In just eight months, the International Marine Organisation (IMO) 2020 regulation will cut the maximum sulphur content in marine fuels worldwide, in an attempt to clean up the shipping industry. The new regulation will impact all levels of the market across the globe, from oil drilling operations in Nigeria to refineries in China.
The IMO has agreed to limit the sulphur content in all marine fuels to 0.5%, a decrease of 3.0% from the current level. This is a major issue for refiners, who historically have used the shipping industry as means of getting rid of high-sulphur material without the cost of further processing.
Some larger operations may have the capacity to remove this excess sulphur, whereas smaller scale refiners will be forced to use a lower-sulphur feedstock, which unfortunately is already being used for fuel in other sectors.
What options do shippers have for alternative fuels?
The need for lower-sulphur refinery input will filter into the oil market, increasing demand for sweeter crude oil grades containing less sulphur. This could prop up prices of benchmark grades such as Brent and WTI. Regions, such as the Americas, which produce sweeter crude are in a better position to produce low-sulphur fuels. This will push them into greater positions of strategic strength.
Another option for shippers is the use of gasoil as fuel. The conversion process is relatively cheap and doesn’t require a long period of time in the shipyard. Unfortunately, there is a catch: gasoil can be blended into diesel, making it a far more valuable product than alternative fuels. Despite this, ICIS sees this as being one of the most viable options for shippers, accounting for over half the bunker fuel mix in 2020.
Alternatively, at a high upfront cost shippers could install exhaust scrubbing facilities which remove sulphur from engine fumes, making vessels compliant with the new regulation. This will allow the continued use of cheap high-sulphur fuel oil (HSFO). Ship owners would lose time at dock, with Wartsila saying fitting would take 1-3 weeks. Some countries, as shown in the infographic, have already proposed restrictions to this technology as the treated wash water is then discharged back into the ocean.
The idea of using liquefied natural gas (LNG) is also gaining traction. However, similar to scrubber installation, shipowners will require a large amount of capital expenditure. This is why ICIS expects most shippers to transition to gasoil in the short term before seeking alternative technologies as the industry adapts to IMO 2020.
The regulation could also squeeze the oil products market. Changes in price for fuels or refinery output could have a knock-on effect on base oils prices, margins, and financial viability. In future, base oils could face more competition from low-sulphur fuels such as diesel for the use of vacuum gasoil (VGO) feedstock.
Our latest infographic highlights the main areas of the value chain affected by the IMO 2020 regulation. Download your free copy now.
Article by Richard Price