Marine fuels get a shakeup

• Date: 01 June 2019
• DOI: http://doi.org/10.1111/oet.12711
• Published date: 01 June 2019

FOCUS

Marine fuels get a shakeup

1|REFINERS ARE SUCCESSFULLY

GEARING UP TO PRODUCE MORE

LOW SULFUR FUEL TO MEET

MARPOL 2020 REGULATIONS,

WHILE TARGETS HAVE ALSO BEEN

INTRODUCED TO CUT CARBON

EMISSIONS IN THE SECTOR

Challenging 0.5% sulfur rules for marine bunker fuel to be

introduced globally from 2020 are leading to significant

changes in refinery configuration, product trade flows and

crude/product price differentials around the world. However,

investment from refiners and shippers, as well as a shift in

the global crude slate to more light, sweet grades, is helping

to smooth the switch—which has led the United States to

drop its demand for a transitional period beyond 2020.

International Maritime Organization (IMO) regulations on

SOx emissions from ships first came into force in 2005, under

Annex VI of the MARPOL Convention. Since then, sulfur

limits have been progressively tightened and in 2016 the IMO

approved a reduction in marine sulfur content to 0.5% by

2020 from 3.5% now (outsideemissions control areas [ECAs],

where the limit is already 0.1%). The new sulfur limits have

major implications for the global refining sector. For a start,

any remaining simple refineries that turn a significant share of

their crude run into high sulfur (3.5%) fuel oil (HSFO) could

be under threat, while more complex refineries look like

benefiting from tighter low sulfur fuel markets.

Refined product prices generally are expected to rise rela-

tive to crude, with predictions suggesting some product

prices will begin increasing by September. This is likely to

add about $5 to 10/bl across all products (not just marine

fuels), and it had been estimated much higher a year or

2 ago. Boston Consulting Group says the total market trans-

formation could take until 2025. Gasoil (0.5% S or less)

prices, in particular, are expected to rise, because it could fill

much of the gap left by HSFO; but also, has competing uses.

The differential between distillates and HSFO will widen, as

will the differential between HSFO and crude, although this

is also expected to lead to wider light-heavy and sweet-sour

crude differentials (see below).

2|LOW SULFUR OPTIONS

Refiners are increasing production of alternative fuels, including

low-sulfur fuel oil (LSFO), which is a straight run product (pro-

duced through a basic distillation of crude, and so can be

increased with higher through-put). It can also be produced by

de-sulphurising HSFO—although this is expensive and there is

little capacity globally. Vopak, the world's largest storage com-

pany, believes LSFO will occupy about 15% of its storage for

bunkering after the rules have gone through, although much of

this is likely to be VLSFO from blending (see below).

The other main alternative fuel is low sulfur marine gasoil

(MGO), which can also be increased by raising refinery runs,

but has far greater potential for production growth through more

cracking, desulphurization and other secondary processing. The

IMO rule is expected to require up to 1.5 million b/d of addi-

tional MGO and other middle distillates to meet bunker demand.

Liquefied natural gas (LNG) is also being introduced as

an alternative bunker fuel, with global LNG bunkering

demand expected to reach about 9mn t/year by 2025. How-

ever, some LNG could get cheaper as a result of the MAR-

POL switch because of the way it is priced: A depreciation

in sour crude prices associated with MARPOL (see below)

could cause a fall in the Japanese JCC crude benchmark,

which is based of sour crude prices and is used in around

40% of LNG contracts, mostly held by Northeast Asian

buyers. Savings could be $2.5 bn in 2020.

Other methods of complying with the MARPOL regulations

include installing scrubbers that allow shippers to continue

burning HSFO, while releasing emissions into the water instead

of air—although some ports prohibit the discharge of wash water

from open-loop scrubbers to maintain marine water quality stan-

dards. Latest estimates suggest shippers have invested in scrub-

bers that allow them to still burn some 700 000 bd of HSFO

(about 25% of current demand) while still meeting emission stan-

dards. Vopak reckons its bunker tanks will still hold about 30%

HSFO after 2020, down from 65% now. Investment in scrubbers

could continue to increase if low sulfur bunker premiums rise

sufficiently and given improvements in scrubber technology.

There is also a risk that some shippers will not comply at

all, particularly in developing regions and open seas where

DOI: 10.1111/oet.12711

Oil and Energy Trends. 2019;44:3–11. wileyonlinelibrary.com/journal/oet © 2019 John Wiley & Sons Ltd 3