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Which Refiners Win From Strict Fuel Regulations?


In a little over 16 months, the International Maritime Organization (IMO) will ban the use of untreated marine fuels that emit high levels of sulphur oxide (SOx).  Vessels that emit SOx in excess of 0.5 percent must be treated with special “scrubber” units to reduce environmental impacts. Within Emission Control Zones, mostly North America and Europe, the SOx content must be less than 0.1 percent. 

Although the Exhaust Gas Cleaning System Association (EGCSA) suggests $20 billion will be spent on scrubbers in the next 5 years, there are serious considerations that may dampen those expectations. There are signs refiners are not sitting idle and are opting to produce more IMO 2020 complaint marine fuels.

Of the roughly 60,000 international dry bulk, container, tanker, and commercial vessels that make up international ocean-going commerce, even the most optimistic sources have figures below 1000 that are currently fitted or scheduled to be fitted with scrubbers in the future. Argus media claims that 308 vessels have the option to install but don’t specify a year.

Ship owners must understand which option is least costly to their business model in the coming decades. Scrubbers can cost between $1.1 to $5.7 million USD. This this does not include lost revenue from completing the installation, nor the project planning required, which can take a full year.  On the other hand, paying higher fuel prices, possibly 25 percent more, for IMO 2020 compliant marine fuels may be the best option for some ship owners in the short term, while refiners try to catch up. 

The IMO predicts 3800 vessels to be fitted by 2020, but this figure appears to be quite optimistic. With additional IMO environmental regulations on the horizon, ship owners may be turning away from Green House Gas (GHG) emissions intensive fuels altogether. Denying the inevitable could cost their business long term, so making gradual changes that reduce environmental impacts from their operations may be most practical solution.

Related: Brazil’s Opposing Energy Views

Bunker fuel storage levels are dropping in major refining centres. U.S. bunker fuel levels their lowest levels in 3 decades. For Singapore, it’s 9 years. Norway’s SEB Bank even predicts 3 million of the current 4 million barrels per day of high sulphur marine fuel will “disappear overnight” to follow changes in the marine fuels market.

With IMO 2020 regulations looming, many refineries are retooling and adding capacity to deliver more middle distillates. The International Energy Agency (IEA) anticipates 7 million additional barrels per day of refining capacity to come online by 2023, mostly in the Middle East, China and other emerging Asian markets. Currently, about 16 refinery coking projects are pending or underway in Europe, Russia, Central Asia (Former Soviet Union), and Turkey alone. Turning heavy residual components, like high sulphur marine fuels, into more middle distillates is a key driver.

Refiners also see other options: Idled refining capacity can be restarted in key locations. In July 2018, for example, Arc Light Capital announced a $1.4 billion dollar plan to refurbish and restart the 650,000 barrel per day Limetree Bay refinery at St. Croix, U.S. Virgin Islands. Because the refinery can intake heavy crudes and produce IMO 2020 compliant fuels, the refinery seems well positioned when 1.1.2020 arrives.

However, the Limetree Refinery restart is not intended solely for IMO 2020:  Venezuela’s crude production plummet has impacted supply to PDVSA’s Caribbean refining assets in the region. In June 2018, a mere 29,000 barrels were processed at the 350,000 barrel per day Isla Refinery (whose assets where recently seized by ConocoPhillips). 

But, there are now signs that an economic slowdown may be emerging as refiners transition to IMO 2020 compliant fuels. 

Related: The Next Major Challenge For Norway’s Oil Industry

Middle distillate fuels are a key indicator of global economic health due to use in aircraft, ship, truck, heavy equipment and rail transport. A little over a third, or roughly 35 million barrels per day, of global oil consumption serves markets for middle distillates.

John Kemp recently reported that middle distillate availability in the U.S. appears to be rising faster than normal, perhaps an indicator that trade disputes between the U.S. and other nations is taking a toll on the global economy. There is also a much stronger U.S. dollar due to recent Federal Reserve rate hikes and a strong U.S. economy.  Because the price of oil and the U.S. dollar have risen in tandem, it is a double-whammy for consumers in emerging markets. The price of oil, and subsequently fuel, becomes substantially more expensive. We shall wait and see how this affects availability of IMO 2020 complaint marine fuels.


For refiners, the IM0 2020 regulation is one of several variables that will impact what future fuels will look like and who will buy them. But, there is significant cost to making these changes that does not happen overnight. Building new capacity, retooling or restarting existing capacity, and changing crude and product slates is expensive, time consuming and presents significant risk. But there is an even greater risk in assuming the current slate of refined products, like high sulphur marine fuels, will always have a market.

For refiners of SOx and GHG intensive marine fuels, simply expecting ship owners to install scrubbers is  wishful thinking, especially when the IMO’s goal is “to peak GHG emissions from international shipping as soon as possible and to reduce the total annual GHG emissions by at least 50 percent by 2050 compared to 2008 whilst pursuing efforts towards phasing them out.”

By Justin Ziebart for Oilprice.com

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