The marine fuel sector may be small, but it has the potential to have significant influence on global crude oil and refined product markets, so said Victor Shum Vice President of IHS Markit at the recent Asian Emissions Technologies conference in Singapore.
Ship operators have a choice of 2020 compliance options:
- Switch away from HSFO to low-sulphur fuels e.g. marine gas oil, diesel, blends of HSFO and low sulphur distillate, low-sulphur residual fuel oil or hybrid fuels
- Install Exhaust Gas Cleaning Systems and continue using HSFO; or
- Switch to LNG
Non-compliance is also possible. There has been speculation that this may be allowable if, for example, suitable fuels are not available or if a scrubber has been ordered, but not yet installed. The tone of IMO communications, however suggests that sanctioned non-compliance for this sort of reason may not be forthcoming. Of course, there is always the probability of deliberate unsanctioned non-compliance by some, the extent of which will depend on the strength of enforcement.
The industry has traditionally taken a wait and see approach and without an immediate incentive to invest some industry commentators suggest that a more significant uptake in the number of installed scrubbers can only be expected from 2019/2020, when supported by the increasing high sulphur-low sulphur fuel price gap.
LNG is seen as an expensive possible medium-term option with challenges, as it is heavily reliant on infrastructure investment and more suitable for newbuilds rather than for retrofits, so most ship operators will opt to simply switch fuels for compliance in 2020.
Challenge for refiners
The challenge for the refining industry will be two-fold:
- Producing sufficient quantities of 0.50%S fuels; and
- Finding ways to dispose of the excess high sulphur residue
Meeting the 0.50%S demand could be initially achieved by increasing refinery throughput and changes in refinery conversion runs to produce fuel blends of high sulphur residual and low sulphur distillate, together with some low sulphur fuel oil. However, it is thought unlikely that there be additional refinery investments on top of the ones that are already planned:
- Because of uncertainty regarding the required fuel mix (which depends on the adoption of scrubbers and LNG)
- The tight time schedule between IMO deciding on the 0.50%S cap in 2016 and entry into force in 2020; and
- Uncertainties around enforcement and the possibility of waivers
Massive HSFO price drop
So, despite the initial investments in refineries and scrubbers, and some non-compliance, a residue surplus of about 400,000 barrels per day is expected in 2020. It is predicted that the oversupply will result in a dramatic reduction in the price of HSFO driven down by the need to be competitive with thermal coal, as the surplus will be available to the shoreside power generation market.
Graphic courtesy IHS Markit
While it is predicted that the price differential will gradually return to more usual levels over a number of years as the installation of scrubbers increases and refinery investments facilitate the production of higher volumes of low sulphur fuel oils, it appears that ship operators investing in scrubbers for 2020 could be very big winners, when charterers start to demand the commercial advantage of HSFO capable vessels.