With fewer than 100 days to go before the IMO 2020 sulfur change goes into
effect, non-diesel segments of the oil barrel are coming into focus for
markets, according to Valero Energy Corp.

The diesel curve continues to climb, but there are also indications of initial
impact from IMO 2020 for gasoline, company executives said in an earnings
conference call Thursday.

Currently, low-sulfur vacuum gas oil (VGO) is $5/bbl over gasoline in the Gulf
Coast, "which is to the point where you'll start to see people pull that out of
cat crackers and put it into low-sulfur bunkers, which should impact gasoline
yield going forward," said Gary Simmons, senior vice president of supply,
international operations and systems optimization.

Impact for feedstocks is "very visible," with high-sulfur fuel oil (HSFO)
trading yesterday at 61% of the price of Brent, down from a high of 95% of that
benchmark crude earlier this year, he added.

Asked about any uptick in Valero's use of HSFO as a feedstock for cokers,
Simmons noted that the company's system had been running some components of
HSFO, rather than HSFO itself, and expectations are to use more going forward.

Chief Operating Officer Lane Riggs explained that historically Valero has run a
lot of "outside blendstocks that go into a 3.5% [sulfur] fuel oil."

As energy markets "unwind [3.5% HSFO] as a fuel, you're going to see more of
these components around the world become available," he continued. "The key is
going out there and understanding and technically fitting [them] into our
system, which we're working very aggressively to do."

Valero's top brass articulated their long-held view that the feedstock side of
the IMO 2020 scenario could be more difficult to resolve than the products side.

Demand for diesel will significantly increase initially, Riggs said, and that
could go on for "quite some time." Simmons characterized the anticipated
bump-up as a "step change" in demand.

"It is not an easy task to create, to make, all the fuels work from a
compatibility perspective," Riggs added, but over the longer term the 3.5%
sulfur fuel oil being made that no longer has a market presents a "much more
capital-intensive thing to try to work through."

There's also uncertainty about scrubbers, Simmons offered. The equipment to
sufficiently remove sulfur from HSFO to prolong its use on marine vessels will
come on line, but technical issues could mean that they don't come on as fast
as initially anticipated, he said.

Valero is offering a compliant blend of low-sulfur fuel oil (LSFO) in the
Corpus Christi market, and is proceeding with a project to offer an LSFO blend
in Pembroke (in the U.K.).

However, the officials acknowledged the challenges of blending 0.5% sulfur
material "especially with a lot of the low-sulfur paraffinic crudes."

"So, I think there is a good chance that initially ships will run marine gas
oil and then gradually transition to the lower sulfur bunker material," Simmons
said.

--Beth Heinsohn, bheinsohn@opisnet.com

Copyright, Oil Price Information Service