IMO 2020 regulation set to send waves through the marine, refining and base oils industries – consultant

LONDON (ICIS)–The International Maritime Organisation (IMO) 2020 regulation is not a disruptor for markets but “more like two freight trains colliding head on”, according to Stephen Ames, managing director of SBA Consulting, on Friday.

“There’s going to be an instantaneous point in time where things will change. It’s the biggest thing to hit the marine industry since it moved from sails to internal combustion engines,” Ames said, speaking at the 23rd ICIS World Base Oils conference in London.

The IMO’s Marpol Annex 6, Regulation 14 comes into effect as of 1 January 2020 and reduces the maximum amount of sulphur content of fuel oil from 3.5% to 0.5%, unless vessels are operating in an emissions control area (ECA) where they are already using lower sulphur fuel or they have an approved scrubber installed.

This regulation will have impacts on the maritime industry, the refining sector and also base oils supply.

“This is a massive [sulphur] reduction for an industry sector responsible for the transport of 80% by volume of the world’s goods. Is it big? Yes!” Ames exclaimed.

Ames went on to say that the marine transport sector is the greatest single contributor to sulphur emissions, with marine bunkers accounting for just 7% of global transport but generating 90% of the transport sector emissions. The new regulations will look to eliminate or capture around 5m tonnes/year of sulphur from the atmosphere.

To comply with IMO 2020 vessel owners or operators have four alternatives whereby they can switch to 0.5% maximum sulphur distillate fuel or marine gasoil, burn 0.5% maximum very low sulphur fuel oil blends, install a scrubber or use other low sulphur fuels such as LNG or methanol.

However, the cost of this to ship owners is estimated to be around $30-40bn a year. This cost is expected to be passed on to customers, with freight rates increasing as a consequence.

Should ship owners fail to comply with the regulations, vessels can be seized or fined up to €6m for each occurrence.

That said, Ames notes that major stakeholders foresee 90% of the global fleet will rely on compliant fuels.

The maritime industry aside, Ames sees the potential for a major impact on the refining sector.

“Simply put, there will be a strong surge in distillate demand and a steep decline in high sulphur fuel oil (HSFO) consumption,” Ames said.

There will be opportunities for some refineries, namely those which process heavy sour crudes or have high distillate fuel yields.

“There will be threats for simple low complexity refineries with high residual fuel yields and which are reliant on processing sour crudes. In between the two possibilities, there will be a myriad of changes that will take place,” Ames said.

“Historically, the bunker market has been a sink to dispose of a refiner’s high sulphur residual products and avoid the need for costly upgrading facilities. Those days are now numbered – there will be few alternative markets,” he said.

These trends stand to impact refinery economics, with some seeing the gasoil vs HSFO spread widening by $20+/bbl over the next two years. Ames seeing this process starting during the second half of 2019, with a steep drop in demand for HSFO contributing to most of the price spread.

Ames said that even associated bitumen operations may no longer be a “safe harbour” for refiners, despite being the largest alternative HSFO market. This is because bitumen prices tend to track HSFO prices and the oversupply of HSFO in the aftermath of IMO 2020 could flood the bitumen market.

“In addition to products prices, the crude oil markets will also be impacted. Low conversion refineries that currently produce the bulk of HSFO will be forced to process lighter sweet crude slates to minimise such yields but only a third of global crude oil production is ‘sweet’ which means there will be increased competition for availability,” Ames said.

“The demand for heavy sour crudes will fall out of favour for some refiners, with prices likely to be further discounted. These factors are likely to expand the light sweet versus heavy source crude oil differential, with some industry pundits expecting a $5-6bbl price widening in 2020. Some say more,” Ames said.

For the base oils market, Ames said that IMO 2020 means that transportation costs are likely to increase and will have a big effect on operations which rely on marine transport. In addition, any refinery closures could see base oils capacity decreasing.

“Most refineries will re-optimise their operations. Some may find higher values alternatives for the VGO feedstock, in turn reducing base oil production,” Ames said, adding that it was largely Group I base oils which were vulnerable to changes in sulphur regulations, with Group II and Group III oils largely based at high complexity refineries.

Ames suggested that higher freight rates may reduce arbitrage opportunities for base oils, with countries relying on domestic production instead.

With 10 months to go until IMO 2020, the marine industry, refining sector and base oils could be in for some dramatic changes which will unfold as we move forward towards the implementation date. However, Stephen Ames believes we could start to see changes occurring as soon as the second half of this year, as players across these markets look to prepare themselves.