Thursday, March 21, 2019
The refining and shipping industries are ill-prepared for a massive change in fuel regulation set to go into effect next year, writes IHS Markit. The resulting market impacts will be major, costly, and far-reaching, says a new report from the business information and intelligence provider.
The impending regulation by the International Maritime Organization (IMO), a sanctioning body for the world’s shipping fleet, aims to significantly reduce the amount of sulfur in bunker fuels that are relied upon for commercial shipping. Collectively, these ships burn more than 3 MMbbld of residual fueloil, which has a sulfur content that exceeds levels found in automotive gasoline by more than 1000 times.
Burning fuels with a higher sulfur content leads to a greater level of toxic emissions, including sulfur oxides, which are considered a threat to the environment and human health. IHS Markit expects the majority of the demand for high-sulfur residual fueloil will switch to demand for the new lower-sulfur fuel in 2020.
First announced by IMO in 2008, the organization confirmed in 2016 that global refiners and shippers would have to comply with the new environmental regulation by 2020—five years earlier than many anticipated, which sent tidal waves through two industries that typi- cally take many years to adapt to such significant change that requires tens of billions in investment.
The new report, Navigating Choppy Waters: Marine Bunker Fuel in a Low-Sulfur, Low-Carbon World, says compliance with the new regulation remains the greatest uncertainty and there is concern whether sufficient sup- plies of compliant fuels will be available in the world’s many ports. The result will be higher freight costs for most cargos, including electronics, autos, fuels, petrochemicals, and even cruise ship fares. Ultimately, these costs will be passed to consumers, IHS Markit says.
“Shippers will face significant compliance costs to either upgrade equipment or switch to more expensive, cleaner fuels,” said Spencer Welch, an executive director at IHS Markit and manager of the study. “Refiners—and fuel buyers—will experience significant price impacts as they shift production to deliver greater volumes of very- low-sulfur fueloil (VLSFO) and find a market for their less valuable fuels.”
“The IMO is taking positive action to address shipping pollution, but the rapid pace of the implementation of this new regulation is making it very challenging for the refining and shipping industries to respond,” said Sandeep Sayal, vice president of downstream research at IHS Markit. “The global scope, the significant uncertainty in fuel formulations, and the volume of new lower-sulfur fuel demand are causing a scramble.”
IMO has signaled it plans to take enforcement of the new regulation—which goes into effect Jan. 1, 2020— seriously. Noncompliant vessels could suffer loss of charter to sail, and major insurance companies have also indicated compliance assurance will be essential to vessel insurability. Shippers have several options for compliance, including low-sulfur bunker fuels. However, IHS Markit researchers expect onboard ship scrubbers, devices that clear harmful pollutants from exhaust gas, will be the primary compliance path for larger ships, which could then continue to burn cheaper, higher-sulfur fuels. However, until those scrubbers can be installed—which for many ships will not occur before the IMO January 2020 dead- line—many ships will have to burn the more expensive, IMO-compliant VLSFO fuels.
“We estimate between 5000 and 10,000 ships will undergo scrubber installation at a cost of between $2 million and $7 million each, plus increased operations costs,” said Krispen Atkinson, senior consultant, IHS Markit maritime and trade research. “To date, the industry has spent or committed more than $6.6 billion to fit more than 2000 ships with scrubbers.”
Other ships will convert to compliant fuels with sulfur levels below 0.5%, but those ship owners will see fuel costs escalate significantly owing to the higher-quality fuel required and may face fuel compatibility issues, IHS Markit said. Each refinery complex could produce differ- ent, although compliant, regional formulations to meet the new fuel standard based on available crude oils, product slates, costs, and supply-chain logistics, presenting operational and continuity challenges for shippers.
Refiners will produce more distillates—higher- value components derived from crude—as new demand arises, with about half of the new compliant fuel coming from non-distillate sources within the refinery. But the remaining 50% will need to be sourced from refinery distillates. However, these same distillates are also needed for other growing diesel markets. As a result, refiners will likely have to make significant operational changes and ultimately invest billions to shift their existing product slates, increasing costs and distillate prices relative to crude prices.
“Highly complex refineries, which have the flexibility to convert various grades of crude oil into a wide range of refined products to meet market demand will benefit most from the IMO-specification change,” Welch said. “Highly complex refiners produce the least amount of residual fueloil and the highest amount of distillate and gasoline compared to lower-complexity refiners. Less integrated and less complex refiners will likely experience the greatest market risk.”
