IMO Sulphur crackdown regulations!! What it mean for Oil Refiners and Shipping companies
New maritime rules from 2020 means world’s refiners needs to find way to get rid of their dirty by-products. Global shipping industry to limit its consumption of sulphur, a common impurity in crude that can cause respiratory problems and acid rain when it’s burned.
Fuel oil, which is high in sulphur content, has traditionally been used by the shipping industry as bunker fuel. Rules on sulphur content coming into force at the start of 2020 will make the bunker fuel used in ships – traditionally the cheapest, dirtiest fraction from refining – cleaner than the median barrel of crude oil produced worldwide.
The current global limit for sulphur content of ships’ fuel oil is 3.50% m/m (mass by mass). IMO has set a global limit for sulphur in fuel oil used on board ships of 0.50% m/m (mass by mass) from 1 January 2020. The regulations for the Prevention of Air Pollution from Ships, seek to control airborne emissions from ships, nitrogen oxides, ozone depleting substances, volatile organic compounds and shipboard incineration and their contribution to local and global air pollution, human health issues and environmental problems.
Concerns with Oil Refiners
The International Energy Agency (IEA) mentioned that by 2020 the price of fuel oil is expected to drop in tandem with demand. This will in turn put pressure on (fuel oil) cracks and simple refineries with high fuel oil yields. On the other hand, it could become more attractive to modern, complex refineries who have the secondary units capable of upgrading fuel oil into higher value lighter products.
The IEA stated: “Global refiners will be put under enormous strain by the shifting product slate. If refiners ran at similar utilisation rates to today, they would be unlikely to be able to produce the required volumes of gas oil. If they increased throughputs to produce the required gas oil volumes, margins would be adversely affected by the law of diminishing returns. In order to increase gas oil output, less valuable products at the top and bottom of the barrel would be produced in tandem, which would likely see cracks for these products weaken and weigh margins down.”
Fundamentally, the rule threatens to leave refiners with roughly 2 million barrels a day of unmarketable fuel oil, while shippers would be short the same amount of compliant low-sulfur fuel. The worldwide marine fuel market of over 4 million barrels a day accounts for more than 4% of overall global oil demand – 75% of which is now comprised of high-sulfur fuel oil – the 3.5% sulfur fuel the IMO is seeking to address. The rest is marine gasoil and low-sulfur fuel diesel, both of which comply with the new IMO regulations.
Global refiners need to find another way to get rid of their repellant by-products. In general, oil majors and refiners are looking to support the shift in bunker fuel demand arising from the new sulphur regulation in various ways.
Firstly, refiners can increase ULSFO production by extracting low sulphur fuel oil streams that are currently blended into LSFO or HSFO to be made available to the market as ULSFO. ExxonMobil, for instance, has launched a relatively new product, Heavy Distillate Marine ECA 50 (HDME 50), that can be handled onboard like HFO and has only 0.1% sulphur content. Refineries can opt to remove the sulphur altogether and turn it into sulphuric acid, a prized raw material for the fertilizer industry and chemicals manufacturing that can even be fed back into refineries to produce ingredients for high-octane petrol. Still, the economics of that look distinctly shaky. Building sulphur plants is costly and takes up a lot of room, at a time when refineries aren’t looking to splurge on capex, according to Sushant Gupta, an analyst with consultancy Wood Mackenzie. Furthermore, the sulphur market is facing a surplus of about 3 million tonnes this year that could grow into a “sustained period of depression” after that, according to consultancy Integer Research, reducing the return from selling the element.
Secondly, refiners in general have an issue of managing their surplus residue. In some instances, exploring residue destruction investments may make sense, but this option comes with higher risk on returns of investment, as gas oil demand is predicated on shippers’ uptake of alternative options such as scrubber installation and LNG bunkering. Some refiners should see better profit margins as incremental demand for MGO rises, pushing up its price. Higher refining runs, required to meet additional MGO demand, could potentially push global gasoline market into surplus weakening gasoline prices. This could mean that the gasoline pain for some refiners could be more acute than the impact of weaker HSFO prices. Overall, we expect a material impact on refining economics post IMO and refiners must ensure they have a robust IMO strategy in place.
Thirdly, refiners can raise LNG bunker supplies in major bunkering hubs. In Singapore, Shell and ExxonMobil are working with Maritime and Port Authority of Singapore (MPA) to supply LNG as fuel. In Rotterdam, Shell this year launched a LNG bunker tanker to supply LNG from Rotterdam’s Gate Terminal.
Refiners are used to offloading their bottom-of-the-barrel fractions at a loss to compensate for the more profitable volatile products like petrol, diesel and naphtha, but the balance of that compromise is set to worsen in future. The cheap and cheerless path of pumping the oil industry’s impurities into the skies over India and Earth’s oceans is gradually disappearing.
