Won't Be Long - How Crude Refiners, Midstreamers and Shipping Companies Are Prepping for IMO 2020

The countdown clock to January 1, 2020 — Implementation Day for the IMO 2020 rule on low-sulfur marine fuel — is ticking, and while that date may still seem far away, it is decidedly not. The impending switch from 3.5%-sulfur fuel oil to marine fuel with sulfur content no higher than 0.5% will affect a broad swath of the energy sector worldwide, not to mention consumers of diesel and other low-sulfur distillates that will be in much higher demand by this time next year as the run-up to IMO 2020 kicks into high gear. Already, complex and simple refineries alike are evaluating changes to their crude slates and planning to add equipment that will enable them to produce more high-value distillate and less “bottom-of-the-barrel” residual fuel oil, the source of high-sulfur marine fuel. U.S. midstream companies are gearing up to export more light, sweet crude from the Permian and other shale and tight-oil plays to simple refineries that will no longer be able to get by refining heavy, sour crudes. Marine-fuel suppliers are testing various blends to see which might produce IMO 2020-compliant fuel at the lowest cost. As for ship owners, they’re preparing for topsy-turvy fuel prices in late 2019 and 2020 as this wrenching change plays out. Today, we consider key market participants’ latest thinking on the likely effects of the new rule for low-sulfur marine fuel.

If your doctor told you that on September 1 you needed to cut 25 calories out of your daily diet, and that you’d have to continue ratcheting back on your consumption by another 25 calories each month thereafter until the end of next year, you’d tell him or her, “Yeah, I can do that. I won’t like it, but I can if I have to.” By New Year’s Eve 2019 — 16-plus months from now — you’d be taking in 400 fewer calories a day (the equivalent of a slice of apple pie) and you’d have lost almost 30 pounds! (We did the math.) But say your doctor told you that starting tomorrow morning, you had to stop eating meat, carbs and sugar — and cut out the alcohol too. Plus, start your day with 45 minutes of yoga and ride a bike to and from the office. You’d give your doc an entirely different answer, one that may not be printable in a family-friendly blog like ours.

The shipping industry is in for a similarly brutal shock to the system with IMO 2020, the nickname for an International Maritime Organization’s (IMO) mandate — approved last October — that slashes allowable sulfur-dioxide emissions from ocean-going ships on January 1, 2020. Because of the rule’s potentially far-reaching effects on everything from global demand for West Texas Intermediate and Brent to the price of diesel at the pump, we’ve blogged about it often. As we said in Against the Wind, the IMO — a specialized agency of the United Nations — in recent years has been implementing rules to reduce the allowable sulfur-oxide emissions from the engines that power these ships. In January 2012, the global cap on sulfur content in marine fuel was reduced to 3.5% (from the old 4.5%) and on January 1, 2020 — only 502 days from now — it will be reduced to a much stiffer 0.5%. There are even tougher standards already in place in the IMO’s Emission Control Areas (ECAs) for sulfur, which include Europe’s Baltic and North seas and areas within 200 nautical miles of the U.S. and Canadian coasts. In July 2010, the ECA sulfur limit in marine fuel was reduced to 1% (from the old 1.5%), and in January 2015, the limit was ratcheted down again to a very stringent 0.1% — a standard that will remain in force within the ECAs when the 0.5% sulfur cap for the rest of the world becomes effective on New Year’s Day in 2020.