With IMO 2020 nearly upon us, it’s a good time to review what IMO 2020 is, and how it will affect your refinery operations.
–by Esa Ramasamy, S&P Global
This article has been adapted from a presentation given by Esa Ramasamy, Global Director of S&P Global at RefComm® Rotterdam.
Beginning Jan 1, 2020, the cap on sulfur emissions from seaborne vessels will impact locations beyond the current ECA areas (Canada, USA, North Sea, and the Baltic, along with China and Taiwan) and have a bullish impact on petroleum products required to produce IMO compliant fuels. An estimated 3.7 million b/d 3.5% sulfur fuel oil bunker fuel is to be backed out of the bunker market.
There is a lot of literature in the market that says anything that is high sulfur is going to experience an extended stretch of bearishness. The reality, however, is not so straightforward.
HSFO Impact will be bearish
HSFO 380 CST 3.5% bunker fuel will be most affected by IMO 2020, because it will be considered non-compliant beginning January 1, 2020 and there aren’t many outlets for non-compliant bunker fuel. HSFO will back out an estimated 3-million b/d of 3.5% bunker fuel, which will be displaced by a variety of combinations of gasoil (diesel) and LSFO. About 500,000 b/d or slightly more of this 380 CST 3.5% will be taken by ships with scrubbers– by the end of 2020 the scrubber numbers will rise to more than 3,500.
As far as straight-run HSFO and VDU bottoms are concerned, there will still be a market for those products and this is why HSFO remains relatively strong compared to bunker fuel spreads.
Medium and heavy sour crudes will remain healthy
Sour crudes are not likely to suffer the same consequence as that of 380 CST 3.5% bunker fuels because of OPEC output cuts and because sanctions on Iran and Venezuela have removed about 5-million b/d of medium/heavy sour crudes from the supply chain. This has tightened the market for sour crudes. Secondly, there is a high rate of dependence on them by the global refining complex. Refineries built in that last 20 years have been based on a medium sour crude – which means they will have secondary processing capacity – so these refiners will continue to utilize sour crudes in support of their secondary capacity. There will also be some demand for light sweet crude to blend down sulfur.
What will determine the real impact of IMO 2020 will be the price movements of 0.5% Marine Fuels (IMO 2020 compliant fuel), high sulfur fuel oil, and diesel. There is data to show that prices between 0.5% Marine Fuels and HSFO is beginning to widen as the 2020 deadline approaches. It is also an indication that diesel prices will turn bullish. It is estimated that there is a need for an additional 2.2 million b/d diesel fuel to convert some of the HSFO into IMO 2020 compliant fuel, which is expected to lift diesel prices come 2020.
Ships without scrubbers cannot hold non-compliant fuel after March 2020. Total HSFO demand from scrubbers is estimated to be 600-700 kb/d.
A quarter of the total ships (approximately 80,000) currently in operation consume 85% of all fuels. And a quarter are owned by big companies which are expected to be more compliant. Enforcement will be lead by bunkering hubs.
Evolution of Bunker Demand After 2020
Bunker demand will evolve after 2020 with lower distillate use, slowing growing LNG bunkers and a partial return of HSFO as scrubber use increases.
In conclusion, prices for fuel oil and diesel will determine how refiners react to IMO 2020 regulations. Refineries with cokers and FCCs are expected to run hard to meet the surge in demand for diesel and that is expected to lead to increased demand for medium/heavy crudes.
For more on IMO 2020, please see the following:
Bottom of the Barrel Conversions: What Does the Future Hold?
Market Disruptor: IMO 2020
Catalytic Solutions to Overcome IMO Challenges
Learn more about IMO 2020 at RefComm® Gdansk, 2-5 November 2020.