Less than a year remains until world shipping must conform to the international maritime organisation’s marpol annex v1 regulation, which will reduce sulphur content in marine fuels from the current maximum of 3.5% wt to 0.5% wt
Market participants agree that this material and potentially disruptive change, which comes into effect on 1st January 2020, will have a major impact on the global fuel oil sector. That said, both fuel suppliers and shippers seem to be approaching the deadline with a measure of equanimity!
Experience from the 1st January 2015 regulation which limited the sulphur content of bunker fuels in emission control areas (ECAs) to a maximum of 0.1% wt., showed that most shippers switched to the most readily accessible bunker fuel - marine gas oil - rather than ultra-low sulphur fuel oil made available by some suppliers at certain ports; a similar pattern of response may well emerge post 2020…..
Data on international bunker fuel demand is notoriously unreliable, with the best estimate on global consumption (in 2017) amounting to circa 200 million metric tonnes of fuel oil and 40m Mt of marine gasoil/diesel. At this level, marine bunkers represent about 45% of global fuel oil demand.
Part of the market’s apparent equanimity may be attributable to the concentration of bunkering volumes in six countries - China, The Netherlands, Singapore, UAE, USA and South Korea which together account for almost 60% of global demand, with the 10 largest suppliers covering around 50% of the bunker market.
The impact on global refining
Satisfying the worldwide bunker market’s requirements for a maximum 0.5% wt. sulphur marine fuel has implications for the global refining sector.
Margins at simple refineries, which turn a significant share of crude into 3.5% heavy fuel oil, will be undermined whilst there will be a margins bonus for complex refineries which are able to produce additional marine gasoil and/or max. 0.5% low sulphur fuel oil.
Refinery configuration and operations could require a combination of the following:
Substantial investment in upgrading fuel oil residues to gasoil grades (building secondary units such as crackers, visbreakers and cokers). Refiners will only make such investments in locations with good returns, leaving a patchy availability prospect.
Reduction of residue production through use of a sweeter crude. Such grades generally trade at higher prices than sour, reducing refining margins, and being in even more demand, will be more expensive in 2020.
Residue destruction, stopping the production of fuel oil, again requiring significant investment.
Desulphurisation of residual fuel oil and blending with low sulphur gas oils requires substantial investment. Fuel oil desulphurisation units are more expensive than upgrading units, and presently there is little demand with global capacity estimated to be less than 100,000b/d (6 mln Mt /year).
The impact of additional requirements for gas oil
Additional requirements for gasoil - either directly as a replacement fuel or indirectly as a blend component to produce max. 0.5% sulphur fuel oil - will see an increase in the middle distillates stream, and the displacement of heavy fuel oil as the principal marine fuel. Increasing refinery runs offers a relatively simple and straightforward way of raising middle distillate production, of which gasoil is a major component. However, in the US this could be a challenge as refinery utilisation rates are already above 90%.
There is little firm consensus as to how the 2020 requirement will be met - will shippers opt for marine gasoil/diesel or low sulphur fuel oil or install exhaust scrubbers and continue to burn 3.5% HFO? Current indications suggest that no more than 4% of the 90,000 strong worldwide shipping fleet will have scrubbers installed by 2020.
A recent Bloomberg survey of the main European refiners suggests that both marine gasoil/diesel and low sulphur fuel oil will feature in post 2020 bunker fuels with no specifics on relative quantities/proportions or locations. This raises a number of questions.
What capacity does the worldwide refinery system have to produce a max. 0.5% sulphur fuel oil?
Are refineries capable of replacing worldwide demand for 3.5% sulphur marine fuel oil and, if so how? And, will it be available at all main bunkering locations?
Will there be two price possibilities - at a discount to the prevailing price of marine gasoil or at a premium to the prevailing price of 3.5% sulphur fuel oil?
Will the grade available at one location be compatible with those in other locations?
Fuel compatibility between different ports/bunkering locations - whether for low sulphur fuel oil and/or the grade being available at some locations whilst only marine gas oil/diesel at others - is a potential nightmare scenario for ship owners/managers/charterers.
LNG may offer a longer term option although limited infrastructure will remain a constraint. Worldwide there are currently 117 vessels burning LNG, two thirds are in Europe with 60 in Norway. A further 111 vessels are on order.
Should LNG uptake increase by 70% between now and 2020 this would only displace circa two million Mt of conventional marine fuel.
As yet there are no clear guidelines as to how the new regulation/requirement will be policed/enforced, nor what fines for non-compliance will be imposed; the balance of probability is that enforcement will rest with the individual ports/ bunkering locations.
Clearly there are a number of uncertainties about how the shipping sector and bunker suppliers will meet the significant challenges presented by the new sulphur regulations.
One worst case scenario suggests that worldwide shipping could face additional fuel costs of around $50 billion. Should this materialise, given that the shipping sector carries 90% of world trade by volume, the wider implications cannot be underestimated!