The Wake of IMO 2020 Makes Rough Seas for Africa
The IMOs 2020 sulfur cap is now a reality and is rocking the boat in the shipping, marine fuel and base oil industries the world over. Emeka Umejei asks people working in the African lube industry what effects the new regulation might have on their businesses.
Uncertainty hangs over Africas lubricant market from the impact of the International Maritime Organizations updated sulfur regulation. Known as IMO 2020, it aims to reduce air pollution by limiting sulfur in marine fuel at 0.5 percent by weight, down from 3.5 percent.
Shipowners must switch to compliant fuels, modify their ships engine or install a scrubber to avoid fines and vessel detentions. Whatever option, there are challenges and costs that will likely be passed on to customers, including base oil buyers.
Some think IMO 2020 will radically upset the global lubricant market by changing trade flows of base oil, marine lubricant formulations and costs. One industry insider described it as the single-most disruptive planned event the downstream industry has ever seen.
It will change supply relationships for the entire shipping industry and change the way the refining industry operates. And that will have impacts on product-price relationships and on refining economics that will affect not only fuels manufacturers but base oil as well, Blake Eskew, vice president of global consulting at research company IHS Markit, said at the UEIL congress in October 2019.
In the immediate term, there may not be enough low-sulfur heavy fuel oil and shortages around the world could increase demand for other complaint fuels that may require changes to lubricant formulations.
The impact of the new regulation could create imbalances in the global lubricant industry, according to one downstream analyst.
Group I base oil margins are likely to be reduced post-IMO 2020 by vacuum gas oil and fuel oil market dynamics, Michael Connolly, senior consultant of the ICIS global refining team, told delegates at the ICIS Africa Base Oils & Lubricant Conference in Cape Town, South Africa.
Vacuum gas oil is one of the products from a refinery and can be used by the base oil unit, other conversion units, such as fluid catalytic cracking and hydrocracking, or be used for the production of low-sulfur fuel oil. Given the effect IMO 2020 will have on marine fuel supply, the latter could be more profitable until the market for low-sulfur marine fuels stabilizes.
Group I base oil producers will be affected differently, Connolly noted, depending on the end use and value of the co-produced extracts and their upstream refinery configuration. About 30 percent of European virgin Group I base oil producers are highly exposed to the effects of IMO 2020.
Refiners with residue conversion or treating are less exposed to the loss of co-product credit, placing them at low risk versus todays environment. Refiners that form part of an integrated multi-refinery network can move high-sulfur oil to a sister refiner with conversion capacity to reduce their full market exposure to poor fuel oil prices. Meanwhile, refiners with limited or no outlet other than the HSFO market are most exposed to the IMOs effects, Connolly said.
In addition, trade flows will change, Connolly explained, which could also impact African buyers in the short term.
Some European Group I base oil refiners may be less competitive than other regions in a post-IMO world, due to the difficulties that might be expected in their refineries upstream. There may be a decrease in the flow of Group I from Europe and an increase from North America, Connolly told LubesnGreases in a follow up email.
The implementation of IMO 2020 is likely to have an impact on cargo offloading vessels working in African ports, rather than ocean-going product tankers, one Nigeria-based industry believes. Smaller vessels will struggle to be fuel compliant, which may cause a supply disruption.
This may indirectly affect the availability of shipping vessels to deliver base oils to African ports, thereby creating an artificial scarcity of base stocks on the continent, said Emmanuel Ekpenyong, head of operations at Singaporean downstream company Puma Energys Lagos office.
Others believe the impact from lubricant shortages, as well as fuel, will also be felt by smaller vessel owners, whereas larger ships will be insulated by long-term lubricant purchase agreements with major suppliers.
Major shipping lines are contracted to many of the major oil corporations, such as Mobil and Shell. So, the African marine market for lubes will just follow the rest of the world. But for the small, uncontracted shipping companies, who purchase lubes when and where needed, there is likely to be a problem, Patrick Swan, a consultant at Aswan Consulting, South Africa, told LubesnGreases.
According to Joseph Juma, product manager of lubricant and fuel additives at IMCD Kenya, a specialty chemicals and food company, blenders are already feeling the effects of IMO 2020 through increased costs on imported lubricants.
Another industry insider thinks that the most significant impact of IMO 2020 for African lubricant companies will be tightening base oil imports. Cliff Classen, director at Clasco Marketing, Cape Town, South Africa, thinks that the result may lead local blenders to consider alternatives base stocks such as rerefined oils, naphthenics or Group II.
Those who are dependent on Group I base stocks will make the move first and start changing formulations to rerefined oils and naphthenics. And then we might see the rapid adoption of Group II in some applications, particularly automotive, Classen told LubesnGreases.
Rerefined oils are becoming more readily available in Africa and may be a viable option for cost-conscious African blenders looking for domestic suppliers.
Ekpenyong cautioned that in reality the availability of alternative materials is limited, adding greater demand would lead to an increase in used oil recycling to replace high-cost virgin base oil imports from the West.
Furthermore, he thinks that Africas few refineries may begin to optimize their base oil units to increase yield or upgrade refineries to start producing base oil. This will reduce dependence on ships for import of base materials, he said.
Africa has combined base oil production capacity of 697,000 metric tons per year, according to the LubesnGreases EMEA Base Stock Guide.
Ekpenyong agreed with Classen that the new regulation may expedite the switch to higher-grade base stocks in Africa because, and as fuel quality improves there may be a gradual switch to Group II and III oils as ships take in higher-quality fuel oil in the long run.
On the Horizon
IMO 2020 will cause disruption to the global market and Africa is not entirely free of the consequences. How African blenders will respond to it is still up in the air. It may hasten the long-awaited African transition from Group I base stocks to Group II faster than was previously anticipated, or even help support the continents rerefined base oil segment.
One thing that is certain is that IMO 2020 is here and African blenders will have to adjust to that reality.