Inside Out
The impact of IMO 2020
AT A TIME WHEN WORLD TRADE ACTIVITY HAS BEEN SUBJECT TO DISRUPTIVE DEVELOPMENTS, THERE ARE
STILL A NUMBER OF IMPONDERABLES IN RELATION TO THE INTRODUCTION OF IMO 2020, WITH BOTH THE
REFINERY AND SHIPPING SECTORS FACING CHALLENGES
In October 2016, the International Maritime Organisation (IMO) confirmed that its Marpol, Annex V1, regulation to reduce the sulphur content of
marine fuels from the existing maximum of 3.5% wt. to 0.5% wt. would take effect from 1st January 2020
Date IMO Marpol Annex VI
1 st January 2020 All marine fuels to be max. 0.50%wt. sulphur content
Emission control areas (ECAs) were
established with tighter sulphur emission limits
than on the open sea – in the Baltic Sea, North
Sea and English Channel as well as in North
America and Caribbean Sea (which also include
limits on NOx and particulates).
IMO 2020 is by far the most impactful
regulation, requiring the displacement
of almost 220 million mt/year global
consumption of max. 3.5 % heavy sulphur fuel
oil (HSFO) used as marine bunkers with max.
0.5% material.
With marine use accounting for almost
half of global HSFO demand, the displacement
impact on the refining sector is also significant
– and will be a challenge!
For shipping, which carries 90% of world
trade by volume, a worst case price differential
scenario has suggested that, globally, the
sector could incur additional fuel costs
amounting to up to $50-$60 bln/ year.
The corollary of this is the potential for
the refining sector, especially those plants
with high conversion facilities, to generate
substantial additional earnings – at least over
the first few years post 2020. The change will
also increase the attraction of running sweet
(low sulphur) crudes and so widen the price
premium over sour grades.
Shippers’ options
•
•
•
Switch to burning appreciably more
expensive, but available at nearly all ports
and of predictable/consistent quality,
marine gasoil (MGO)
Switch to burning the newly available
grade of max 0.5% wt. sulphur fuel
oil (VLSFO), available at many main
ports but likely to be of varying quality/
specifications
Retrofit vessels with exhaust gas scrubbers
and continue to burn max. 3.5% sulphur
wt. (HSFO)
Current indications are that about
4,000 vessels, out of a total of circa 60,000
commercial vessels worldwide that burn HSFO,
will have installed scrubbers by end 2020.
The cost of an individual scrubber can range
between £1 million and almost £5 million –
so, much will depend on the evolving price
differential between 3.5% material and low
sulphur grades. In addition, future, stricter
regulation may render scrubbers no longer fit
for purpose.
Global demand for VLSFO post 2020 is
projected to be of the order of 100 mln mt,
of which about half will comprise a blended
(fuel oil/distillate) product; demand for marine
gasoil is projected to rise by up to 70%, from
circa 55 mln mt to around 90-100 mln mt.
Demand for HSFO is forecast to fall to around
70 mln mt/year.
What are marine bunker suppliers doing?
All major suppliers of marine bunkers have
announced the intention to supply VLSFO
at the main ports, with much work done to
accommodate VLSFO’s storage infrastructure.
What remains unclear is the specification
to which supplies will comply and in particular -
• The viscosity at 50 Degr C which, for
marine fuel oils, can range from 10cst
to 700cst?
• Cold flow properties which are critical
to determine handling and storage
requirements?
Lack of clarity around specifications will
complicate market price determination and
establishment of appropriate benchmark/
reference prices. In early November,
indications in Rotterdam show VLSFO price
quotations at circa $60/mt (10%) below MGO
but almost $300/mt (140%) above 3.5%
HSFO.
Within the refinery, there are several
possible sources of VLSFO – straight from
distillation when combined with vacuum
residue from thermal cracking, from vacuum
distillation, from cracking processes, from
solvent deasphaltisation, etc., and blends
thereof/therefrom.
Until a definitive specification is
established, by far the major challenge arising
from the introduction of IMO 2020 is the
compatibility of fuels between ports. Switching
between marine gasoil and VLSFO is not an
option.
Enforcement
Vessels can choose to ignore the sulphur
limitation and continue to use high sulphur
fuel without scrubbers. The extent of non-
compliance will depend on the low sulphur fuel
availability, the price of alternative options,
the nature and scope of enforcement (and
punishment) as well as uncertainty about
future IMO measures.
Based on current rules, it will be flag and
port states, not the IMO, that will oversee the
control. The charges shall include detention of
a ship and fines. Based on an estimate from
early 2019, non-compliance is expected to be
around 15% and is likely to gradually drop to
zero by 2025.
Ships can also submit a Fuel Oil Non-
Availability Report (FONAR) explaining why
they had to use a non-compliant HSFO and
what steps they took to obtain max. 0.5%
sulphur content fuel. Although FONAR might
appear to be a ‘get-around’ procedure,
in reality the requirements to trigger this
provision are very stringent and potentially
difficult to meet.
It will be a measure of the bunker supply sector
as to how seamless the transition to 0.5%
max. sulphur fuels proves to be. There are
uncertain times ahead, at least in the short
term.
Fuel Oil News | December 2019 23