Emulsion Fuel Economics: Can Quadrise's MSAR Make Commercial Sense for Bunker Buyers and Suppliers?

Monday March 13, 2017

Emulsion fuels are not a new idea, but so far they have failed to find a place in the marine fuels market.

Quadrise Fuels International plc (Quadrise) is perhaps the most prominent company trying to change that, and as regular Ship & Bunker readers will know the UK-based company is aiming to bring its Multi-phase, Superfine, Atomised Residue (better known as MSAR) to market later this year.

MSAR is a water continuous emulsion fuel that has been in development for several years and is designed to be a direct substitute for heavy fuel oil.

Ship & Bunker has already discussed many of the technical aspects of the offering in these pages, but with a sea trial of MSAR set to complete this year, we recently spoke to Chairman Mike Kirk to ask if MSAR emulsion bunkers really can make commercial sense to bunker buyers and/or sellers.

"The most important thing to keep in mind is that what Quadrise offers is not a product, it is a proprietary upgrading technology for refiners," Kirk reminds me - a point previous chairman Ian Williams stressed on several occasions.

This means that certain metrics such as the sulfur content of MSAR, for example, can not be stated as they are dependent on the residue to which the MSAR production process has been applied.

"While I believe that MSAR bunkers could one day migrate to being a true bunker fuel that people make as a commodity and sell on to whoever, our current mode of operation is what we call licencing mode," Kirk explains.

"This is our short to medium-term business model, and the way that we will make our money is by entering into an agreement with a specific refiner for production and a specific consumer for offtake - be that in the power or marine market. We provide the technology, chemicals, and services, the refiner produces the fuel, and the consumer purchases the fuel produced, all under a term agreement. From a shareholder point of view, the advantage of this is it allows us to significantly expand our business without any significant investment requirements from our perspective, but it still enables us to get out there in the major bunker hubs."

For marine, Kirk says the hubs the company will focus on are in Europe (Rotterdam/Antwerp and Algeciras), the Far East (Singapore), and the Middle East (Fujairah), while Saudi Arabia will also be a focus for the power generation market.

"So even with the licence mode approach we can still potentially go for a very significant part of the overall bunker market," he says.

Production Economics

Quadrise says MSAR will be sold at a discount to HFO, but as a number of readers have noted to Ship & Bunker, it does not seem obvious how the cost to produce MSAR, essentially processed fuel oil, could be less than simply selling the unprocessed fuel oil.

The company has also said the 0.50% global sulfur cap for bunker fuel, which is set to come into force in 2020, should be good news for MSAR; but with the cap expected to mean a significant reduction in fuel oil demand and prices, again, it is not immediately obviously how this would be of benefit for Quadrise.

So why would a refiner want to produce MSAR?

"One of the inherent benefits of our technology is that it enables a refiner to sell more of their product at crude plus rather than crude minus," explains Kirk.

"Not all refineries produce HFO, some undertake complete conversion. But if we're talking about the refiners that are producing HFO then our basic proposition is that in a typical semi-complex refinery every barrel of crude yields about 30% residue and 70% higher value distillates. But of that 70%, 20% of that high-value distillate is used to dilute the residue so it can flow at a reasonable temperate to get it out of the refinery, as HFO. The HFO is sold at a discount to crude and the other 50% of high-value distillates sold at crude plus.

"What we're enabling them to do is instead of having to use 20% of the high-value product as a diluent, we're taking that residue and using our propriety technology to produce MSAR using water as the diluent. This means they can sell 70% of the barrel as higher value products at crude plus and only have to sell the 30% residue at crude minus. Because of that additional value we're creating for them, we can actually sell MSAR at a discount to HFO as well."

So in essence, a key value for MSAR from a producers' perspective is not that is allows a cheaper HFO-like product to be produced, but rather, it enables a greater amount of higher-value distillate product to be produced.

This is also why the falling HFO prices and rising MGO prices expected from 2020 are seen by Quadrise as a positive, because a widening spread increases this overall value proposition.

Now the refiner could, of course, achieve a similar result by investing in upgrades to convert the residue into higher value products, but as Ship & Bunker has previously noted, such upgrades would cost a refinery around $1 billion and take five to seven years to complete.

In comparison, Kirk says an equivalent MSAR upgrade would cost between $50 and $100 million, while Quadrise's recent upgrades to a CEPSA refinery to produce MSAR took around nine months.

"Another point we think is important is that it's scalable. The technology has units you can plug together which gives refiners the flexibility to 'dip their toe in' and when they see what the fundamentals are they can increase capacity very quickly and at very low cost," he says.

"So it's low CAPEX with rapid cash payback, and that is something we think is very attractive for refiners."

As for whether inherently compliant 0.50% sulfur MSAR can be produced, Kirk also confirms that desulfurisation is not part of the MSAR production process.

