IMO 2020 to beckon in a new reality
The new regulations are poised to change shipping markets forever. Some participants may handle the new regulatory environment better than others
IMO 2020 will radically change shipping market supply/demand dynamics. The basis of the new regulations is simple–to reduce sulphur emissions by tightening the requirements around allowable fuels any given seagoing vessel can burn. In technical terms, this means cutting sulphur content to 0.5pc, down from 3.5pc at present. High sulphur fuel oil (HSFO) demand will, in part, be forced to shift towards cleaner alternatives, namely marine gasoil and low sulphur fuel oil (LSFO). LNG is also an option, albeit uptake will be limited.
Advantage West Africa
A barrel of crude oil is associated with a wide variety of classifications that can range from light-sweet (thin, low sulphur) to heavy-sour (dense, high sulphur) and everything in-between. The heavier (denser) a barrel of crude, the lower the attached API gravity. Most importantly, a heavier crude tends to yield higher amounts of distillate output per barrel compared to that of a lighter crude. Consideration of sulphur is also key— with sweet (<0.5pc sulphur by volume) barrels enjoying an advantage against higher sulphur sour alternatives. By combining the need for high amounts of low sulphur distillate output, heavier-sweeter barrels will serve as the ‘optimal’ IMO 2020 barrel.
West Africa (Waf) is poised to profit the most from an upswing in heavy-sweet demand, with some 235,000bl/d of this crude type departing from the region over the past year (60pc of total heavy-sweet loadings). The likes of Doba blend (API 25, sulphur 0.09pc, 100,000bl/d) out of Chad and Dalia (API 24, sulphur 0.5pc, 135,000bl/d) sourced from Angola are debatably some of the best IMO optimised barrels and will thus enjoy sizable positive price spreads against alternative grades that are lighter or more sour.
West Africa is poised to profit the most from an upswing in heavy-sweet demand
Middle Eastern oil production sits on the opposite end of the IMO optimality spectrum. Output leaving the region holds an average API of just 33 despite sulphur content near 1.4pc. Latin America is in a slightly better position. Despite equally high sulphur levels, produced barrels are overly heavy, holding an average API of 23, a positive for middle distillate yields.
The US remains the biggest question mark. Export volumes are overly light and sweet, which is optimal for gasoline production, less so for distillate output. Even so, any sweet barrel is preferred to one with more sulphur. With an average API of just 39 and sulphur content at 0.44pc, US exports are likely to be in a middle ground alongside light-sweet Waf barrels and medium/heavy-sour Middle Eastern and Latin American grades.
Complexity is key
Oil production is only part of the IMO equation. Refinery infrastructure will also play an outsized role. So called ‘complex’ refineries enjoy the ability to turn a higher percentage of a heavier-sourer barrels into valuable petroleum derivatives. ‘Intermediate’ or ‘simple’ refineries have less of an ability to transform the same barrel into product yields of equivalent value. Such a process advantage is important given sour barrels are likely to sell at a growing discount to sweeter alternatives as the need to cut sulphurous product outputs grows.
The US Gulf coast, arguably the most complex refining center on earth, is well placed to benefit from IMO 2020. With more than 9mn bl/d in throughput capacity, the region is not only a large consumer of heavy-sour barrels, but well-equipped to re-export refined products. The average API/sulphur split of barrels imported into the region held at 24/2.39pc—resulting in high amounts of middle distillate and petroleum coke production, reflected in overall export totals. Departures of jet, gasoil and diesel alone averaged 4.685mn t per month over the past year.
API 24, sulphur 0.5pc - specification of the IMO-favoured Angolan Dalia grade
Saudi Arabia is also well placed to benefit from IMO 2020. Its refinery cluster readily competes with the US on complexity and export mix. Saudi throughput, all of which is sourced domestically, is slightly heavier than oil leaving the state (API 33, sulphur 1.97pc). Second only to the US, Saudi petroleum coke departures averaged an impressive 0.5mn t per month with combined exports of diesel, gasoil and jet also coming in strongly at just below 3mn t per month.
India’s Jamnagar refinery, the largest in the world by throughput, is also poised to come out a winner after the IMO changes. The facility, which is highly complex, has long showed an ability to import large volumes of medium-sour barrels, with an API/sulphur split of 30/1.7pc. Middle distillate exports have dominated, averaging in excess of 1.875mn t per month over the past year.
New regulatory environment
The introduction of IMO 2020 is set to radically alter shipping markets over the next 12-18 months. A forced move away from HSFO will put distinct pressure on middle distillate supplies. Producers with readily available heavier and/or sweeter grades, particularly those in Waf, will enjoy a positive price spread to sourer alternatives. Complex refiners—such as those along the US Gulf Coast and within Saudi Arabia, among others—will also benefit given an inherent process advantage that allows a minimisation of higher sulphur petroleum product yields.
Reid I’Anson is Global Energy Economist at Kpler