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bunkerworld D2 and No. 2 Diesel Fuel:

an Introduction


bunkerworld

D2 and No. 2 diesel fuel: an introduction There has been growing interest in trading markets in D2 diesel fuel, despite the term 'D2' often being used in a misleading way when referring to different products and diesel grades available in cargo markets around the world. This paper provides an introduction to diesel fuel and includes some common diesel grade specifications as well as price histories in two major cargo markets.

Table of Contents Refining a barrel of oil ........................................................................................................... 3 Diesel and fuel oil classifications .......................................................................................... 3 Cargo markets ...................................................................................................................... 5 Tankers, arbitrage, and prices .............................................................................................. 6 Appendix 1 – Fuel standards ................................................................................................ 9 Appendix 2 – Gasoil historical prices .................................................................................. 10

Copyright © 2009 Petromedia Limited. All rights reserved. No part of this publication my be reproduced or stored in any form by any mechanical, electronic, photocopying, recording or other means without the prior written consent of the publisher.

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Refining a barrel of oil The exact properties of the refined products that come from a barrel of oil depend on the composition of the original crude, which is determined by its origins. The relative percentages of different types of hydrocarbons, such as paraffins, naphthenes, and asphaltics, give rise to different clarifications of crudes such as light or heavy, and 'sweet' or 'sour'. Lighter crudes yield more lowerboiling fractions, such as gasoline; sweet crudes have a lower sulphur content than sour grades, and sulphur content can vary between 0.5% and 6% per barrel. A barrel of crude oil is refined into different fractions through fractional distillation. In the simple refining model, refined products are removed from the crude at different boiling points (from low to high): gasoline, naptha, kerosene and jet fuels, light diesel, and heavy diesel. Residual fuel oil is the leftover product from this process. Because the final product from refining is dependent on the properties of the original crude, diesel will, for example, be higher in sulphur when produced from sour crude than from sweet crude. Impurities in the original feedstock will also be present in small quantities in the refined fuel.

Diesel and fuel oil classifications There are many different fuel standards for petroleum products. Some of the most universally used fuel specifications come from the American Society for Testing and Materials (ASTM), which was started in the US but has standards that have been adopted worldwide. Under the ATSM standard, there are six types of fuel oils: numbers 1 through 6. Diesel fuel is a type of fuel oil and No. 1, No.2 and No.3 fuel oils are all called diesel fuel oils, light fuel oils, heating oil, gasoil, or distillate grades. No. 2 fuel oil has specifications set down by ASTM standard D975. It is very similar to No.2 heating oil, which has its specifications set by ASTM D396. D2, for example, is simply another name for No.2 diesel, although the D2 nomenclature is typically only used outside North America and Europe, such as in Southeast Asia. For a diesel product to be called No.2 diesel, it must meet the specifications set out under the ASTM

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bunkerworld standard. There are a number of different standards in use in other countries, most notably for this discussion in Russia. In this case, Russia has a GOST 305-82 standard for the gasoil produced in Russia, which is used domestically and exported to Europe in particular. 'Gasoil' is the usual term used for diesel fuel, like No.2 diesel, in European cargo markets, although in recent times it has been more and more referred to as D2 by new players coming into the market. In the marine bunkering industry, there are separate fuel standards set out by the International Organization for Standardization (ISO). The most common diesel grade in the marine industry is marine gasoil (MGO) and its specifications are set by ISO 8217 and it is classed as either DMA or DMX. Much of the No.2 diesel produced in North America and Europe for inland use in trucks and trains meets the DMA standard and is used in the marine industry. Appendix 1 to this paper reproduces some selected parameters from three of the different diesel standards: ASTM No.2 diesel, MGO, and Russian gasoil. As many fuel marketers and testing agencies note, the different way the standards are structured and the parameters for the tests laid out, comparisons between grades can be difficult. With stricter air pollution rules coming into force in recent years, there has been more attention given to sulphur levels in diesel fuels. Recall that sulphur levels can vary in refined products based on the sulphur level of the original crude feedstock. The maximum sulphur allowed in DMA-MGO is 1.5%, even though regulations in future will require marine gasoil to have lower levels. No.2 diesel in the ASTM standard is only 0.5% maximum sulphur, and there is also a low-sulphur version that has a maximum of 0.05%. In the GOST 305-82 Russian gasoil standard the maximum sulphur is 0.02%, but there are also other similar Russian grades where the sulphur level is 0.2% maximum. In the US, the Environmental Protection Agency (EPA) has an ultra-low sulphur diesel standard that allows just 0.0008% maximum sulphur. Also, for example, heating oil (No.2 diesel) in the US does not have a regulated sulphur content so must be 'marked' so that it is not diverted into the off-road market. Since 2007, all non-road locomotive and marine (NRLM) diesel must be 0.05% maximum sulphur under EPA regulations. Within the basic classification of 'diesel', therefore, there are different types of fuels in the US that must conform to environmental standards for sulphur and to other parameters for specific use. The pipeline company Colonial, which delivers over 100 million barrels of product per day via pipeline Bunkerworld: D2 and No. 2 Diesel Fuel: an Introduction

