Exclusive: Texas storage operator jumps into race to produce low-sulfur marine fuels

HOUSTON (Reuters) - A U.S. Gulf Coast fuel storage operator is launching its own crude processing facility to make 50,000 barrels per day (bpd) of low-sulfur fuels to comply with new environmental rules beginning in 2020, executives told Reuters on Tuesday.

Texas International Terminals plans to operate its own crude distillation unit (CDU) at a site in Galveston, Texas, producing bunker and gas oil for affiliate GCC Bunkers, which will supply crude and market the resulting fuels.

The previously undisclosed refining project, an unusual venture for a storage facility, will compete with big refinery operators such as BP Plc BP.L, Chevron Corp CVX.N and Exxon Mobil Corp XOM.N, and startups such as Limetree Bay Refining LLC. The plant aims to tap demand for very low-sulfur fuels required beginning Jan. 1 for ocean-going vessels under an International Maritime Organization (IMO) mandate. The IMO 2020 rule limits sulfur content to 0.5%, from 3.5%, to reduce air pollution.

“We expect most of the bunker demand in the Houston and surrounding markets to shift to the IMO 2020 spec,” said Mark VandeVoorde, a principal at GCC Bunkers. “We anticipate there will be strong demand for the product.”

Todd Sullivan, president of Texas International Terminals, declined to disclose the company’s investment in the small-scale refinery and storage-terminal additions. The company expects to acquire low-sulfur Texas crudes for the operation and has already begun construction on the project, expected to be completed early next year.

Refiners’ profit margins have already begun to rise as inventory builds in anticipation of sales beginning later this year, said Jan-Jaap Verschoor, director of Oil Analytics Ltd. He forecasts demand initially could outstrip supply by 250,000 bpd.

The company operates a terminal with bunker storage capacity of 50,000 barrels at the plant site on the Galveston Ship Channel, and plans to add 750,000 barrels of fuel oil storage and 500,000 barrels of gas oil storage at the site, Sullivan said.

“West Texas barrels can create compliant fuels,” said John Auers, executive vice president at consultancy Turner, Mason & Co. “The thing is, the existing refiners are making IMO-compliant fuels, as well. You’ve got to find a home for it.”

Expansions to existing refineries since the early 1990s have added about 2.9 million bpd of crude refining capacity along the U.S. Gulf Coast, bringing the region’s capacity to 9.8 million bpd, according to the U.S. Energy Information Administration.

Reporting by Collin Eaton; Editing by Marguerita Choy and Leslie Adler