Transport fuel’s day of reckoning
Gulf refiners wonder how to cope with new green standards for shipping and aviation fuel
A global clampdown on two of the most public scapegoats to the acceleration of climate change—shipping and aviation—is putting Gulf refiners' portfolios to the test.
The International Maritime Organisation's (IMO) 0.5% sulphur cap on bunker fuels, set to begin from 1 January 2020, is followed by the International Air Transport Association's (IATA) Carbon Offsetting Reduction Scheme for International Aviation (CORSIA) from 2021. Both are milestones after decades of toing-and-froing between environmentalists and industry.
As the Gulf is home to the world's second-largest bunkering hub, the UAE's Port of Fujairah, and is one of the world's fastest-growing aviation hubs, could a shortage of post-2020 fuel specs put a black mark on its golden refining run? Or will the region leverage its flexible crude refining palette to hit a home run in 16 months? The compass is heading towards the latter—but only just.
The IMO's ruling could cost the global economy $1 trillion over five years and conservatively uplift crude prices by an average of $7 a barrel in 2020—a 10% gain on current prices—said energy pricing agency S&P Global Platts. Gulf refineries, like the UAE's 900,000-barrels-a-day Ruwais and Kuwait's 620,000-b/d al-Zour, must plot a new route.
But the map for the biggest shake-up to the shipping industry—with major implications for refiners—since engines replaced sails in the late 1800s appears lost in a storm of finger-pointing. Debates between refiners, port authorities, ministries and the shipping industry over who should spearhead clarity on the supply-demand balance and enforcement continue to swirl-to the benefit of very few. For now, the emphasis is largely on port authorities, according to 56% of Middle Eastern respondents to a GIQ Survey by researcher Gulf Intelligence.
"The Gulf won't be caught short of low-sulphur fuel oil by 2020…but there's no room for progress to slow. Today's pace must continue—we all need guidance," an oil expert at Kuwait Petroleum Corporation (KPC) told Petroleum Economist. Just 35% of the world's refineries can supply 0.5% fuel by 2020 as it stands, he added, citing KPC's own research.
More surprises to come?
In the meantime, KPC's internal committee to gauge and mitigate the impact of IMO 2020 is working with at least half of its approximately 40 service providers. Kuwait's own fuel supply, at 0.5% sulphur, will support KPC's fleet of approximately 35 ships and power generation. Export plans are currently being kept in the back pocket.
Gulf refiners' gradual proactivity is infused with caution. While the sulphur cut has been on the table for more than a decade, confidence that this is the end of the 'climate-driven surprises' with 10-digit cost implications is low. Such fears may be justified, in part. London-based think tank Carbon Tracker said global refinery values and earnings could halve by 2035 amid a swelling tide of climate regulations and rapid advances in clean technologies.
Gulf refineries also need to keep an eye on activity in the skies. CORSIA aims to reduce any annual increase in total CO2 emissions from aviation above 2020 levels. The voluntary period, 2021-26 becomes mandatory from 2027.
"Refiners everywhere, including the Middle East, will start to see new trends. This includes rising fuel and ticket taxation, which will impact travel and kerosene demand as regulators prepare for a transition to synfuels," says Bill Hemmings, shipping and aviation director at Brussels-based Transport & Environment, a clean transport campaign group. Each month takes Gulf refiners one step closer to the 2020 crossroad.