Shipping sector all scrubbed up and ready to go?

With less than a year to go until the International Maritime Organisation’s (IMO) regulation limiting the sulphur content of fuel oil used onboard ships to 0.5% comes into force, market analyst Wood Mackenzie has revealed its latest thinking on the impact of this fuel specification change.

The IMO Marine Environmental Protection Committee meeting in October 2016 (MEPC 70) agreed to implement the 0.5% sulphur limit for marine fuels on 1 January 2020. The deliberations at MEPC 70 recognised various implementation challenges, including fuel availability, blending, stability, compatibility and safety issues. The sub-committee on pollution prevention and response met in February 2018 (PPR5), and worked through the approach to implementation of the global sulphur cap. A key development was the implementation of the carriage ban of heavy sulphur fuel oil (HSFO). This was approved at MEPC 72 in April and was adopted at MEPC 73 in October, with implementation on 1 March 2020.

Wood Mackenzie anticipates around 85% compliance with the regulation in 2020, with full compliance achieved by 2025. The pace of investment in onboard scrubbing (the lowest cost solution) is rising, with over 2,000 confirmed orders for scrubbers. Just over 10% of marine fuel is expected to be scrubbed in 2020.

The market analyst also forecasts that LNG use will rise by over 70% between 2019 and 2020, but only displace just under 100,000 b/d of liquid marine fuels in 2020. Very low sulphur fuel oil (VLSFO) supply is estimated to be 1.4mn b/d in 2020, rising to 1.7mn b/d by 2024. A lightening global crude slate will help to free-up further residue upgrading capacity, while the wide HSFO crack spread should encourage higher utilisation of existing capacity. This is considered to be sufficient to process most of the surplus HSFO in 2020. Heavier sour crudes will fall in value relative to lighter sweeter crudes, while very sweet crudes supplying resid of <0/5% sulphur will rise in value relative to Brent.

Refining margins are expected to rise across the board in 2020, but the big winner will be deep conversion and distillate oriented refiners. For refiners choosing not to invest in residue upgrading ahead of 2020, the focus should be on infrastructure to capture the opportunity from their existing configuration and internal streams, concludes Wood Mackenzie

For more on the IMO sulphur case, see Petroleum Review’s December 2018/January 2019 issue.