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bunkerworld networks in the US Gulf and the East Coast, carries 16 different grades of diesel fuel. In this part of the US, different diesel and heating oils – depending on their end use – are often classified by their Colonial grade number (the company also has product codes for 38 different gasolines and 7 grades of kerosene). The proliferation of standards in the petroleum industry, and the difficulty of reconciling them, is also found in the aviation business. Jet fuel has its own ASTM standards and there are six main types of jet fuel in the standard. There are, however, other standards, which are being used in the UK, Russia, Eastern Europe, and China. There have been efforts recently to reconcile the differences between standards and there is now an international Check List that includes the strictest parameters from the UK-based DEF STAN 91-91 and the US-based ASTM D1655 Kerosine Type Jet A-1 standard. The Check List is recognised by eight of the major aviation fuel suppliers - Agip, BP, ChevronTexaco, ExxonMobil, Kuwait Petroleum, Shell, Statoil and Total - as the basis of their international supply of virtually all civil aviation fuels outside North America and former Soviet Union. There has been increasing trading interest in some of the grades that fall outside this system, such as JP54 from Russia, which is often cited as meeting the Colonial 54 jet fuel standard that is in compliance with Jet A but not Jet A-1.

Cargo markets Refined petroleum products are bought and sold in 'cargo' markets. Because the volumes traded are large, transportation is typically by tanker or barge, hence the term cargo. Large cargo markets in the world include Rotterdam, Singapore, New York, and the US Gulf where cargos are bought and sold, and re-sold, and loaded and unloaded, and even re-loaded onto transportation for destinations in other countries. There are also ports of origin, where cargoes are loaded at oil refineries for shipping to large hub ports such as those mentioned above or to specific destinations. These smaller 'markets' might take their price cues from nearby larger markets. Prices in larger markets also can take their cues from elsewhere, such as the gasoil prices in Europe that are based on futures prices from the Intercontinental Exchange (ICE) for delivery of product in Rotterdam or the Russian gasoil prices for loading at Ventspils in Latvia that are often quoted at a discount to gasoil on the ICE. The volumes involved in the trade of refined products are substantial. Europe as a whole typically Bunkerworld: D2 and No. 2 Diesel Fuel: an Introduction

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bunkerworld refines around 270 million metric tonnes (mt) of distillate fuels annually. It exports in the region of 80 million mt and imports over 100 million mt. Russia exports approximately 30 million mt of gasoil, according to market figures. The cost of purchasing cargoes can be either free on board (FOB), or cost, insurance, freight (CIF). FOB, to use the definition from the New York Mercantile Exchange (NYMEX) is: “A transaction in which the seller provides a commodity at an agreed unit price, at a specified loading point within a specified period; it is the responsibility of the buyer to arrange for transportation and insurance.” CIF “refers to a sale in which the buyer agrees to pay a unit price that includes the FOB value at the port of origin plus all costs of insurance and transportation” - essentially the basic cost of getting the product to a particular destination. The range of options shown by pricing and market data providers such as Argus and Platts gives an indication of the trading options available to buyers and sellers in cargo markets. Argus, in Europe, shows pricing for Russian gasoil CIF in North-West Europe, as well as FOB in Novorossiysk on the Black Sea and CIF in the West Mediterranean. In Asia, it shows prices for three different sulphur levels of gasoil (0.5%, 0.05%, and 0.005%) FOB in Singapore, Indonesia, and South China, as well as a ultra-ultra-low sulphur diesel gasoil at 0.001%. In US markets it has pricing for heating oil, as well as other types of diesel including NRLM diesel, and a 0.5% maximum sulphur on-road diesel on the East Coast and a Colonial-specced 0.42% sulphur grade on the Gulf Coast. On the US West Coast it reports prices for diesel that meets the EPA standard for ultra-low sulphur diesel (ULSD) as well as the California Air Resources Board (CARB) standard for such diesel in California. Platts provides market assessments around the world. Quoted products, for example, in Europe include 0.2% maximum sulphur gasoil FOB in the Mediterranean, and FOB in Rotterdam and CIF in North-West Europe for the same product.

Tankers, arbitrage, and prices In cargo markets, as can be seen from the discussion above, products are bought for loading in certain ports or for delivery to other ports. FOB deals might be particularly favoured if the product is to go to a destination not typically covered by some of the regular market options.

