* Refiners cut gasoline output to produce VLSFO
* More than 10 VLSFO cargoes exported so far
* VLSFO demand outlook remains unclear
By Jane Chung and Florence Tan
SEOUL/SINGAPORE, July 16 (Reuters) - Refineries in Taiwanand South Korea are testing the market for fuels that meet newrules for low-sulphur ship fuel starting next year, exportingsome cargoes of very low-sulphur fuel oil (VLSFO) this month.
Oil market participants are uncertain what kind of fuelproduct shipping companies will use to meet the InternationalMaritime Organization's (IMO) 0.5% sulphur standard for shipfuels starting in 2020. The VLSFO shipments demonstrate thatthis type of fuel is a viable option that refineries couldreadily market.
The refiners in Taiwan and South Korea have redirectedlow-sulphur feedstocks, that would normally undergo furtherrefining into gasoline, toward making the VLSFO, with 0.5% orless sulphur content, as a result of recent low profits forgasoline and to test their ability to produce the fuel.
One refining official based in Seoul said their plantprimarily runs high-sulphur crude oil so they take the fuel oilproduced after initial refining and remove the sulphur through aresidue desulphurization process. Instead of passing thefeedstock through a residue fluid catalytic cracker (RFCC) tomake gasoline, they are selling it as VLSFO.
He declined to be named as he is not authorized to speak tothe media.
This would "reduce gasoline output while increasing LSFOoutput so the gasoline market could recover," the official said.
Taiwan's Formosa Petrochemical, South Korea's GSCaltex, S-Oil Corp and Hyundai OilbankCorp have sold VLSFO cargoes since June, Reuters hasreported.
More VLSFO supply could offset demand for marine gasoil(MGO), a more expensive alternative that is being considered byshippers.
Consultancy Energy Aspects said in a report that the"growing VLSFO production provides a threat to diesel demand in2020 and provides a floor to Asian gasoline markets as more FCCstrim runs to free up VGO to be blended into VLSFO."
Formosa has sold two July cargoes, their first exports ofVLSFO in at least a decade, in a pre-marketing effort, companyspokesman K.Y. Lin said.
"We'll see how big the market can be," he said, adding thatthe company also plans to supply VLSFO to tankers calling at itsrefinery in Mailiao, Taiwan.
GS Caltex sold three VLSFO cargoes for July to Septemberdelivery and the company's spokesman said it plans to increasesupplies by replacing fuel oil used at their refineries forpower generation with liquefied natural gas (LNG).
However, gasoline margins have rebounded this month,reducing the incentive for refiners to switch production.
"Gasoline and fuel oil margins aren't that far apart,"Formosa's Lin said, adding that gasoline prices are still higherat more than $600 a tonne versus VLSFO at $500-$520 per tonneagainst the cost of Dubai crude at $450 a tonne.
He added that refiners also have to assess the value of thebasket of products produced from an RFCC which includesgasoline, liquefied petroleum gas, propylene and light cycleoil.
Furthermore, shipowners have the choice of using either LSFOor MGO to comply with IMO's mandate, making it harder forrefiners to decide which fuel to produce.
"People in the bunkering business need to store either ofVLSFO, MGO, or HSFO. Shipowners have a choice among these threekinds of fuels and not necessarily only VLSFO," a Seoul-basedfuel trader said.
(Reporting by Jane Chung in SEOUL, Florence Tan and RoslanKhasawaneh in SINGAPORE; Additional reporting by Yuka Obayashiin TOKYO, Jessica Jaganathan, Chen Aizhu and Koustav Samanta inSINGAPORE; editing by Christian Schmollinger)