Insight: IMO 2020 – business as usual or a game changer?
The new sulphur directive for marine fuels that comes into force next year will have an impact on the oil refining industry. What will be the effect on the bitumen industry? In this article Nynas presents its view on some of the factors of importance.
The International Maritime Organization (IMO) has announced that it will dramatically lower the global limit on sulphur content for marine fuels from the current level of 3.5 % to 0.5 % as of 2020. The aim is to significantly curb pollution produced by the world’s ships.
“The biggest change ever to affect the refining and shipping industries”The IMO's decision to reduce the bunker fuel sulphur level from 3.5 % to 0.5 % starting 1 January 2020 is the biggest change ever to affect the refining and shipping industries. But the change doesn’t stop there; the impact will be felt by crude oil producers, traders and bunker fuel suppliers, as well as being expected to cause structural changes in the sweet-sour crude price differentials.
In broad terms, the world’s ships consume about three million barrels (approx. 159 litres) per day of high-sulphur fuel oil (HSFO). Most vessels will have to change to more costly low-sulphur fuels. A minor share of the fleet will continue to use high-sulphur bunkers after January 2020, provided that they have installed flue gas de-sulphurisation systems (scrubbers) to reduce emissions. But to do so will require investment.
Refineries must find solutions for a way to manage these streams. Options include investing in residue de-sulphurisation, coking or switching to sweeter feeds. Residue de-sulphurisation is risky and unlikely, coking investments are very costly but take the refiner out from the residue market, while switching to low-sulphur crude oils will increase their raw material cost.
If we look a little closer at how prices may be affected, lighter oils with a lower sulphur content will become relatively more expensive, while at the same time reduced market demand for high-sulphur fuel oils (HSFO) will result in prices relative to Brent no longer being predictable or representative. Gasoil prices are becoming stronger due to additional oil demand for marine gasoil.
Nynas Crude Supply & Analysis ManagerSo how will this affect the European bitumen industry? Will it be business as usual after 2020, or will the implementation of the IMO’s new regulations be a game changer?
What we can see is that the new regulation will have a noticeable impact on the overall supply side as well as on how much of different products will be available. The cost of transportation and how bitumen is priced are other factors that are likely to change. Let us take a closer look at each of these areas.
SUPPLY/DEMAND BECOMES MORE BALANCED
Following the implementation of the new sulphur regulation it is expected that more refiners will change their set-up, either through a change in the type of crude oil that they process or by installation of upgrading units such as solvent deasphalters, cokers etc. This is especially true for those refiners that do not have a strong focus on the bitumen market. The result is a likely reduction in the amount of bitumen produced in Europe. In contrast, some of the high-sulphur fuel oil (HSFO) currently used for bunker fuel might make its way into the bitumen pool, but it is more likely that a majority of the HSFO volumes will go into other streams. Combined with a foreseen increased market demand for bitumen in the region in the coming years, the information available to Nynas indicates that the European bitumen market will see a balanced supply/demand after 2020. As always, there will be some regional imbalances, but indications are that these will be reduced compared to the current situation. In summary, Nynas sees no indication that there will be a significant surplus of bitumen in Europe after 2020.
SOFTER COMPONENTS BECOME SCARCER
We are already seeing a trend where refineries produce harder grades than in the past. The implementation of the new sulphur regulations will likely reinforce this trend. Nynas expects softer bitumen components to be less widely available and therefore command a higher value in the market after 2020. However, as a company focused on the bitumen industry, Nynas will continue to produce soft components.
BITUMEN KNOWLEDGE BECOMES MORE IMPORTANT
As shifts in the bitumen market occur with new entrants and new product streams it becomes increasingly important to work with suppliers that have a good knowledge of bitumen and its applications. As a bitumen specialist, Nynas has this knowledge and we will continue to offer a wide portfolio of high-quality bitumen products in our Regular, Extra and Premium categories via the Performance Programme.
TRANSPORTATION BECOMES MORE EXPENSIVE
The extra costs shipping companies will be incurring, either from using low-sulphur fuel oils or through installation of scrubbers will in turn result in increased transport costs for both crude oil and bitumen. These increased costs are also expected to be seen further downstream in secondary distribution by truck.
HSFO BECOMES LESS RELEVANT AS A BITUMEN PRICE MARKER
Finally, when it comes to pricing, we do not expect HSFO to be used as a price marker for bitumen in the future. Due to the reduction in HSFO volumes traded, this notation risks suffering from severely increased volatility and as such becomes less reliable and relevant as a price marker. Therefore, from 2020 bitumen prices are more likely to be linked to crude oil notations. Nynas firmly believes that ICE Brent is the appropriate bitumen price marker for Europe and intends to use price formulas linked to this notation.
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