Valuing Refined Petroleum Intermediates and Products - What are the End-Use Options?

Insurance Claim, Western Europe

After experiencing a mechanical breakdown enroute from Russia to a United States refinery, a tanker was redirected to an island port for repairs. We were engaged to value the petroleum cargo as part of the resolution of a marine insurance matter. The potential end-uses of the cargo – as a refinery feedstock, electrical power plant fuel or as marine bunker fuel oil – were important considerations for our reported valuation.

Refined products are usually valued based on the end-use associated reference market price. Most finished products – such as gasoline – have a single rational end-use, liquid markets, and transparent prices. However, some refined products can have multiple end-uses, each with specific pricing dynamics and sometimes relatively illiquid markets. Finally, trading hubs which set the reference prices may be very distant from the location of interest. These complexities often give rise to value-related disagreements.

A tanker shipping petroleum cargo from Russia to a US refinery lost propulsion following an engine room fire. The incident led to an insurance claim. To help resolve the claim, Baker & O’Brien was asked to value the cargo at a specific island port location.

In this case, the petroleum cargo was a ‘’black oil” residue from the distillation of Russian low-sulfur crude oil with several potential end uses. The typical end-use and highest value for Russian residues is as a refinery feedstock (as was the case here); however, these black oils are also used as fuel oil for power plants or marine vessels. Marine fuel oil is known as “bunker fuel” and typically has the least value.

The island where the ship was undergoing repairs did not have a refinery or fuel oil-fired power station. However, we found that the port’s marine bunker fuel operation, while much smaller than typical bunkering stations, had enough commercial activity and storage capacity to accommodate the petroleum cargo. Therefore, we considered the sale of the cargo at the port to a marine fuel supplier a realistic scenario and valuing the bunker fuel on an import parity basis as a rational basis for negotiations. Additional valuation premiums would theoretically have been achievable by transporting and selling the cargo as a refinery feedstock or fuel for a power plant. We summarized our findings in a written report.

Peter P. Bartlett

Senior Vice President

Petroleum Refining / Transportation and Storage
Accident / Incident Investigation / Insurance Claims / Litigation / Expert Witness Testimony / Product Quality / Water/Marine / Pricing
Western Europe