Industry gets ready for global sulphur cap

IMO 2020 is the latest regulation by the International Marine Organization (IMO) to reduce sulphur content in fuel oil used on board ships to 0.5% mass by mass (m/m) from 3.5% m/m. When the regulation comes into effect in January 2020, the sulphur oxides (SOx) emissions from ships will be reduced, improving environmental implications as well as the health of those living close to ports and coasts.

In total there are about 60,000 vessels travelling international routes. According to BP, marine ships consumed 3.8m barrels per day (MMbbl/d) of high sulphur fuel oil (HSFO) in 2017, accounting for half of global fuel oil demand. The impact on refineries will depend on the routes chosen to implement the sulphur cap.  

Meeting the new IMO regulations

There are four options available to ship owners for complying with the new sulphur limits in marine fuels:  

1. Fitting marine vessels with exhaust gas cleaning facilities, known as scrubbers, in order to continue burning cheap HSFO from the refineries
   About 60% of new-build ships in South Korea were fitted with scrubbers in 2017 and the market to retrofit existing vessels is expected to grow steadily to 1,550 vessels by 2020. According to Finnish exhaust gas cleaning company, Wärtsilä, a typical scrubber can cost between US$1.23m to US$7.38m and can take up to a year to install, making it a costly and time-consuming option. BP predicts that HSFO use will decline significantly with implementation of IMO 2020, as only limited vessels will be fitted with scrubbers – thus impacting the refineries with highest HSFO production. With time and advances in technology, scrubbers will be an increasingly attractive solution and more vessels will be fitted with them, but the HSFO production from refineries is likely to steadily increase. However, the open-loop scrubbers are not environmentally sustainable, as in order to reduce SOx, seawater is utilised and then discharged into the sea. Singapore, with the world’s busiest port, is planning to prohibit the use of open-loop scrubbers in its waters to protect the marine environment.  
2. Burning liquefied natural gas fuel
   This option is likely to be limited to specialist sectors and geographies as it is costly and complex, restricts vessel cargo capacity and requires specialist operating skills. The International Energy Agency estimates that liquefied natural gas (LNG) will account for only 0.2MMbbl/d of total bunker fuel consumption as part of IMO 2020 due to limited bunkering infrastructure. South Korea plans to financially incentivise LNG-fuelled vessels and to re-orientate its shipbuilding industry towards LNG-fuelled ships. Although this option requires a higher up-front investment, lower LNG prices could make this option more cost effective in the long-term with lower carbon emissions, if methane slip is controlled.  
3. Burning marine gas oil
   Marine gas oil (MGO) is a blend of various distillate components, in particular diesel, with about 60% aromatics. It is expected to account for the majority of fuel use as part of IMO 2020 with no fuel switching. The need for additional lubricants makes MGO the most expensive option. The expected rise in MGO consumption is likely to help refineries boost their margins by increasing production of distillates with maximum sulphur content between 0.1%m/m and 0.5%m/m, as well as increasing production of lubricants. ExxonMobil has recently completed construction of the new delayed coking unit at its refinery in Antwerp with an investment of more than US$1bn in order to convert heavy, higher-sulphur residual oils into MGO. It is also planning to use its proprietary technologies to turn lower value by-products into high-value marine fuels at its Fawley refinery in England. Galp Energia is currently analysing the possible solutions at its Sines refinery in Portugal, either to supply alternative fuels or to upgrade the refining processes for the production of fuel according to the new specifications.  
4. Burning very low sulphur fuel oil
   Very low sulphur fuel oil (VLSFO) is also a blend of various distillate components, either aromatic or paraffinic, with a maximum sulphur content of 0.5% m/m and has been specifically designed to meet IMO regulations. It is expected that half of the current level of HSFO will be re-blended to produce VLSFO. Major companies including BP, Cepsa, Compañía Española de Petróleos, ExxonMobil and Shell are investing heavily to develop their own blend of VLSFO due to financial incentives. According to IHS Markit, BP is developing two possible new VLSFO blends; Cepsa is planning to sell a single 0.5% fuel at ports in Spain priced at about US$120–US$190/tonne above HSFO levels. According to several studies, the wide variety of blends produced by the refineries will make it difficult to ensure fuel compatibility and stability and may lead to technical issues and engine problems.  

What it means for refiners

Given the scale of the change, the oil value chain is likely to see high volatility during 2020

Overall, the IMO 2020 regulation is expected to increase demand for various types of low-sulphur fuel and reduce high-sulphur fuel consumption by ships. As a result, the implementation of IMO 2020 is already having a significant impact on the refining industry. The main challenge for refiners will be finding alternatives for the surplus high-sulphur residue oil. The design and construction of new conversion units for HSFO will take several years with multimillion-dollar investment required. Some refineries have started constructing new conversion units to stay competitive, in particular during the transition period in 2020 when the demand for compliant bunkering fuel is predicted to be high.

The predicted excess supply of HSFO is likely to drive prices down whereas the prices of MGO and new VLSFO will be significantly higher, also impacting prices of fuel used in road transportation. Given the scale of the change, the oil value chain is likely to see high volatility during 2020. Those refineries that can stay flexible and switch between production of low and high-sulphur fuel oil will enjoy the greatest benefits in the long run. 

By Dina Abieva, Senior Downstream Analyst, EIC

Image credit | Richard Gleed