reduce CO2 emissions compared with MGO, but grey methanol does not contain sulphur and can substitute MGO, which has 0.1pc sulphur maximum limit in US territorial waters.

Ship owners looking to commission new vessels can invest in dual-fuel methanol burning vessels, substitute their MGO burn with grey methanol to reduce their bunker costs, while waiting to see if green methanol prices ease. Demand for grey methanol for bunkering could see an uptick in the US Gulf.

By Stefka Wechsler

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