The refining and shipping industries may be ill-prepared for a massive change in fuel regulation that is set to go into effect in 2020. The resulting market impacts will be major, costly and far-reaching, says a new report from IHS Markit.
The impending regulation by the International Maritime Organization (IMO) aims to significantly reduce the amount of sulphur in bunker fuels that are relied on for commercial shipping. Collectively, these ships burn more than 3 million barrels a day of residual fuel oil, which has a sulphur content that exceeds levels found in automotive gasoline by more than 1,000 times.
Burning fuels with a higher sulphur content can lead to a greater level of toxic air emissions -- including sulphur oxides -- which are considered a threat to the environment and human health. IHS Markit expects the majority of the demand for high-sulphur residual fuel oil will switch to a higher demand for the new lower-sulphur fuel in 2020.
The new report, titled "Navigating Choppy Waters: Marine Bunker Fuel in a Low-Sulphur, Low-Carbon World," says compliance remains the greatest uncertainty with the new regulation and there is concern whether sufficient supplies of compliant fuels will be available in the world's ports. The result will be higher freight costs for most cargoes -- including electronics, autos, petrochemicals and even cruise ship fares. Ultimately, those costs will be passed to consumers, IHS Markit said.
Noncompliant vessels could suffer loss of charter to sail. Major insurance companies have also indicated compliance assurance would be essential to vessel insurability.
Shippers have several options for compliance, including low-sulphur bunker fuels and liquefied natural gas. However, IHS Markit researchers expect on-board ship scrubbers, devices that clear harmful pollutants from exhaust gas, will be the primary compliance path for larger ships, which could continue to burn cheaper, higher-sulphur fuels. However, until those scrubbers can be installed, many ships will have to burn the more expensive, IMO-compliant very-low-sulphur fuel oil (VLSFO).
Other ships will convert to compliant fuels with sulphur levels below 0.5 percent. But those ship owners will see fuel costs escalate significantly due to the higher-quality fuel required and may face fuel compatibility issues, IHS Markit said. Each refinery complex could produce different -- but compliant -- regional formulations to meet the new fuel standard based on available crude oils, product slates, costs and supply chain logistics, presenting operational and continuity challenges for shippers.
Refiners will produce more distillates -- higher-value components derived from crude -- as new demand arises, with about half of the new compliant fuel coming from nondistillate sources within the refinery, but the remaining 50 percent will need to be sourced from refinery distillates. However, these same distillates are also needed for other growing diesel markets. As a result, refiners will likely have to make significant operational changes and ultimately invest billions to shift their existing product slates, increasing costs and distillate prices (relative to crude oil prices).
For more information, visit www.ihsmarkit.com or call (877) 762-7548.
