IMO 2020: Low Sulphur Fuel, Scrubbers or LNG, Shipping Industry at Crossroads

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(Image Courtesy: HeavyLift.News)

Beginning 2020, ship-owners will have to comply with a new 0.5% cap on the amount of sulphur in marine fuel, compared with the existing limit of 3.5% that was enforced back in 2012. The immediate impact will be on consumers of High Sulphur Fuel Oil (HSFO), the shippers.

Any vessels failing to comply will face fines, could find their insurance stops being valid and might be declared “unseaworthy” which would bar them from sailing.

Options available:

Ship-owners will face several options: continue to use non-compliant fuel oil and install scrubbers that clean out exhaust fumes including sulphur content, burn LNG or methanol, or use compliant fuels such as Low Sulphur Fuel Oil (LSFO) and marine gasoil.

LNG bunkering has not developed globally and the lack of infrastructure will restrict LNG-based power to ships moving on standard and short-haul routes. Shippers considering a switch to LSFO will not only have to factor in the higher cost of the fuel, but supply restrictions in the short to medium term will create uncertainty around its availability in bunkering ports around the world.

Preparedness of industry:

Shipping industries are ill-prepared, say analysts, with refiners likely to struggle to meet higher demand for cleaner fuel and few ships fitted with equipment to reduce sulphur emissions.

Even in the event that the global market is able to produce sufficient quantities of the fuel, there is no guarantee that machinery on ships designed to run on high viscosity/HSFO can switch to low viscosity/LSFO.

In the short term, the ability of the global refining industry to produce an estimated 8mb/d of compliant bunker fuel for the world’s ships by the IMO target of 2020 will be tested. Depending on assumptions about scrubber uptake, the resulting boost to demand for marine diesel alone is expected to be around 2.1-2.5mb/d.

Consumption scenario:

The shipping industry’s choice of option will directly impact the supply/demand dynamics of the Gulf’s oil industry, and the results will be varied. In 2017, demand for fuel oil averaged 7.5 million barrels per day (mb/d) of which 3.5mb/d was HSFO, used mainly in bunkering.

Going forward, the IMO regulations will reduce demand for HSFO whilst demand for both LSFO and marine diesel will increase. Other things being equal, the differential between sour-sweet crudes, HSFO-LSFO and distillate-HSFO could widen.

The global shipping fleet now consumes about 4 million barrels per day (bpd) of high sulphur fuel oil, but about 3 million bpd of that demand will “disappear overnight”, according to the average market forecast calculated by Norway’s SEB Bank.

Most demand is expected to shift to marine gasoil, a lower sulphur distillate fuel.

Morgan Stanley predicts this will generate at least 1.5 million bpd in extra demand for distillate in the next three years, pushing up total distillate demand growth for the period to 3.2 million bpd.

Iraq and Iran scenario:

For Iraq and Iran, on the other hand, the picture is gloomy. Already struggling to meet domestic demand, the damage to Iraq’s Beiji refinery drastically reduced the country’s capacity. In addition, the refining sector as a whole is not as sophisticated as those in the GCC, and their ability to produce low sulphur fuel is questionable. Worse, with lower demand for HSFO, Iraq will struggle to get rid of the fuel, whilst the domestic power sector is not large enough to absorb higher quantities of HSFO, especially given that the majority of new power generation will be gas-fired plants.

As for Iran, whilst fuel oil consumption has been increasing in the region driven predominantly by Saudi Arabia, and demand in the region more generally has been relatively stable, only Iran is exhibiting a fall in fuel oil consumption, declining from 382kb/d in 2014 to 214kb/d in 2017. This means that it will struggle to find a market for its excess HFSO, a situation made worse by the re-imposition of US sanctions; whilst its refining sector is not sufficiently sophisticated to produce LFSO, nor is there sufficient demand from the power sector.

Winners and Losers:

Uncertainty around the availability of LSFO, HSFO prices and scrubbing technology makes it difficult for ship-owners to take a decision on what outlet to adopt for IMO compliance. What is more clear is that demand for HSFO is likely to decline, whilst demand for compliant fuels such as marine diesel and LSFO will increase. This means that refineries that have the means to reduce fuel oil production, or that are geared to producing middle-distillates will benefit from the additional demand. By contrast, countries without this capability, and with fewer alternative sources of demand, such as Iran and Iraq, will not be able to absorb excess supplies of fuel oil.

Impact of IMO 2020 on Shippers

Many vessels may try to dodge the new rules, unable to afford the cost of scrubbers and reluctant to pay the premium for cleaner fuel. The IMO says it will ban ships that do not have scrubbers from carrying any fuel oil, making it easier to catch cheaters.

Oil major BP expects 10 per cent of ships could cheat, while consultancy Wood Mackenzie expects a figure of about 30 per cent when the rules launch in 2020. Consultant Citac says industry polls indicate cheating could be in a range of 25 to 40 per cent.

The global refining industry needs to process an extra 2.5 million bpd of crude to make distillates for cleaner fuel, says Robert Herman, refining executive at Phillips 66. Many traders do not expect a new lease of life for the LSFO market until mid-2019.

Some refiners have invested in cutting sulphur in their output, but fitting hydrocracker or coker unit so that a refinery produces more distillates with lower sulphur content while reducing fuel oil output can cost about USD 1 billion, analysts say. Small refineries, unable to afford the upgrade, may find they are churning out fuel oil without finding buyers.

(References: Trade Arabia, Platts, gCaptain)

Sea News Feature, October 16

Baibhav Mishra
Author: Baibhav Mishra

Associate Editor, Sea News

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