European storage adjusts to IMO 2020
There are signs that European operators and refiners are getting comfortable with inventory levels ahead of the IMO 2020 switch
Europe's steady oil consumption has provided a firm underpinning to oil storage activity this year, as the market adjusted to expectations of a significant change in product consumption patterns with the implementation of the International Maritime Organisation's (IMO) 2020 reduction in marine fuel sulphur specifications, and the arrival of increased volumes of US crude.
These two factors appeared to compensate for market backwardation—the spot price exceeding forward prices—which discourages speculative oil storage. Royal Vopak, the world's largest independent liquids storage company, reported in its analyst presentation for the first half of 2019 that in the second quarter occupancy at its European and African business segment terminals stood at 83pc, unchanged year-on-year. It added that its programme to convert tankage from high-sulphur fuel oil (HSFO) storage to storage for lower-sulphur products is continuing, and that it expected its capacity dedicated to HSFO to decline to less than 45pc of its total in 2020, from 65pc in 2017, when it began planning for the switch.
The Port of Rotterdam, a bellwether for storage activity, reported that liquid bulk shipments in the first half of this year were up 2.8pc from the first half of 2018 to 110 mn t from 107 mn t, but noted that the increase was accounted for by increased crude shipments, particularly from the US, transiting the port, LNG and other products including chemicals, while liquid products transit fell 5.8pc.
"The fall was mainly attributable to less trade in fuel oil between Russia and Asia via Rotterdam. This is in line with the declining trend for fuel oil production in Russia in recent years," the Port stated in its half-yearly report. European OECD members' oil consumption has remained essentially flat at around 14 mn b/d for the past three years, according to the International Energy Agency (IEA).
Despite the products storage decline in the first half of the year, analysts say reported product stocks and terminal occupancy could rise through the end of this year. Oil storage specialists at Genscape say they see gasoil storage utilisation currently around 55pc, compared with 39pc in December 2018. Winter heating demand and the expectation of increased marine diesel consumption as IMO 2020 specifications kick in on 1 January are likely to lead to stock builds through the third and fourth quarters.
Fuel oil storage may also benefit, says Adrian Tolson, senior partner at 20/20 Marine Energy, who advises on marine energy procurement, supply and infrastructure development. He notes that despite its lower fuel oil exports, Russia will still be producing large quantities of HSFO. "What do the Russians do with all that high-sulphur residual?" he asks, suggesting that much of it may end up in European storage. Other analysts suggest that fuel may be burnt in Russia's power sector, but that the problem of a Russian HSFO surplus may long persist.
Analysts say there are signs that European operators and refiners are getting comfortable with inventory levels ahead of the IMO 2020 switch. They pointed to the movement of the ultra-large crude carrier Oceania—which had been chartered for floating storage of very low sulphur fuel oil (VLSFO) offshore Malta—to the Far East as a sign that the industry is now comfortable with expected European supply levels.
Throughout Europe, the storage industry is evolving, with divestments and closures by some operators being balanced by new openings. Vopak has for a year been planning on the divestment or closure of its terminals at Algeciras in Spain and Hamburg in Germany; and in April sold its 1 mn m³ capacity terminal at Tallinn, Estonia to Abu-Dhabi-based storage operator Liwathon. HES International is developing a 1.3 mn m³ terminal at Rotterdam to add to its European terminal portfolio. In Scandinavia bunkering firm Stena Oil is adding 100,000 m³ of storage at its Gothenberg and Frederikshavn terminals in Sweden to meet IMO 2020 fuels demand and add flexibility to its operations in the Baltic Emission Control Area (ECA).