Global scenarios for fuel oil utilisation under new sulphur and carbon regulations

• Date: 01 December 2017
• DOI: http://doi.org/10.1111/opec.12110
• Author: Yousef M. Alshammari,Moufid Benmerabet
• Published date: 01 December 2017

Global scenarios for fuel oil utilisation under

new sulphur and carbon regulations

Yousef M. Alshammari* and Mouf‌id Benmerabet**

*Faculty of Economics, Business and Statistics, University of Vienna, Oskar Morgen-Stern Platz,

Vienna1090, Austria. Email: yousef.alshammari08@alumni.imperial.ac.uk

**Department of Energy Studies, Division of Research, Organization of the Petroleum Exporting Countries

(OPEC), Helferstorferstrasse 17, Vienna1010, Austria.

Abstract

Fuel oil is an important derivative of crude oil used mainly in marine transport and power

generation. The environmental impact of this important energy vector continues to be a major

challenge due to its high sulphur and carbon content. In this work, we analyse the impact of

sulphur cap and CO

2

price on the inter-competition between fuel oil and alternative low-sulphur

low-carbon fuels. It was found that the increase in crude oil prices enhances the cost-effectiveness

of using middle distillates compared to using fuel oil with scrubbing systems. In addition, we

found that imposing a CO

2

price between $50–150/TonCO

2

leads to reducing the emissions from

fuel oil combustion by up to 87 per cent by 2040. In comparison with previous literature, we show

that fuel oil will represent at least 56 per cent by 2030, under the low oil price scenario, if

scrubbing systems are implemented in the shipping industry.

1. Introduction

Fuel oil is an important petroleum product as a fuel, and a major feedstock for the

petrochemical industry. According to the OPEC World Oil Outlook, marine transport

and power generation sector accounts for around 80 per cent of global demand for fuel

oil (Ban et al., 2016). The demand for fuel oil in marine transport is expected to increase

signif‌icantly to reach around 6 mbbl/day in 2040. This increase is also expected to be

associated with a decrease in its demand in power generation down to around 4 mbbl/

day in 2040 due to an increasing share for renewables and natural gas in the global

electricity mix (Ban et al., 2016). Nonetheless, the combustion of fuel oil carries a

signif‌icant environmental impact that originates primarily from its high carbon and

sulphur content leading to the emissions of harmful pollutants. As a result, the

international environmental regulations will limit the conventional use of fuel oil in

combustion processes (International Maritime Organisation (IMO), 2017; Rogelj et al.,

2016). To illustrate, the International Maritime Organisation (IMO) will require the

©2017 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

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261

shipping industry to use fuels with a maximum sulphur concentration of 0.5 per cent wt

(International Maritime Organisation (IMO), 2017). Such a global decision could affect

the of attractiveness of fuel oil market, while it increases demand on other low-sulphur

fuels including middle distillates, liquef‌ied natural gas (LNG), marine gas oil (MGO) and

biofuels, that may be both expensive and not readily available. Furthermore, the Paris

Agreement on climate change aims at reducing global greenhouse gas emissions in order

to limit the earth’s rising temperature to <2°C by 2100 (Rogelj et al., 2016). This may

result in establishing a price on CO

2

emissions which will affect the economic

competitiveness of low cost hydrocarbon fuels while enhancing the competitiveness of

clean alternative sources of energy.

2. Literature review

There has been signif‌icant research on the environmental impact of fuel oil combustion

from the shipping industry (Streets et al., 1997; Capaldo et al., 1999; Lawrence and

Crutzen, 1999; Endresen et al., 2003, 2005; Eyring et al., 2005a, 2005b, 2010; Wang

and Corbett, 2007; Cadarso et al., 2010; Matthias et al., 2010) and from the power

generation sector (Bacci et al., 1983; Rao and Rubin, 2002; Sims et al., 2003; Reddy

et al., 2005; Rubin et al., 2007; Schneider and Bogdan, 2007; den Broek et al., 2008;

Popov, 2011). For instance, Eyring et al. (2005a; Rogelj et al., 2016) also analysed the

impact of technological advancement on the emissions of international shipping by

2050. Furthermore, Eyring et al. (2005b) calculated the globally weighted average

sulphur content for heavy fuels which was found to be 5 per cent higher than the average

Sulphur content commonly used. Streets (Eyring et al., 2010) analysed the SO

2

emissions and sulphur deposition from the shipping transport in Asia showing that

sulphur emissions account for 11.7 per cent of emissions in the Southeast Asia and 0.7

per cent of the total continental Asian emissions. This level of sulphur emission was

suggested to contribute to the ecological damage in the Strait of Malacca (Eyring et al.,

2010). Furthermore, the costs benef‌it of reducing SO

2

emissions from the shipping

industry was analysed by Wang and Corbet (Streets et al., 1997) showing that the 0.5

per cent sulphur cap on marine fuels may lead to net economic benef‌its that that exceed

$284 million per year. They also recommended a combination of fuel switching and

control technology strategy in the shipping industry.

The environmental impact resulting from the use of fuel oil in power generation has

been reported by many studies (Bacci et al., 1983; Rao and Rubin, 2002; Sims et al.,

2003; Reddy et al., 2005; Rubin et al., 2007; Schneider and Bogdan, 2007; den Broek

et al., 2008; Popov, 2011). For instance, Schneider and Bogdan (2007) analysed the

effect of heavy fuel oil combustion in power plant. They showed that increased

replacement of heavy fuel oil by natural gas in dual fuels burners leads to reducing

OPEC Energy Review December 2017 ©2017 Organization of the Petroleum Exporting Countries

262 Yousef M. Alshammari and Mouf‌id Benmerabet