(SOURCE: The Weekly Propane Newsletter, March 18, 2019)
The impending regulation by the International Maritime Organization (IMO), a sanctioning body for the world’s shipping fleet, aims to significantly reduce the amount of sulfur in bunker fuels that are relied upon for commercial shipping. Collectively, these ships burn more than 3 MMbbld of residual fueloil, which has a sulfur content that exceeds levels found in automotive gasoline by more than 1000 times.
Burning fuels with a higher sulfur content leads to a greater level of toxic emissions, including sulfur oxides, which are considered a threat to the environment and human health. IHS Markit expects the majority of the demand for high-sulfur residual fueloil will switch to demand for the new lower-sulfur fuel in 2020.
First announced by IMO in 2008, the organization confirmed in 2016 that global refiners and shippers would have to comply with the new environmental regulation by 2020—five years earlier than many anticipated, which sent tidal waves through two industries that typi- cally take many years to adapt to such significant change that requires tens of billions in investment.
The new report, Navigating Choppy Waters: Marine Bunker Fuel in a Low-Sulfur, Low-Carbon World, says compliance with the new regulation remains the greatest uncertainty and there is concern whether sufficient sup- plies of compliant fuels will be available in the world’s many ports. The result will be higher freight costs for most cargos, including electronics, autos, fuels, petrochemicals, and even cruise ship fares. Ultimately, these costs will be passed to consumers, IHS Markit says.
“Shippers will face significant compliance costs to either upgrade equipment or switch to more expensive, cleaner fuels,” said Spencer Welch, an executive director at IHS Markit and manager of the study. “Refiners—and fuel buyers—will experience significant price impacts as they shift production to deliver greater volumes of very- low-sulfur fueloil (VLSFO) and find a market for their less valuable fuels.”
“The IMO is taking positive action to address shipping pollution, but the rapid pace of the implementation of this new regulation is making it very challenging for the refining and shipping industries to respond,” said Sandeep Sayal, vice president of downstream research at IHS Markit. “The global scope, the significant uncertainty in fuel formulations, and the volume of new lower-sulfur fuel demand are causing a scramble.”
IMO has signaled it plans to take enforcement of the new regulation—which goes into effect Jan. 1, 2020— seriously. Noncompliant vessels could suffer loss of charter to sail, and major insurance companies have also indicated compliance assurance will be essential to vessel insurability. Shippers have several options for compliance, including low-sulfur bunker fuels. However, IHS Markit researchers expect onboard ship scrubbers, devices that clear harmful pollutants from exhaust gas, will be the primary compliance path for larger ships, which could then continue to burn cheaper, higher-sulfur fuels. However, until those scrubbers can be installed—which for many ships will not occur before the IMO January 2020 dead- line—many ships will have to burn the more expensive, IMO-compliant VLSFO fuels.
“We estimate between 5000 and 10,000 ships will undergo scrubber installation at a cost of between $2 million and $7 million each, plus increased operations costs,” said Krispen Atkinson, senior consultant, IHS Markit maritime and trade research. “To date, the industry has spent or committed more than $6.6 billion to fit more than 2000 ships with scrubbers.”
Other ships will convert to compliant fuels with sulfur levels below 0.5%, but those ship owners will see fuel costs escalate significantly owing to the higher-quality fuel required and may face fuel compatibility issues, IHS Markit said. Each refinery complex could produce differ- ent, although compliant, regional formulations to meet the new fuel standard based on available crude oils, product slates, costs, and supply-chain logistics, presenting operational and continuity challenges for shippers.
Refiners will produce more distillates—higher- value components derived from crude—as new demand arises, with about half of the new compliant fuel coming from non-distillate sources within the refinery. But the remaining 50% will need to be sourced from refinery distillates. However, these same distillates are also needed for other growing diesel markets. As a result, refiners will likely have to make significant operational changes and ultimately invest billions to shift their existing product slates, increasing costs and distillate prices relative to crude prices.
“Highly complex refineries, which have the flexibility to convert various grades of crude oil into a wide range of refined products to meet market demand will benefit most from the IMO-specification change,” Welch said. “Highly complex refiners produce the least amount of residual fueloil and the highest amount of distillate and gasoline compared to lower-complexity refiners. Less integrated and less complex refiners will likely experience the greatest market risk.”
(SOURCE: The Weekly Propane Newsletter, March 18, 2019)
