The International Maritime Organizations 2020 regulations won’t just affect the marine fuels and shipping industries, but is predicted to impact base oil refining as well. In fact, early prognostications on its effects are already starting to take shape.
Market analysts are predicting that the new sulfur cap – 0.5 percent compared to the present 3.5 percent – will force wide-ranging changes in the fuels that ship operators choose to power their vessels. In some cases, they say, refiners who have the refining capabilities to manufacture IMO 2020-compliant marine gasoil may opt for streaming more feedstocks into MGO at the expense of light base oils output as it may offer better profits. The regulations go into effect on Jan. 1 of next year.
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The price of MGO was expected to move up in coming months, while margins for base oil production have been squeezed for some time. Indeed, IHS Markit forecasts the new, low-sulfur fuel will cost between $500 and $650 per metric ton by 2020.
Furthermore, global demand for MGO is predicted to grow exponentially over the next few years, while base oil consumption has remained relatively flat. In fact, low sulfur oil components are already being stored in floating storage off-shore Singapore and Malaysia, S&P Platts reported in March, and there is speculation that this type of storage may be used in preparation for a jump in low-sulfur fuel oil demand later in the year.
The price gap between light sweet crude oil and heavy sour crudes – expected by pundits to expand by $5 to $6 a barrel by 2020 – will also have an impact, according to a presentation given by Steve Ames of SBA Consulting at the ICIS World Base Oils & Lubricants Conference in London in February. Refiners that switch to sweet crude could see less yield in their base oil production, and even changes in the quality of their base oil. Meanwhile, the demand for heavy sour crude will fall.
But not every base oil producer can pull off such a switch to MGO manufacturing. High-sulfur residual by-products from base oil production – which were formerly used to produce marine fuels by refiners – must now find use in other products, something Group I producers could struggle with. These refineries may have half or more of their output end as low value high-sulfur fuel products, according to Ames, and without a way to convert those products into revenue, operators may be forced to close down their base oil plants and produce distillates, instead.
Transportation logistics could also prove to be an issue for refiners. Costs to ship by vessel, rail or truck will be passed on to customers, Ames said. Marine freight rates are forecast to increase by 25 to 40 percent in 2020, and overland freight rates could rise by 3 to 6 percent.
Some have estimated that 1.4 million barrels per day of refining capacity may close, Ames said.
Still, not every company will be affected by the new regulations. “In the U.S. most lube plants are already in place so I do not foresee any new Group II plants being built,” Terry Hoffman, an industry consultant, told Lube Report. “The new marine specification is 500 ppm sulfur diesel. This is much easier to make than 15 ppm on road diesel. Therefore I believe refiners on the Gulf Coast will be able to adjust to make whichever fuel slate makes the most money.”
Hoffman doesn’t expect any major changes for refiners in Europe, but did note that there has already been some activity in Asia in relation to the pending regulations, saying refineries in China and Singapore are either adding Group II production capacity and/or adding hydroprocessing to make low-sulfur fuels.