IMO 2020 promises widespread disruption
Large-scale changes in refinery operations will be just one of the major changes the new regulations will bring to the energy landscape
From 1 January 2020, international bunker fuels have needed to meet a much tighter maximum sulphur specification of 0.5pc, versus 3.5pc currently, due to the new regulations implemented by the International Maritime Organisation (IMO). This change aims to effectively eliminate one of the largest sources of SOx emissions, accounting for roughly 10pc of the global total from all sources.
Although exhaust gas scrubbers on ships will cover some of the requirement, along with a very limited amount of LNG bunkers, the vast majority of demand will need to change to low sulphur bunker fuels.
From a refining standpoint, this will require a major shift in the blendstocks used to make marine fuels, initially creating a huge displacement issue for roughly 3mn bl/d of high sulphur fuel oil (HSFO). That volume will be replaced by various low sulphur blends containing both residual and distillate materials, including marine gasoil.
Prices for marine gasoil (MGO) and the new blended fuels are expected to rise sharply while HSFO prices will fall. Those price changes began in the third quarter of 2019 and accelerated in the fourth quarter. Peak price impacts are expected in the first half of 2020, before differentials ease somewhat later in the year.
The price pressures arise from the need to use relatively expensive steps throughout the refining circuit to rebalance products, resulting in much wider price spreads for all middle distillates versus HSFO. At times in 2020, the refining circuit may need to run additional crude to make sufficient compliant marine fuel and may not have the capability to completely ‘destroy’ the surplus high sulphur fuels—forcing them to price lower into power generation or storage. Diesel and jet cracks will increase, along with marine gasoil, as they have overlapping boiling ranges. Gasoline cracks may also see support as yields shift towards middle distillates. The price of the new 0.5pc low sulphur fuel oil (LSFO) will initially be fairly close to marine gasoil. Refinery operations and crude/refined product trade flows will change dramatically.
However, these initial price effects will begin to dissipate later in 2020—and particularly over the following few years—as refinery conversion capacity expands, more ships add exhaust gas scrubbers, and the industry adjusts operations to more efficiently supply low sulphur fuels.
For bunker blenders/sellers and shippers, the adjustments revolve around securing sufficient supply, as well as segregating potentially incompatible blends to avoid operational problems. This will be a major concern, at least initially, since the new fuels are more varied than traditional HSFO and some are not mutually compatible. The development of testing/operational procedures has also been slow. Those risks are expected to drive some shippers to initially use MGO, rather than LSFO, until concerns are resolved.
Other key implications for which to watch out include:
- Middle distillate crack price spreads relative to crude oil will increase substantially in 2020. Gasoline cracks will also see some strength but much less so. HSFO cracks will fall sharply relative to recent history
- Crude quality price differentials will widen dramatically in refinery parity with light-heavy and sweet-sour product spreads. Refineries with deep conversion will see very strong margins
- Medium conversion refiners will also see substantial margin improvement
- Higher refinery crude runs in 2020 and stronger economics for sweet crude will drive overall prices higher for key sweet benchmarks such as Brent and WTI
- Reforming margins and utilisation rates should strengthen due to lower gasoline production from fluid catalytic cracking (FCC) and a need to backfill from the virgin naphtha pool. This will also pull up naphtha prices and incrementally shift petrochemical feed preferences towards LPG/ethane
- Waterborne shipping costs will increase for nearly all goods due to higher fuel costs
Overall, this will be a period of price volatility and operational change that will offer both challenges and opportunities. But in the end, the industry will rebalance with only more modest lasting price effects, chiefly on wider low sulphur versus high sulphur spreads, and the global environment will see 10pc less SOx emissions.
Rick Joswick, Head of Oil and Trade Flow Analytics, S&P Global Platts