The impact of IMO 2020

"The biggest change ever to affect the refining and shipping industries"

"The IMO's decision to reduce the bunker fuel sulfur 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, refiners 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 per day of high-sulfur fuel oil (HSFO). Most vessels will have to change to more costly low-sulfur fuels. A minor share of the fleet will continue to use high-sulfur bunkers after January 2020, provided that they have installed flue gas desulfurisation 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 desulfurisation, coking or switching to sweeter feeds. Residue desulfurisation is risky and unlikely, coking investments are very costly but take the refiner out from the residue market, while switching to low-sulfur crude oils will command a premium.

If we look a little closer at how prices may be affected, lighter oils with a lower sulfur content will become relatively more expensive, while at the same time reduced market demand for high-sulfur 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 is expecting prices to increase for all highly refined low-sulfur oil products, including naphthenic base oils.”

"A knock-on effect"

"IMO 2020 is a hot topic in shipping, bunker and refining circles. Ship-owners can comply with the reduction of sulfur in bunker fuels by installing exhaust gas cleaning systems (scrubbers) or burning compliant fuels such as marine gasoil (MGO), blends, low sulfur fuel oil (LSFO) or LNG.

The option of LNG is the least entertained option at this stage. After a hesitant start, scrubber uptake has gained momentum and stood at 1,100 vessels by September 2018. But considering a global fleet of about 60,000 vessels, it only accounts for 2% of the fleet, meaning that the vast majority will be burning compliant fuels.

Compatibility and stability concerns suggest that owners may initially burn more MGO as they have experience with this fuel. The rather sudden switch of bunker fuel demand will drive up prices of MGO and the oversupply of high sulfur fuel oil (HSFO) will pressurise prices. Some of the excess HSFO is expected to be used for power generation, whilst regional availability imbalances of compliant fuels are highly likely.

These developments will have a knock-on effect on other refined products and alter trade flows.”

"It will create many new exciting opportunities"

"Approaching sulfur cap of 0.5%, ship-owners are taking different paths towards compliance. Fewer than 2,000 ships are expected to have exhaust cleaning scrubbers installed by 2020, which means that demand for compliant fuels, MGO and VLSFO (Very Low Sulfur Fuel Oil) will surge, while demand for HSFO (Heavy Sulfur Fuel Oil) will plummet. This is likely to widen the price gap between bottom barrel products and distillates and increase overall demand for crude oil. Oil storage companies are likely to benefit from an over-supplied HSFO market and from increased blending complexity.

The variety of propulsion options will broaden with LNG and Methanol also being a small part of a more complex marine fuels portfolio. Bunker costs will rise and shipping companies will do their utmost to try and pass that extra cost onto the charterers, which means that shipping freight rates are expected to increase.

ScanOcean believes that those ship-owners that have scrubbers installed by 2020 will be shortterm winners, but in the long run we will probably see a more developed and well-supplied market of compatible fuels. We think it will create many new exciting opportunities for ship-owners to make marine fuel sourcing a competitive advantage."