With the IMO 2020 regulation on marine fuels scheduled to take effect in just over a month, vessel operators and ports are still preparing for compliance.
Industry insiders say some shipping will require more time to conform to the new requirements. Analysts also predict fallout for the base oil market, saying the regulation will probably force some plants to close.
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A number of base oil operations are deemed at risk, either for being shut on their own or with the closure of the entire refinery, said Stephen Ames, managing director of SBA Consulting LLC. “The vast global oversupply of base oils and resulting poor margins imply that their contribution to the overall refinery’s profitability has declined markedly in recent years,” Ames said.
Under the regulation, which were adopted by the International Maritime Organization, an arm of the United Nations, the cap on sulfur content in marine fuels will fall from 3.5 percent to 0.5 percent on Jan. 1, 2020. The new standard will dramatically decrease demand for high-sulfur fuel oil, which currently is used by a large portion of maritime vessels.
Ames said most refineries producing HSFO have already or are currently making the adjustments to limit its production and alternatively offer the low-sulfur variants. The refineries may switch their crude slate to low-sulfur sources, particularly those from North Africa, Angola and some North Sea fields, he said
“IMO 2020 could impact those refineries with base oil operations, especially [API] Group I plants. Sweet crudes typically have lower [vacuum gasoil] content than their high-sulfur counterparts – for example Arab Light – typically used for Group I base oil plants,” he said. “That would reduce base oil yield and adversely change some their properties. The relatively higher cost of sweet crude will also economically impact their cost of production.”
For API Group II and III refineries the impact wouldn’t be as harsh. “Those refineries are more complex, allowing more capability to upgrade from high- to low-sulfur products, which could give them an advantage,” he said.
The new regulation is expected to impact refiners in Europe, especially in Russia, the worlds largest producer of HSFO. Ames explained that most Russian refineries are land-locked and dependent on local high-sulfur Urals crude, a sour crude.
Vessel operators have four options for how to comply with the new regulations: switching to marine gasoil; using very low-sulfur fuel oil; using an alternative clean fuel such as natural gas; or installing scrubbers, which allows them to continue using high-sulfur fuel oil. Each has its drawbacks, said Joel Hancock, an energy analysts with Natixis Investment Management in London. “MGO is priced well above HSFO,” Hancock said. “The main problem with VLSFO is that its a blended fuel and finding a constant grade can be difficult. Scrubbers are costly to install and maintain.”
One industry insider, who asked not to be named, said most shippers are opting to use MGO. It seems the cost difference, at least in the U.S. Gulf, is only about $50 per metric ton. “However, I imagine that this narrow gap will widen before too long,” the insider said.
One ship operator told the insider that VLSFO needs preheated and that after factoring in the cost of doing so, the cost advantage of using VLSFO virtually disappears.
“Major bunkering ports – from Singapore to Fujairah, United Arab Emirates, Rotterdam, Netherlands and Houston – already have in place all of the various fuels, including HSFO for ships with scrubbers,” Ames said. “Some of the smaller volume ports may not have enough storage tanks for all fuel types, causing them to choose which ones to stock. Most likely those ports will or already have opted for a 0.5 percent fuel, be it VLSFO or MGO.”
In certain instances, he explained, ships with scrubbers that normally run on HSFO will have to use more expensive low sulfur alternatives. “However, that should not be a significant occurrence as most vessels are on planned voyages and will have sufficient or extra HSFO on board to make it to the next port of availability,” he said.
On the vessel side, the World Shipping Council has stated that members are still preparing for the regulation but will be ready by the deadline. The industry understands the importance of meeting the deadline both environmentally and financially, the council said, adding that it is vital that IMO member states plan to enforce the regulation consistently.
“It is important to note there is no grace period afforded to the requirements that take effect on 1 Jan. 2020,” the organization said.
Ames suggested between 5 and 15 percent of vessels will not be compliant with the new regulations before Jan. 1; however, that percentage will decline as time passes. Failure to comply with the new regulation could subject the shipper to fines, loss of insurance or even arrest in the majority of countries and ports that will be policing enforcement.
“At minimum they would not be able to berth to load or unload their cargo,” he explained. Non-compliance is most likely confined to independent ship owners plying some lesser ports or countries unwilling to police the matter. On the other hand, all major shipping companies that comprise the vast majority of bunker uptake have already committed to compliance.