IMO Sulphur Cap 2020: Impact on Cost and Supply of Clean Fuel

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(Image used for representational purposes only)

The global sulphur cap of 0.5% on marine fuels that that will come into effect on January 1, 2020 is already seen as a perfect storm by the oil and shipping industries as it may cause extreme volatility in bunker prices.

The most likely outcome is a sharp rise in costs for shipowners, and — as in any business — these costs will be passed on to the customer. For anyone involved in seaborne coal trade, this would mean dealing with a dramatic, long-term increase in freight rates.

The new sulphur cap of 0.5% is a sharp drop from the current limit of 3.5% and in simple terms it means that come January 2020, all vessels around the globe will have to burn cleaner and more expensive fuels or take other costly measures to comply.

Options Available with Shipowners/Operators

One way that shipowners could go is using special fuel oil blends, which would fall below the 0.5% cap. However, experts are doubtful that the global refining industry will be able to supply these in sufficient volume and variety in time for 2020.

Otherwise the industry could go straight to burning marine gasoil which many expect will be the most popular option, at least at first. However, while MGO is compliant and more readily available, it also much more expensive than conventional IFO 380 bunker fuel.

Of course, there are a few alternatives available to shipowners, such as LNG bunkering or exhaust control systems, also known as scrubbers, but both have serious drawbacks.

(Image Courtesy: Petro bazaar)

Cost Appreciation

Global bunker fuel costs could rise by up to USD 60 billion annually from 2020, in a full compliance scenario, when the International Maritime Organization’s (IMO) 0.5 wt% sulphur cap for bunker fuels kicks in.

Fuel oil, which is high in sulphur content, has traditionally been used by the shipping industry as bunker fuel. In 2017, global demand for high-sulphur fuel oil stood at over 70% of overall bunker fuels.

With the implementation of the IMO regulation in 2020, shippers will have to consider a switch to alternative fuels, such as Ultra Low Sulphur Fuel Oil (ULSFO) or marine gas oil (MGO), or install scrubbers, a system that removes sulphur from exhaust gas emitted by bunkers.

(Image Courtesy: Container Shipping & Trade)

Scrubbers

Installing scrubbers may be an economically attractive option. Although there is an initial investment, shippers can expect a rate of return of between 20% and 50% depending on investment cost, MGO-fuel oil spread and ships’ fuel consumption.  However, the penetration rate for scrubbers could be limited by a number of factors, including access to finance, scrubber manufacturing capacity and dry-dock space.

Demand from the bunker fuels market will total about 5.3 million b/d in 2020, according to Wood Mackenzie forecasts. Based on pure ULSFO refinery streams, available ULSFO volumes in 2020 will total about 1.2 million b/d. This could be boosted by further blending ULSFO with vacuum gas oil (VGO) streams, but VGO is a valuable feedstock for the production of other lighter refinery products, and may not be readily available.

It is likely that MGO will help meet additional demand from the shipping sector. Wood Mackenzie estimates that this will see MGO demand rise by over 1 million b/d in 2020 in our base case outlook. Meeting this demand will require higher crude runs with residue upgrading units, particularly in the US and China, supporting an uplift in refining margins.

(Image Courtesy: Climeon)

Apprehensions Galore

Questions over scrubber uptake levels, how soon and how strict policing of the new rules will be, as well as calls for a phased introduction to the new cap (rather than a “hard” start for all on January 1, 2020) means refiners have little idea what the true demand for MGO in 2020 will be.

What we do know is that any response to a lack of demand will be slow. Investing in technology to convert fuel oil into distillates is not only expensive (USD1 billion+ per refinery) it is also time consuming to implement (5-7 years). Buyers can expect price spikes if there is a shortfall.

MGO and HFO have very different handling characteristics and should only be co-mingled after careful compatibility testing. This means vessels, as well as storage and bunkering infrastructure, will all need investment to accommodate the shift in HFO/MGO demand. While this will be of less concern at major hubs, buyers can expect the supply of compliant product in smaller ports to be decidedly less assured, at least initially.

(References: Platts, Wood Mackenzie, ExxonMobil)

Sea News Feature, June 29