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If, for example, prices are higher in a particular area, there may be arbitrage opportunities to take fuel from Europe and ship it as far away as Asia for a short period of time if a pricing 'window' is open. This is because prices for products such as fuel oil and gasoil are not uniform around the world but have – often substantial – regional differences due to supply and demand factors in particular markets. The volumes that are involved in this sort of 'spot' market trading are substantial. In 2007, for example, the volume of fuel oil trade worldwide was over 130 million tonnes. Most Russian gasoil, for example, is used in Russia or in Europe for a variety of on-road, industrial and marine uses. The EU will shortly, however, introduce new diesel standards requiring only 0.001% sulphur. This is expected to reduce gasoil imports from Russia, which typically have higher sulphur levels. Market expectations are that this rule change will see exports of Russian gasoil shift from Europe as a destination to elsewhere, most likely Asia. Russian gasoil is exported from time-to-time further afield to other locations depending on the opportunities. Market sources reported that recent winter demand for heating oil in the US North East saw cargoes of 0.2% sulphur gasoil being shipped over from Europe, with the tankers taking ULSD from the US Gulf back on the return trip. Margins were reportedly slim on the gasoil sales but the trips were profitable due to the prices of the ULSD. This movement of Russian gasoil typically happens infrequently, but winter demand for heating oil in the US can open up arbitrage opportunities. The historical price data shown in graph form in Appendix 2 gives a good example of regional variations in prices. The graph shows weekly prices for FOB cargoes in Rotterdam and New York for gasoil. It can be quickly seen from the graph that the larger trends in both ports for gasoil are similar and one would expect that prices would follow larger trends in oil and petroleum markets. The price lines do diverge, however, which shows the regional variations in prices and how arbitrage windows for profit margins can open up between different geographical locations. As noted, Argus Media and Platts provide price and market information for cargo markets around the world. Bunkerworld provides spot prices for the marine fuel (bunkering) industry. Cargo markets are very important in the bunker market because this is where bunker fuel suppliers purchase their wholesale product for blending and then sale on the shipping retail market to shipowner customers. Fuel oil cargoes purchased on the cargo market often require blending to meet ISO 8217 Bunkerworld: D2 and No. 2 Diesel Fuel: an Introduction

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bunkerworld specifications. Distillate grades such as MGO typically do not require blending as they are available on-spec direct from refineries. As noted above, different diesel and gasoil specifications exist from different countries and refineries. Russian gasoil and other No.2 diesel grades from elsewhere do appear in marine markets. Fuel testing agencies typically note, however, that the specifications for some gasoil grades and the ISO 8217 MGO standards do differ. They therefore recommend that buyers of MGO undertake tests on the fuel to ensure that it does meet the proper specifications and is not off-spec and being incorrectly marketed as MGO when in fact it is a different grade of gasoil. Bunkerworld shows spot market prices available in bunker markets for ship refuelling in major ports around the world for MGO and also in many cases for marine diesel oil (MDO), which is a blend of MGO (or other diesel grades) and heavier-weight residual fuel oil. Like other petroleum products, MGO typically follows the broader trends of prices in oil markets, but substantial regional variations based on supply and demand also exist. Like the arbitrage opportunities in cargo markets, buyers of MGO (and indeed other bunker fuel grades) can choose the port where they will get the best deal. It remains a truism that accurate pricing information is of benefit to both buyers and sellers.

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Appendix 1 – Fuel standards The following table shows some of the key parameters in different gasoil standards. The full standards are available from their publishing organisation, such as the ISO or the ATSM. Note that the parameters in the standards are often expressed as a range that the fuel must fall within (such as viscosity), or a minimum or maximum value, which means that a batch of fuel might not necessarily have this property but return a different value but still be on-spec: for example, a batch of DMA with a flashpoint of 62 would still be within the standard.

Parameter Viscosity @ 40o C (cst) Viscosity @ 20o C (cst) Cetane number min. Flash point (oC min) Sulphur (% max) Pour point (oC max)

ASTM No.2 diesel

ISO 8217 DMA MGO

GOST Russian gasoil

1.9-4.1 --40 52 0.5 or 0.05 ---

1.5-6.0 --40 60 1.5 -6 - 0

--3-6 45 62 0.02 -10

Viscosity is a measurement for the thickness of the fuel and is measured in centistokes (cst) where 1 cst = 1 mm2/second (this notation shows clearly how it measures 'resistance to flow') in metric terms. Note that viscosity is measured at different temperatures in some standards. Cetane is a measurement of fuel combustion quality with a higher number indicating a shorter ignition delay. It is based in international standards. Flashpoint is the lowest temperature measured in degrees C that the fuel will ignite. Sulphur content refers to the percentage of sulphur in a quantity of fuel, which will produce sulphur oxides (SOx) as air pollutants when burned. The ASTM No.2 diesel standard has two sulphur levels for high and low-sulphur grades. Pour point is the lowest temperature in degrees C that the product will flow under certain test conditions.

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Appendix 2 – Gasoil historical prices The following graph shows weekly prices for FOB gasoil in Rotterdam and New York, 2000-2008, in cents per gallon. A standard barrel is 42 gallons; depending on the speciďŹ c gravity of the product, there is typically 7.1-7.8 barrels of gasoil in a metric tonne.

(Source: US Department of Energy)

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