The global shift in the sulphur content of marine fuels mandated by the International Maritime Organization (IMO) will have wide-ranging effects for the entire oil industry, affecting not just fuel oil, but distillates, gasoline and crude.
From 1 January 2020, ocean-going ships will have to use marine fuels with a sulphur content of no more than 0.5% sulphur, compared to the current limit of 3.5% sulphur. This puts just over 4 mb/d of high-sulphur fuel oil (HSFO) demand at risk and requires a step change in clean products output by the world’s refineries. There are ramifications from IMO 2020 for product price spreads, refining margins, crude differentials, power generation, asphalt—in fact, the impact will be across the entire barrel and affect anyone focussed on the supply-demand equation.
There is still considerable uncertainty and confusion even as we fast approach the deadline. Opinion within the market has latched onto diesel as the solution to the IMO 2020 conundrum, but even if diesel was to be the main fuel used by ship owners, it will be a very different product from the one put in the tanks of cars and trucks today. Scrubbers and compliant fuel oils (VLSFO) will also compete for share in this new market. On balance, we do not see a problem producing the clean fuels required by the marine fuels market in 2020. The challenge will be reducing the surplus of HSFO that will be produced in 2020. Even with the recent flurry of scrubber announcements, some 2.5 mb/d of HSFO demand today will switch to a compliant solution. Meanwhile, although refinery fuel oil destruction projects are gathering pace, there will be excess HSFO supply in 2020. Power generation will provide an outlet in some cases, if fuel oil is cheap enough to compete with imported LNG and coal.
In crude markets, heavy grades with a high sulphur content will have to discount significantly, as refiners will shun those grades, while landlocked crudes such as WCS will be the clear losers, and PADD 2, PADD 3 and generally complex refineries will be clear winners. The higher the sulphur content, the more the crude has to discount. Crude oil trade flows will shift, with significant implications for inter-regional spreads and quality differentials.
However, IMO 2020 is not about fuel oil losing out and diesel winning. It is an unprecedented tightening of global bunker specifications, but it also creates a vast new market for low-quality, high-density distillate fuel, opening up opportunities for refiners to segregate streams previously absorbed into the fuel oil pool in the absence of an alternative outlet. For the first time in more than a decade, it is going to be easier for refineries to make distillates. For instance, VLSFO will play an important role and an oversupplied gasoline market will only facilitate VLSFO production. Initially, MGO will win as it will be the likely default response from shipowners, but VLSFO demand will pick up substantially within a few months.
IMO is about components and feedstocks and clean products versus dirty products, which will have far-reaching ramifications for crude pricing and natural gas usage in power generation. The simplistic narrative that it is a fuel oil versus diesel story is misleading. Energy Aspects’ extensive analysis, database of refinery projects tied to IMO 2020, scrubbers, storage units among others and regional/country-level balances gives us a unique perspective on this topic.