An International Maritime Organization (IMO) target to ban ships using fuel with more than 0.5% sulphur content by 2020 could cost the industry billions, a research report says.
The IMO announced the target two years ago which slashes the current limit of 3.5% of sulphur in an effort to reduce greenhouse gas emissions.
Global energy consultancy group Wood Mackenzie is predicting the IMO 2020 cap could cost the global shipping industry US$60 billion annually as a result of higher crude prices and tight availability of alternative fuels.
Fuel oil, which is high in sulphur content, has traditionally been used by the shipping industry as bunker fuel.
Global demand for high-sulphur fuel oil stood at almost 70% of overall bunker fuels in 2016.
However, the industry will soon have to decide whether it switches to alternative fuels, such as marine gas oil (MGO) or ultra-low sulphur fuel oil (ULSFO) or install scrubber systems which remove sulphur from exhaust gas emitted by bunkers.
Wood Mackenzie senior research analyst Iain Mowat says installing scrubbers may be an “economically attractive option”.
“Although there is an initial investment, shippers can expect a rate of return of between 20% and 50% depending on investment cost, MGO-fuel oil spread and ships’ fuel consumption.
“However, the penetration rate for scrubbers could be limited by a number of factors, including access to finance, scrubber manufacturing capacity and dry-dock space.
“Switching to MGO is a more costly solution, and in full compliance, would probably see freight rates increase, perhaps by around $1 a barrel,” Mowat says.
Demand from the bunker fuels market will total about 5.
3 million barrels per day in 2020, according to Wood Mackenzie forecasts.
Based on pure ULSFO refinery streams, available ULSFO volumes in 2020 will total about 1.
2 million barrels per day.
This could be boosted by further blending ULSFO with vacuum gas oil (VGO) streams, but VGO is a valuable feedstock for the production of other lighter refinery products, and may not be readily available, the report says.
“It is likely that MGO will help meet additional demand from the shipping sector.
Wood Mackenzie estimates that this will see MGO demand rise by over 1 million b/d in 2020 in our base case outlook.
“Meeting this demand will require higher crude runs with residue upgrading units, particularly in the US and China, supporting an uplift in refining margins,” Mowat says.
“While there is a risk that this fuel specification change could be disruptive, the anticipated market reaction could benefit refiners with deep conversion/distillate oriented configurations.
It also provides refiners, particularly in the US and China, the opportunity to capture the value of their ULSFO component streams and increase their share of the global bunker market.
“Some refiners should see better profit margins as incremental demand for MGO rises, pushing up its price.
Higher refining runs, required to meet additional MGO demand, could potentially push global gasoline market into surplus weakening gasoline prices.
“This could mean that the gasoline pain for some refiners could be more acute than the impact of weaker HSFO prices.
Overall, we expect a material impact on refining economics post IMO and refiners must ensure they have a robust IMO strategy in place.
“We also expect a shift in bunkering locations based on compliant fuels availability.
Singapore, for example, could potentially lose some of its market share for bunker fuels to China as shippers look for alternative locations with a surplus of compliant fuels.
China, with ample MGO supply, is well positioned to attract shippers,” Mowat says.
