The Thunder Rolls - How IMO 2020 May Impact Markets and Challenge Refiners and Shippers

The planned implementation date for IMO 2020 is still more than a year away, but this much already seems clear: even assuming some degree of non-compliance, a combination of fuel-oil blending, crude-slate shifts, refinery upgrades and ship-mounted “scrubbers” won’t be enough to achieve full, Day 1 compliance with the international mandate to slash the shipping sector’s sulfur emissions. Increased global refinery runs would help, but there are limits to what that could do. So, what’s ahead for global crude oil and bunker-fuel markets — and for refiners in the U.S. and elsewhere — in the coming months? Today, we discuss Baker & O’Brien’s analysis of how sharply rising demand for low-sulfur marine fuel might affect crude flows, crude slates and a whole lot more.

As regular readers of RBN’s blogs know, the International Maritime Organization (IMO), a specialized agency of the United Nations, in recent years has been implementing ever-tightening rules to reduce allowable sulfur-oxide emissions from the engines that power the 50,000-plus tankers, dry bulkers, container ships and other commercial vessels plying international waters. In Against the Wind, we explained that in January 2012, the global cap on sulfur content in bunker (marine fuel) was reduced to 3.5% (from the old 4.5%) and that on January 1, 2020 — only 13 months away — it is set to 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.

Our Bad Moon Rising series discussed the three primary options for shipowners to achieve compliance with the IMO 2020 rule: (1) continue burning high-sulfur fuel oil (HSFO; sulfur content up to 3.5%) and install an exhaust gas cleaning system (scrubber) to eliminate most of the sulfur dioxide emissions; (2) switch to marine distillates or low-sulfur bunker blends whose sulfur content is 0.5% or less; or (3) use alternative low-sulfur fuels like liquefied natural gas (LNG) or methanol. Then, most recently, in Won't Be Long, we noted that, with the long-scheduled IMO 2020 Implementation Day on the not-so-distant horizon, many refiners are making plans to adjust their crude slates to optimize their output of low-sulfur distillates and minimize their production of  “bottom-of-the-barrel” residual fuel oil (RFO; also known as resid), the primary source of high-sulfur marine fuel. At the same time, 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 overseas that would no longer be able to get by refining primarily crudes that are more sour. Marine-fuel suppliers are testing various blends to see which might produce IMO 2020-compliant fuel at the lowest cost. As for shipowners, they’re preparing for topsy-turvy bunker prices.

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