Analysis
IMO regulations and the push for
cleaner, lower carbon transport fuels
“WITH LESS THAN A YEAR TO RUN UNTIL THE NEW INTERNATIONAL MARITIME ORGANISATION
(IMO) SULPHUR REGULATIONS COME INTO FORCE IN JANUARY 2020, MOST REFINERS AND
SHIPOWNERS HAVE TAKEN THEIR BIG DECISIONS AND ARE NOW WAITING TO SEE HOW THE
MARKET RESPONDS,” SAYS STEPHEN GEORGE, CHIEF ECONOMIST – EMEA AND APAC AT KBC
Supply chain destocking from
mid-2019
While shipowners do not need to
be in compliance until January,
the supply chain will need to start
destocking from around mid-2019
to ensure stocks of high sulphur
material are sold off, lines and
tanks are clean and new compliant
fuel oil and middle distillates are in
place, ready to start supplying in
the fourth quarter.
As these changes happen,
price relationships between high
sulphur residue and compliant
grades will start to widen out.
Futures market forward curves
currently suggest a spread
between high sulphur fuel oil and
0.1% sulphur gasoil of around
$350 per tonne.
The second half of 2018
saw a big push by shipowners
to fit stack emissions scrubbers
on their biggest ships, which are
the largest consumers of fuel
oil. Scrubbers will allow them to
continue to burn higher sulphur
bunker, which will be considerably
cheaper than compliant fuel.
The choice to scrub or to burn
compliant fuel depends on
payback economics for scrubber
projects, but the bottom line looks
good for bigger ships, which can
consume up to 100 tonnes of
bunker fuel per day at sea.
A powerful margin incentive
for refineries?
The refining industry has four
principal pathways for coping with
IMO 2020: residue destruction to
exit the fuel oil market completely;
residue desulphurisation to
produce compliant bunker;
changing the feed slate for
sweeter or lighter crudes to avoid
making residue; and “doing
nothing”, hoping to ride out the
turbulent period until the market
re-equilibrates. How long that
will take depends on the level of
initial compliance, the number
of scrubbers, any demand-side
impact caused by the price
dislocation and a number of other
factors. We expect equilibrium
could be restored within about
two years, with a spread between
compliant fuel oil and 3.5%
sulphur bunker of perhaps $100-
120 per tonne.
“SWEET CRUDES
WILL BECOME
EXPENSIVE; SOUR
CRUDES MUCH
CHEAPER”
IMO 2020 will create a
powerful margin incentive for
refiners. The price shift between
residue and distillates could see
some refiners boost their margins
by $5 per barrel or more, though
this is likely to be volatile and
to moderate as the market re-
equilibrates. Sweet crudes will
become expensive; sour crudes
much cheaper. Compliant fuel oil
will price closer to distillate at first,
while high sulphur crudes and their
residues will lose value, creating
strong incentives for full-upgrading
Stephen George
refineries to boost their margins by
filling up their coking and residue
hydrocracking units.
Some refineries will specialise
on sweet crude operations
to produce compliant bunker
blendstock. Refiners who have
recently invested in residue
destruction configurations,
including a number in Northern
Europe and, many new grassroots
facilities in the Middle East and
Asia, are effectively future-
proofing their assets, exiting
the fuel oil business, which will
continue to evolve away from
higher sulphur products as
tightening emissions regulation
and the energy transition continue
the push to cleaner, lower carbon
transport fuels.”
Fuel Oil News | March 2019 11