IMO regulations will roil oil markets, creating market uncertainty,
higher costs, new IHS Markit report says
HOUSTON–(BUSINESS WIRE)–lt;a href=”https://twitter.com/hashtag/Energy?src=hash” target=”_blank”gt;#Energylt;/agt;–The refining and shipping industries are ill-prepared for a massive
change in fuel regulation set to go into effect next year. The resulting
market impacts will be major, costly and far-reaching, says a new report
Markit (Nasdaq: INFO), the leading global source of critical
information and insight.
The impending regulation by the International Maritime Organization
(IMO), a sanctioning body for the world’s shipping fleet, aims to
significantly reduce the amount of sulfur in bunker fuels that are
relied on for commercial shipping. Collectively, these ships burn more
than 3 million barrels a day of residual fuel oil, which has a sulfur
content that exceeds levels found in automotive gasoline by more than
Burning fuels with a higher sulfur content leads to a greater level of
toxic air emissions, including sulfur oxides, which are considered a
threat to the environment and human health. IHS Markit expects the
majority of the demand for high-sulfur residual fuel oil will switch to
demand for the new lower sulfur fuel in 2020.
First announced by the IMO in 2008, the IMO confirmed in 2016 that
global refiners and shippers would have to comply with these new
environmental regulations by 2020—five years earlier than many
anticipated, which sent tidal waves through two industries that
typically take many years to adapt to such significant change that
requires tens of billions in investment.
The new report, titled Navigating
Choppy Waters: Marine Bunker Fuel in a Low-Sulfur, Low-Carbon World,
says that compliance remains the greatest uncertainty with the new
regulation and that there is concern whether sufficient supplies of
compliant fuels will be available in the world’s many ports. The result
will be higher freight costs for most cargoes—including electronics,
autos, petrochemicals and even cruise ship fares. Ultimately, those
costs will be passed to consumers, IHS Markit said.
“Shippers will face significant compliance costs to either upgrade
equipment or switch to more expensive, cleaner fuels,” said Spencer
Welch executive director, oil, midstream and downstream for Europe, CIS
and Africa at IHS Markit, and manager of the study. “Refiners – and fuel
buyers – will experience significant price impacts as they shift
production to deliver greater volumes of very low-sulfur fuel oil
(VLSFO) and find a market for their less valuable fuels.”
“The IMO is taking positive action to address shipping pollution, but
the rapid pace of the implementation of this new regulation is making it
very challenging for the refining and shipping industries to respond,”
said Sandeep Sayal, vice president of downstream research at IHS Markit.
“The global scope, the significant uncertainty in fuel-formulations, and
the volume of new lower-sulfur fuel demand, are causing a scramble.”
The IMO has signaled that it plans to take enforcement of the new
regulation—which goes into effect January 1, 2020—seriously.
Non-compliant vessels could suffer loss of charter to sail. And major
insurance companies have also indicated compliance assurance would be
essential to vessel insurability.
Shippers have several options for compliance, including low-sulfur
bunker fuels and liquefied natural gas. However, IHS Markit researchers
expect on-board ship scrubbers, devices that clear harmful pollutants
from exhaust gas, will be the primary compliance path for larger ships
which could continue to burn cheaper, higher-sulfur fuels. However,
until those scrubbers can be installed—which for numerous ships will not
happen before the IMO January 2020 deadline, many ships will have to
burn the more expensive, IMO-compliant VLSFO fuels.
“We estimate between 5,000 and 10,000 ships will undergo scrubber
installation at a cost of between $2 million and $7 million each, plus
increased operations costs,” said Krispen Atkinson, senior consultant,
IHS Markit maritime & trade research. “To date, the industry has spent
or committed more than $6.6 billion to fit more than 2,000 ships with
Other ships will convert to compliant fuels with sulfur levels below
0.50 percent. But those ship owners will see fuel costs escalate
significantly due to the higher-quality fuel required and may face fuel
compatibility issues, IHS Markit said. Each refinery complex could
produce different – but compliant – regional formulations to meet the
new fuel standard based on available crude oils, product slates, costs
and supply chain logistics, presenting operational and continuity
challenges for shippers.
Refiners will produce more distillates (higher-value components derived
from crude) as new demand arises, with about half of the new compliant
fuel coming from non-distillate sources within the refinery, but the
remaining 50 percent will need to be sourced from refinery distillates.
However, these same distillates are also needed for other growing diesel
markets. As a result, refiners will likely have to make significant
operational changes and ultimately invest billions to shift their
existing product slates, increasing costs and distillate prices
(relative to crude oil prices).
“Highly complex refineries, which have the flexibility to convert
various grades of crude oil into a wide range of refined products to
meet market demand, will benefit most from the IMO-specification
change,” Welch said. “Highly complex refiners produce the least amount
of residual fuel oil and the highest amount of distillate and gasoline
compared to lower-complexity refiners. Less integrated and less complex
refiners will likely experience the greatest market risk,” Welch said.
The findings of the IHS Markit study Navigating
Choppy Waters: Marine Bunker Fuel in a Low-Sulfur, Low-Carbon World
and the global outlook for refining, will be on the agenda for
discussion at CERAWeek 2019, Monday, March 11-Friday, March 15, in
Houston. Please visit www.ceraweek.com
for the most up-to-date agenda and list of speakers. Session times,
topics and speakers are subject to change.
About IHS Markit (www.ihsmarkit.com)
IHS Markit (Nasdaq: INFO) is a world leader in critical information,
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