January 1, 2020 is just seventeen months away when the International Maritime Organization (IMO) will no longer permit use of heavy sulphur marine fuels without treatment of sulphur oxide emissions (SOx). The move to treat SOx from vessel emissions is expected to reduce “global air pollution, human health issues and environmental problems”. Suffice it to say, the rate of SOx scrubber installations appears to be lower than expected.
The IMO anticipates 3,800 vessels will undergo scrubber installation by 2020. But in May 2018, DNV GL reported just 817 vessels ordered or installed with scrubbers. In August 2018, Argus Media reported 842, 306 of which “have the option to install, but without a date specified.” Paltry compared to a total of 60,000 international dry bulk, container, tanker and commercial vessels.
Ships without these scrubbers will be required to use fuels with sulphur content not in excess of 0.5 percent from the current 3.5 percent, and, within Emission Control Areas, mostly in North America and Europe, the limit will be just 0.1 percent.
Two compliance options are available to ship owners: Install scrubbers to continue using high sulphur marine fuels or pay more for middle distillate fuels like marine gasoil (MGO) and diesel that complies with the new regulation.
Of course, neither solution comes without additional cost.
Installation of a scrubber ranges from roughly $1.1 to $5.7 million USD and usually takes between 10-20 days to complete. However, the cost does not account for out-of-service revenue loss or the amount of planning required, which can take up to a year.
Wood Mackenzie estimates that ship owners avoiding scrubbers will see fuel bills increase by as much as 25 percent as fleets are adjusted to more expensive, IMO 2020 compliant marine distillates. Related: China’s Oil Futures Jump To Record High
So why would ship owners risk higher fuel bills? Because additional regulations are on the horizon.
IMO’s Marine Environment Protection Committee recently adopted an initial strategy for tackling greenhouse gas emissions (GHGs), which appears to target carbon intensity and total GHG emissions. One goal presented, courtesy of an American Bureau of Shipping brief, is “to reduce the total annual GHG emissions by at least 50 percent by 2050 compared to 2008 whilst pursuing efforts towards phasing them out.” It appears the IMO is not yet finished with implementing even more stringent emissions regulations.
The concern is that future IMO GHG regulations would make emissions intensive marine fuels obsolete, along with the need for scrubbers. So, what is a ship owner to do? Modifying all, or part, of the fleet to satisfy one regulation may be risky when additional regulations are being developed. Passing on scrubber installation and evolving the business to less emissions intensive fuels may be the preferred path of the majority of ship owners.
Currently, about 4 million barrels per day of high sulphur marine fuels are consumed by the global fleet. But, there are signs that refiners are making changes.
Earlier this month, the US Energy Information Administration and International Enterprise Singapore reported that stockpiles of high sulphur marine fuels are at a 3-decade low in the US, and a 9 year low in Singapore. Since the majority of international vessels won’t have scrubbers before January 1, 2020, low inventories of high sulphur marine fuels indicate that refineries are shifting volumes toward middle distillates.
Middle distillates accounted for roughly 35 million barrels per day of oil consumption in 2017, according to the latest BP Statistical Review, an increase of about 4 million barrels per day from 2007.
The IMO 2020 sulphur regulation is expected to increase demand for distillates, but also demand for low-sulphur crudes like Brent. This presents a challenge. Related: Canada Frees Itself From Saudi Oil Imports
Globally, heavier crudes are in short supply at the moment. Venezuela’s production continues to plummet, Mexico’s production is stagnant, Canadian production is expected to be bottlenecked by pipeline constraints for a few years, and there are suggestions that Saudi Arabia’s spare production capacity may not be able to fill the current gap caused by increasing demand and loss of supply. This is problematic as heavy crudes tend to produce greater middle distillate yields than lighter crudes.
Likewise, Morgan Stanley suggests the IMO 2020 sulphur regulation coupled with economic growth scenarios will make markets for Brent tighter, with annual demand growth at 0.6 million barrels per day. Since new barrels of oil reaching markets are increasingly light (and not heavy), “more shale oil is required to produce a refined product.”
Ship owners will be paying close attention to middle distillate capacity additions and availability of low sulphur crude blends over the next seventeen months. The ‘wait-and-see’ approach of some ship owners may turn into a stampede for scrubbers if IMO 2020 compliant fuels cannot be sufficiently supplied.
By Justin Ziebart for Oilprice.com
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