Koninklijke Vereniging - Société Royale



IMO changes to disrupt industries as 2020 nears

This comment piece is attributed to research work undertaken by IHS Markit on the likely repercussions of the IMO’s impending 0.5% sulfur cap.

Both the global refining and shipping industries will experience rapid change and significant cost and operational impacts, according to an IHS Markit report.

Kurt Barrow, vice president of downstream research at IHS Markit along with Sandeep Sayal, IHS Markit senior director of refining and marketing research, are two authors of a report entitled ‘Refining and Shipping Industries Will Scramble to Meet the 2020 IMO Bunker Fuel Rules.’

“The two industries are vastly unprepared,” Sayal said. “Neither has made the necessary investments for compliance, which means that the 2020 implementation date will result in a scramble. Both industries are taking a wait­and-see approach until firm signals are in place by the IMO for compliance with the regulation."

“Shippers will face significant compliance costs by having to upgrade equipment or switch to more expensive fuels,” Barrow said. “Refiners will experience significant price impacts, as they shift production to deliver more lower-sulfur fuels to the market and, at the same time, find a market for the higher-sulfur fuels they produce. Refineries, like ships, do not turn on a dime, so it takes significant investment and market demand to retool a refinery to deliver new supply.”

Several options will be available to meet the new IMO regulations, IHS Markit said. Low-sulfur bunker fuels - primarily for smaller vessels- and LNG - primarily for newbuilds -will be part of the solution.

However, researchers expected that on board ship scrubbers will be the primary compliance path for ships, which could then continue to burn higher-sulfur fuels.

“From the shipping industry point of view, IHS Markit estimates that about 20,000 ships account for around 80% of heavy fuel-oil bunker fuel use,” said Krispen Atkinson, senior consultant, IHS Markit Maritime & Trade research.

“Currently only about 360 ships have installed scrubbers, since there is currently no economic incentive for the ships to add scrubbers. However, based on the price spreads between low-sulfur bunker fuel and high-sulfur fuel oil during the scramble period, it will be economic for many of them to install scrubbers.”

He said that the payback period for installing a scrubber on the largest vessels would be two-to-four years in 2022-2025, and less than one year based on peak-price spreads in 2020.

Overall, the installation of scrubbers and some level of non compliance will not be in time to halt the disruption on refined products markets, IHS Markit said.

The primary challenge with the bunker fuel quality change (which requires sulfur content to be reduced from 3.5% by weight to 0.5% by weight) is the disposal of high-sulfur residual fuel—not the production of low-sulfur bunker fuel.

The largest refinery margin disruption will be significant but fleeting, according to the report, with impacts felt most notably in 2020 and 2021. IHS Markit expected an unprecedented light-heavy price spread during 2020/2021.

As shipowners respond to the large-scrubber investment incentives, high-sulfur bunker fuel demand will rebound, although not to prior 2020 levels.

Due to increasing demand and addition of de-bottle necking capacity for residue conversion, IHS Markit estimated price spreads will moderate within a few years.

Refiners will produce more distillates, as new demand arises for these products during the disrupted years. With HSFO priced at coal-thermal parity and demand for middle distillates (kerosene, jet fuel, diesel) increasing to blend to low-sulfur bunker fuel, refining margins will benefit, but in different ways.

“Refiners of sour-crude will be negatively impacted by the nearly valueless sour-crude residue, while refiners of sweet-crude conversion will experience moderately higher margins, but sweet-crude prices will reflect the low-sulfur residue value,” Barrow said. “It is the high-conversion refiners of sour crude that are expected to have extraordinary margins.”

Highly complex refineries will benefit the most from the IMO specification change, IHS Markit said. These refiners will produce the least amount of residual fuel oil and the highest amount of distillate and gasoline, compared to lower-complexity refiners.

Crude-price relationships, specifically between light-sweet and heavy-sour crude, will widen around the compliance time frame.

Assuming the specification change implements as announced on a global and instantaneous basis with no phase-in timing or quality transition allowances, the margin uplift will be acute in the compliance period of 2020 - 2021.



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