The Thunder Rolls, Part 2 - IMO 2020's Market Impacts and Challenges to Refiners

The planned shift from 3.5%-sulfur marine fuel to fuel with sulfur content of 0.5% or less mandated by IMO 2020 on January 1, 2020, will require a combination of fuel-oil blending, crude-slate changes, refinery upgrades and, potentially, increased refinery runs, not to mention ship-mounted “scrubbers” for those who want to continue burning higher-sulfur bunker. That’s a lot of stars to align, and even then, there’s likely to be at least some degree of non-compliance, at least for a while. 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 continue our analysis of how sharply rising demand for low-sulfur marine fuel might affect crude flows, crude slates and a whole lot more.

For the past few years, the International Maritime Organization (IMO), a specialized agency of the United Nations, has been ratcheting down 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. As we explained in Against the Wind, in January 2012, the global cap on sulfur content in bunker (marine fuel) was reduced to 3.5% (from the old 4.5%), and 13 months from now — on New Year’s Day in 2020 — the cap is set to be reduced to a much stiffer 0.5%. There is an even tougher 0.1%-sulfur limit 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. (Bunker fuel demand for these ECAs comprises 10-15% of total petroleum-derived bunker fuels.) That standard will remain in force within the ECAs when the 0.5% sulfur cap for the rest of the world becomes effective 13 months from now.

There are three primary options for shipowners to achieve compliance with the IMO 2020 rule: (1) continue burning high-sulfur bunker (HSB; 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 (see Bad Moon Rising). As for refiners, they’re doing everything they can 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 (see Won't Be Long).

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