Refiners set to struggle with low-sulphur bunker fuel supply
The shipping industry could be forgiven for thinking there are no easy compliance options for the International Maritime Organization’s (IMO’s) 2020 sulphur cap. Owners have complained that scrubbers are a new, expensive, and dirty technology, although they may now be having a last-minute change of heart. By contrast, burning low-sulphur fuels or marine gasoil (MGO) – already standard in emission control areas (ECAs) – has appeared to be a simpler solution.
Yet with less than 18 months to go until the regulations come into force, concern is mounting that the refinery industry will produce enough low-sulphur fuels to meet demand, especially at an affordable price.
“The short answer is that supply won’t meet demand,” said Martin Tallett, president of energy consultancy Ensys and chief author of an unofficial study on fuel availability that was submitted to the IMO to inform its decision over the sulphur cap in 2016.
Ensys believes that the ‘switch volume’ – the amount of product that would need to change from high to low sulphur to enable 100% compliance to take place – stands at about 4 million bpd.
“We compared that with what we believe the refining industry can supply,” Tallett told Fairplay. “We reckon the industry will be very stretched to supply three out of those four million barrels.”
It is a concern echoed by the International Energy Agency (IEA), which has estimated a switch volume of 3–4 million bpd to MGO. It warns that although in the context of a 28 million bpd global diesel market, the supply can be found by outbidding other users – and therefore will come at a price – producing more diesel overall would be challenging.
“Refiners can’t meet the extra demand as the crude supply is only just enough to meet the diesel that is currently produced,” Kristine Petrosyan, senior energy analyst at the IEA, told Fairplay. “There is no crude overhang.”
Producing new 0.5% sulphur blends by desulphurising to upgrade fuel oil would also be difficult. “The costs mean it would essentially be the same price as to produce diesel,” she said.
The 0.5% sulphur blends are expected to be a combination of residual product, such as fuel oil and distillates like diesel.
Although refiners have held back from large-scale expansions specifically to cater for the sulphur cap, Ronan Graham, an oil market analyst at IHS Markit, pointed out that they are making low-capital tweaks and de-bottlenecking to boost diesel capacity, as well as preparing to expand crude runs.
“We are expecting reasonable quantities of fuel because everyone is looking at how they can optimise the refining processes to maximise gasoil and distillates,” he told Fairplay.
Coker units, for example, which can turn residual fuels such as HFO into higher-value products such as diesel are currently under-utilised, but as 2020 approaches they will be ramped up to take advantage of stronger margins.
A change in the types of crude hitting the market could also make it easier to produce low-sulphur fuels. “There has been a lot more US oil – surpassing expectations – and this is light US crude, which will make it easier for refiners to process and produce compliant fuels,” Graham said.
Yet refiners have so far provided little information about their plans to supply 0.5% sulphur fuels.
ExxonMobil has said it will supply them at ports in northwest Europe, the Mediterranean, and Singapore. It is also planning an upgrade to produce 0.5% fuel at its Jurong refinery in Singapore, but this will not be completed until after 2020. BP has announced two “possible” new blends, although details are vague. Cepsa will sell a single 0.5% fuel at Spanish ports and believes 0.5% blends will be priced at about USD120–190/tonne above HFO. Shell plans to announce its strategy in October, while Total has said it is “too early for us to comment on this topic. We are actively working on it”.
The concerns over diesel supply stand in contrast with the IMO’s official availability study from consultancy CE Delft, which concluded that the refinery industry would adapt to produce 0.5% sulphur blends and that 3,800 vessels would install scrubbers by 2020, collectively consuming 36 million tonnes of HFO per year.
Two years since that study was published, things have not developed as CE Delft predicted, with just 591 vessels having installed scrubbers as of 29 June, according to IHS Markit data. Although interest in the technology has risen significantly this year, by 2020 the number will still be well below what was estimated by CE Delft.
“There is a lot of uncertainty,” Graham said. “Some refiners say they will produce blends, but they don’t say which blends [...] it leaves it unclear, with the potential for lots of refiners to produce lots of different types of 0.5% fuels with different components. Obviously, that leads to potential for difficulties for vessels.”
Veritas Petroleum Services (VPS) noted in a recent industry presentation that these new 0.5% sulphur blends will have an increased risk of instability and incompatibility compared with existing fuels, containing variations depending on their blend and their region, and even between different batches produced in the same refinery.
“Their heavier fuels represent the more novel blends, which will take owners longer to get used to,” Tallett said. “There are big issues here with marine fuel compatibility. You can take two fuels that are stable, combine them, and make them unstable.”
Because of this potential for incompatibility, Ensys expects the majority of shipowners to turn to MGO in the initial stage of the sulphur cap, even if 0.5% sulphur fuels are available.
MGO has been in use as a marine fuel in ECAs in Europe and North America since they were introduced in 2015. As a standardised fuel spec, there should also be no problems with compatibility.
Yet Lars Robert Pedersen of the Baltic and International Maritime Council (BIMCO) pointed out that a carefully managed transition to 0.5% sulphur blends should not be dangerous, nor is managing fuel related safety risks something new.
“[Using] 0.5% sulphur fuels will require you to segregate the different bunker fuels to a much higher degree than now,” he told Fairplay. “Yes, you can get into problems managing the changeover if different fuels are incompatible. Every time you change from one bunker to another bunker, you will run this risk. It is the frequency of safety-related fuel issues expected to occur with the new 0.5% blends that will drive up the risk.
“The price difference will dictate these blended fuels very early on. I don’t think charterers and others will pay for distillate fuels if something else is available at a much lower price.”
One thing on which there is agreement is that the price of MGO and new low-sulphur fuels will be significantly greater than that for HFO. The IEA predicts that the sulphur cap will “trigger a surge in gasoil demand in 2020, used directly as an MGO or for blending in a new very-low-sulphur (0.5%) marine fuel (VLSFO).” During the switch, “gasoil availability will be a major constraint,” sparking a rise in diesel prices of 20–30% in 2020.
Because of the strain in switching to that volume of fuel, the effects will be felt way beyond marine fuels.
“If you’re maximising to produce as much gasoil as you can, then you’re not producing as much gasoiline, jet fuel, and other products, so those markets are going to tighten as well. We see very significant change in the diesel price,” Graham said.
The effect on road users could be notable. Ensys predicts that if US gasoline prices are USD3/gallon at the start of 2020, the sulphur cap could push them to USD5/gallon, a jump that is large enough to imply political consequences in what is also a US presidential election year. It should also be viewed in the context of US President Trump’s recent demands that OPEC increase supply in order to reduce gas prices in the run-up to the US mid-term elections in November.
“[Trump’s] not exactly enamoured with international agreements. Think of [the] Paris [Agreeement], NAFTA, TransPac [the Trans-Pacific Partnership], and NATO,” Tallett noted. “It seems quite plausible that if the US administration gets wind of IMO 2020, they could get very exercised about it, although it remains to be seen what action they could take.”
*This article was updated on 17 July to reflect an announcement by the ISO that bunker blends would be covered by the current ISO 8217 fuel specification.