Concerns with Shipping Industry perspective
Marpol Annex VI started with a global sulphur cap of 4.5% before it was lowered to 3.5% in 2012. The steep reduction to a global 0.5% sulphur cap by 2020 was decided in October 2016 by the IMO Marine Environment Protection Committee (MEPC).
There are three options set out in this paper that shipowners can consider complying with the IMO regulations.
First, shipowners can install exhaust gas cleaning systems on their ships. Which is known as “Scrubbers”, it removes sulphur from exhaust gas emitted by bunkers. The use of exhaust gas cleaning systems, also known as scrubbers, is a commercially available option for the shipping industry. Ships installed with scrubbers mean they can continue to burn high-sulphur bunker fuel from 2020 and comply with the 0.5% sulphur limit. The technology works by spraying alkaline water into a vessel’s exhaust to remove sulphur and other unwanted chemicals, either via open-loop system, closed-loop system, or hybrid (open-and-closed loop) system. The use of scrubbers will enable the eradication of almost all the harmful emissions from ships, with major scrubber manufacturers like Alfa Laval, DuPont and Wartsila having systems that eliminate 97-98% of sulphur oxides (SOx) and 70-80% of particulate matter (PM), which makes up most of the visible smoke. Despite an initial hefty investment ranging from $5m to $10m per vessel, depending on the number and capacity of the main engines, installing scrubbers can potentially be an economically attractive option. Shipowners can expect a high rate of return of between 20-50% depending on investment cost, MGO-HFO price spread and ships’ fuel consumption. However, the penetration rate for scrubbers could be limited by several factors, including access to finance, scrubber manufacturing capacity and dry-dock space.
Second, owners can simply buy compliant fuels at higher costs such as Ultra Low Sulphur Fuel Oil (ULSFO). Way for ships is to simply switch to burning MGO or ULSFO to meet IMO’s sulphur limits. The operators will have to either absorb the cost of the higher fuels or pass it on to their customers whenever possible. The demand for fuel oil in Asia has already been steadily declining in recent years, falling by about 20% from 2011 to 2016. The HFO imports into Asia – mainly Singapore, China and Japan – averaged about 6.92m tonnes each month last year, down from the monthly average of about 8.5m tonnes between 2011 and 2012. Based on pure ULSFO refinery streams, available ULSFO volumes in 2020 will total about 1.2 million b/d. It is likely that MGO will help meet additional demand from the shipping sector. Meeting this demand will require higher crude runs with residue upgrading units, particularly in the US and China, supporting an uplift in refining margins. This could be boosted by further blending ULSFO with vacuum gas oil (VGO) streams, but VGO is a valuable feedstock for the production of other lighter refinery products, and may not be readily available.
Third, ships can run on the clean gas LNG as fuel. The viability for ships to burn LNG as fuel depends very much on the availability of a worldwide network of LNG bunkering infrastructure, which to-date is severely underdeveloped. Global LNG bunkering infrastructure is considered to be at an infant stage today, as most LNG-powered ships are mainly coastal vessels limited to European waters, and major bunkering ports in the world have yet to develop full-scale LNG bunkering facilities. There continues to be interest in some countries such as Singapore, Japan and the Netherlands in pursuing the development of LNG bunkering infrastructure. But there has not been any indication that developments will blossom to a global scale to offer any real change for LNG to become a viable option come 2020.
Demand from the bunker fuels market will total about 5.3 million b/d in 2020, While there is a risk that this fuel specification change could be disruptive, the anticipated market reaction could benefit refiners with deep conversion/distillate oriented configurations.
It also provides refiners, particularly in the US and China, the opportunity to capture the value of their ULSFO component streams and increase their share of the global bunker market.
We also expect a shift in bunkering locations based on compliant fuels availability. Singapore, for example, could potentially lose some of its market share for bunker fuels to China as shippers look for alternative locations with a surplus of compliant fuels. China, with ample MGO supply, is well positioned to attract shippers.
New greenfield upgrading investments from refiners are unlikely to be purely driven by IMO regulation, and there is a need to look at longer-term rationale and strategic fit of these projects. Structural shifts in the fuel oil and gasoil markets may result in better economics, but that needs to be re-evaluated. For refiners choosing not to invest, the focus should be on infrastructure to capture the opportunity from their existing configuration and internal streams.
If refiners indeed move to significantly restrict the sale of HFO as they see higher margins from selling MGO, ships fitted with scrubbers and potential scrubber users would be left wondering if there will be enough supply of HFO to use. The surge in use of MGO will then lead to the question of what how will refiners deal with all the surplus of HFO which is a natural by-product of the cracking process.
Refiners are certainly not taking the plunge first by making huge investment costs to change production configurations, while most shipowners are adopting a wait-and-see approach as they consider the options before them. It is a dilemma for the parties involved. All the different options will be assessed by all the involved parties and they will have to choose one that they consider the most cost effective, suitable for their operations, and commercially sustainable for the long term.