Producing a 0.50% sulfur MSAR is therefore achievable only in a refinery that has a crude slate and a residue that would ordinarily be able to produce a compliant fuel.

Bunker Buyer Considerations

With the proposition for refiners explained, the obvious question for Ship & Bunker readers is whether MSAR is a product of interest to bunker buyers, and chief among traditional considerations is price.

Having already explained how MSAR can be sold at a discount to HFO, Kirk says that while it is dependent on the specifics of a trilateral agreement, he expects that discount to be upwards of 5 percent.

To be clear, the discount is based on the calorific content of the fuel - that is, the buyer is not paying for the water portion of the emulsion.

However, it is worth noting this water content means MSAR takes up 1.4 to 1.5 times the volume of the calorific equivalent volume of HFO.

Presumably, a true "drop in" replacement fuel testing to equal quality and ISO8217 specification to a buyer's regular HFO would have little trouble finding buyers at a 5 percent discount, so whether MSAR's discount is enough depends on several factors including its handling characteristics.

To that end, emulsion fuels are chemically very different to regular bunkers and Kirk confirms that, as one would expect, MSAR should not be co-mingled with other bunker fuels.

"You would generally have to have dedicated tankage for it, both on a larger scale at a refinery and smaller scale on a vessel," says Kirk.

However, MSAR is designed to use existing HFO infrastructure, so you can store it in HFO tanks and pump it through normal pipelines with the same pumps used for HFO.

"The advantage it has is you can generally store it at ambient temperature - you don't have to heat it to get it to flow," he says.

MSAR's specification is generally compliant with ISO8217:2010 RMG/RMK - being a water-based emulsion it will always be non-compliant on water content while MSAR produced from very heavy residues could be non-compliant for density.

Static stability and dynamic stability are also both very good, says Kirk; MSAR can be stored and used over a nine month to a one-year period and then remains "absolutely stable" when being pumped at high pressure for use.

MSAR is currently undergoing sea trials with Maersk, and Kirk says they have installed a fuel switchover system onboard that allows for successful multi-fuelling of the vessel.

"You do have to be careful of how you carry out a fuel switchover, but this is just as you would in switching from HFO to low sulfur MGO, primarily in terms of managing the temperature change in the engine," he says.

Kirk says MSAR offers an improved emissions performance over HFO: "The MSAR manufacturing process pre-atomizes the hydrocarbons meaning there is almost complete carbon burnout. This reduces particulate and soot emissions, particularly black soot, so not only is it a much nicer product to burn we think this reduction is going to be increasingly important from a future legislation perspective.

"Anecdotally, crew onboard Maersk's trial vessel have noticed when switching to MSAR the exhaust goes from grey to white, and less carbon in the exhaust means it's burning more of the fuel. So while we have not been able to quantity this yet, we believe it's got some efficiency advantages too."

Using water as the diluent also reduces the temperature of combustion in the engine, and this reduces NOx emissions by between 20 to 40%, says Kirk, adding that this is also another area of focus for both current and future marine fuels legislation.

"So if you pull these three things together - the economics, the reduced black soot, and the NOx - we think it's a pretty compelling offer to a bunker purchaser," says Kirk.

Boutique Bunkers, or a Mainstream Contender?

With supply limited to a few ports, and cost savings of around 5% offset by the need for dedicated tankage - a decisive factor in the lukewarm uptake of ULSFO bunkers - it is difficult to see how MSAR could be anything other than a boutique bunker product.

Restrictive supply points and dedicated tankage also means MSAR is unlikely to be suitable for smaller and tramp players.

But as Kirk notes, for major buyers a 5% discount on the bunker price means significant savings across their entire fleet, and those players are likely also the ones already operating end-to-end services from the major ports identified by Quadrise.

Those major players are also likely to be the ones attracted by MSAR's improved emissions credentials, and it is no surprise that MSAR trialist Maersk is not only the world's biggest box carrier but also a prominent member of Trident Alliance, the advocacy group for sulfur regulation enforcement.

In many ways MSAR is a similar sounding story to LNG bunkers, "only for us you don't have to use separate infrastructure, MSAR just needs to have dedicated infrastructure," says Kirk.

"It's going to start off as boutique but I think still with a significant market opportunity, particularly for those that are bunkering at particular ports on a regular basis. That's why we chose the container shipping market because unlike other parts of the shipping industry where they are on routes that are not always predetermined, they typically always know where they're bunkering. For the same reason, MSAR is potentially also attractive to the Ro-Ro and cruise markets.

"There isn't another company around offering this at a commercial scale. As long as the cost of production is lower than the extra 20% distillate yield that they're getting to sell in the market place, it drives the economics that you can offer a product of equal - or I would say higher - quality than relevant HFO but at a discount to HFO, and actually still deliver value for the refiner and for us as the technology and service provider."