IMO 2020, the International Maritime Organization’s new MARPOL Annex VI fuel regulation that aims to reduce air pollution from ships, will come into effect from January 2020. The regulation limits sulphur content in bunker fuel to 0.5% for all commercial shipping vessels, a marked reduction from the current rate of 3.5%. In 2018, the shipping industry used about 3.5 million barrels of high sulphur residual fuel per day, accounting for approximately half the global sulphur demand. The bulk of this demand went towards high-sulphur fuel oil (HSFO), which contained between 1% to 3.5% of sulphur content. Reducing emissions by getting sulphur content in fuel oil to under 0.5% will require a large commitment from the shipping industry.
According to CAI Logistics, the cost of maritime fuel oil will rise by an estimated 25 percent in 2020 when IMO 2020 takes effect. However, this is just the beginning, as IMO 2020 will impact downstream oil and gas in a major way. Some of the major market changes one can expect in the wake of this regulation include:
Changing Fuel Parameters
Operators without an up-to-date understanding of fuel parameters, and its associated handling requirements, run the risk of incurring major cost escalations, among other problems. At a recent Lloyd’s List Business Briefing, experts noted that there is no coordinated approach from refiners. Instead, the industry is headed for a multi-fuel future that would be divided into five major categories:
- Ultra-low sulphur fuel oil (ULSFO): maximum sulphur content of 0.10%
- Very-low sulphur fuel oil (VLSFO): maximum sulphur content of 0.50%
- Heavy fuel oil (HFO): maximum sulphur content of 3.50%
- LNG (Liquified Natural Gas)
- Others: biofuels, fuels extracted from waste plastic, methanol, and other fuels not yet on the market
Alternative Uses of HSFO:
Current producers of high-sulfur fuel oil will need to look for alternative end-uses, most likely in power generation and other industrial uses. Some refiners have already confirmed that they are looking for options to incentivize HSFO being used as a fuel for power generation, competing with coal in emerging markets, given the fact that HSFO emits less carbon dioxide than coal.
However, it is important to note that while HSFO looks like a better option based on emissions and energy density – HSFO contains around 50% more energy than an equal amount of coal – it loses out on price. Coal currently trades at about $100 per metric ton, which is significantly lower than the spot and two-year forward prices of HSFO: $400 and $250 per metric ton, respectively.
Refinery Adaptation and Investment
Technology will play a critical role in ensuring the steady supply of maritime fuel post-IMO 2020. There are four main technologies being explored by the industry to keep fuel prices rising too rapidly.
- Bottom of the Barrel Conversion: Separating, upgrading and converting the vacuum residue part of crude oils
- Lighter Crudes: Producing low-sulphur fuel from existing processes
- Desulphurization: Using technology to lower the sulphur content of the distillate
- Resid Hydrocrackers: Cutting more distillate by adding heavier elements
The Status of Global Refiners
Nations have been gearing up for IMO 2020 since its announcement nearly four years ago.
1. China: The world’s largest refiner, Sinopec Corp, has started producing very low-sulphur fuel oil (VLSFO) at its 10 refineries in China. The company plans a total VLSFO capacity of 10 million metric tons a year by 2020, while also building a fleet of 100 barges to supply fuel to ships. Meanwhile, PetroChina has pledged 4 million metric tons of VLSFO in 2020, likely from its Jinzhou, Jinxi, Dalian and Guangxi refineries.
2. North Asia: South Korean refiner SK Energy, can produce up to 1.1 million metric tons of marine gasoil, about 8% of its total gasoil output. SK is also building a vacuum residue desulphurization (VRDS) unit that can produce 1.7 million metric tons of LSFO, which is due online in March or April 2020. Meanwhile in Japan, Fuji Oil, Cosmo Energy and Idemitsu Kosan began shipping IMO-2020 compliant fuels in October.
3. South East Asia: Chevron said its VLSFO and MGO supply capacity in Asia could double in the next couple of years. Vitol is building a crude processing unit in Malaysia that could supply 1.3 million metric tons of LSFO from May 2020, and IRPC said it will produce 52,000 metric tons of VLSFO in November 2020, making it Thailand’s first refinery to produce IMO 2020 compliant fuel. The Indian Oil Corporation Ltd has started supplying IMO 2020 compliant fuel in India.
4. Middle East: Uniper Energy operates two crude processing units in Fujairah, UAE that annually produce 3.6 million metric tons of VLSFO, including 0.1% sulphur fuel. Brooge Petroleum and Gas has revealed plans for a refinery in Fujairah to produce over 10 million metric tons of low-sulphur fuel. Meanwhile, Qatar Petroleum announced that it has started supplying VLSFO at its ports in October.
5. Europe: Marine fuel supplier Peninsula Petroleum plans to double VLSFO deliveries to 600,000 metric tons by January 2020 in Europe and the Americas, while Gunvor Group announced an overhaul of its refinery in Rotterdam to produce LSFO in March 2020.
6. United States: Most U.S. Gulf Coast refiners are able to process heavy crudes to make IMO 2020 compliant marine fuels and have spent heavily on refurbishing distillation and coker units to process cheaper, heavy grades.
Crude oil demand will be artificially high in 2020, before reverting back to normal growth rates in 2021 and 2022. Low-sulphur fuel oil and diesel prices are expected to increase as a result of higher demand from the maritime market. U.S. shale oil producers should benefit from the implementation of IMO 2020 as European and Asian refiners will demand more of their crude to compensate. Given the global nature of the regulation, costs are likely to be largely passed on to the customer as fuel costs also make up between 70% to 80% of total transport costs. However, overall transportation cost increase estimates vary. While IMO 2020 will benefit everyone in the long-term, it might lead to short-term price increases across shipping and transportation as refiners and suppliers bring their production up to speed with regulations.