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IMO alters competing fuels’ price dynamics

Buyers of marine fuels may need to think harder about their decision-making when considering what to put in their vessels

Marine fuel economics fails to look at fuel values critically in terms of their respective energy values. And the pricing methodologies used in bunker fuel purchasing are underestimating these criteria.

These were key conclusions in our previous look at the subject, and thus it is worth analysing these statements and looking at the mathematics involved. Such a study should widen the debate as to where fuel prices might go in the future. 

As a starting point, let us look at the essential difference in energy density of each of the fuels used in marine internal combustion engines (ICEs). Most modern vessels run on slow speed diesel engines, except for LNG carriers, which use boil-off gas to fuel boilers and thus run steam turbines. Without the unique LNG characteristic of boil-off, steam turbines are not as efficient as ICEs.

To carry out a comparison we need to compare the calorific value, or heat energy, per tonne of each fuel. This is known as energy density. Fig. 1 gives the energy density expressed as a percentage energy per tonne and the energy values of the different fuels.

So, how do we value energy in ICEs? The main thrust of our argument is that energy in fuels should be equated to calorific or thermal values. This, after all, is what puts horsepower into engines.

It should also be pointed out that several papers have been given on this subject and our methodology may not agree with them. However, when we apply pricing to the methodology, we find that the correlation through the price range is maintained.

Our methodology is to look at the price of fuels as a cost in $/mn Btu, using as a starting point the price of each fuel as a percentage of the price of Brent crude oil. It can also be calculated in megajoules (MJ), which is a direct conversion (947.817 Btu = 1MJ).

The basic formula for cost per mn Btu is:

             (Pc x R) /J / E= $/mn Btu

Where: Pc = Price of Brent crude in $/t = ($/bl*7.55)

             R = Ratio of the relevant fuel as a percentage of Pc

             J = mn Btu/t of product

E = Energy density percentage

The formula for LNG is slightly different as LNG is quoted in $/mn Btu so it would read as follows:

P c x PG

Where: Pc = Price of Brent crude oil in $/bl.

PG = Ratio of LNG price per mn Btu to Pc

If we go back to 2017—well before IMO 2020 was due to take force and while the debate was raging—thus the market had not even begun the process of trying to price in its impact—the average of the previous three years’ pricing gave the following ratios:

Ultra-low sulphur gasoil (ULSGO)              126pc of Brent

Low sulphur fuel oil (LSFO) 1pc                   98pc

IFO 380                                                          80pc

We then applied these factors over a range of Brent $/bl prices, as seen in tabular (Fig. 2) and linear form (Fig. 3). But we were also cognisant that these factors would change with the advent of IMO 2020.  

As IMO compliant fuel started to be made available, we soon realised that the initial 115pc of Brent being asked for very low sulphur fuel oil (VLSFO), would soon be eroded and, at the same time, the factor for diesel lowered. As more and more supply of VLSFO came onto the market, so the difference between VLSFO and IFO 380 narrowed.

The result of the lockdown in many countries due to Covid-19 was a steep reduction in demand for aviation fuel and a corresponding increase in diesel surpluses. And these changes to refining economics resulted in greater demand for atmospheric high sulphur residues as cracker feedstocks, thus resulting in a hike in the price of IFO 380.

Comparing the prices observed over the last three months to the 2017 calculations, the changes are also marked. The ratios of product prices to crude oil in Fig. 4 are very different to those in Fig. 2. And the lines in Fig. 5 have swapped over completely from Fig. 3, with marine diesel oil (MDO) flipping from a premium to a discount fuel.    

What does this tell us? Firstly, as the energy values of the three main bunker fuels are similar, there is little justification for investment in scrubbers. This price parity is the clearest signal yet that, when under pressure, refiners will always find ways of making product. However, if price competition keeps VLSFO prices below the price of crude, then supply will become uneconomic and refiners will reduce runs, resulting in a higher VLSFO price.


VLSFO is definitely here to stay and is likely to develop into a liquid commodity market. And it could play an expanded role in the spectrum of futures/swaps traded oil, allowing better hedging opportunities to ship operators.

The reason for the lack of historic success in commoditising HSFO with a benchmark futures contract was the risk of adulteration of the final product in deliverable contracts. VLSFO will diminish this risk, due to the sensitivity of its sulphur content, which will deter adulteration.

Another possible consequence is the adoption of more ULSGO burning engines. Up to now there has been a resistance from ships’ engineers to purchase ULSGO, as they argue that it has less upper cylinder lubricity and leeches out of faulty valves. It also needs cooling before it enters the injection stage of the cycle to increase its viscosity.

VLSFO is definitely here to stay and is likely to develop into a liquid commodity market

The lubricity issue has been overcome for high speed diesel engines in the past—by using additives—and these could easily make a comeback if demand was there.

Injectors can be made to accept a lower viscosity, and conversion need not be costly. The advantages of burning ULSGO are worth considering. It is ubiquitous in its availability; it is competitively priced; it does not need pre heating; it does not cause a mess if accidentally spilled; it is easy to handle; it does not block filters as often as heavy fuel; and it is easy to hedge.

It burns more cleanly and thus emits much lower sulphur oxides and particulates. ULSGO blends can also include biofuels compatible with the maritime sector, such as hydrotreated vegetable oil (HVO), which will in turn increase the shipowner’s ability to comply with future decarbonisation targets.

Low carbon options

Another significant finding is, that over the years, the price of gas, and therefore LNG, has decoupled from the price of crude and, as such, it is difficult to make the comparisons we have done above. What seems clear at is that gas is in plentiful supply and unlikely to come under severe price pressure soon.

This will make it attractive to ship operators. But, like the rush to validate scrubber economics, it may be a false dawn, should other lower carbon products come on the market faster than currently forecast.

Decarbonisation of the entire shipping fleet is now underway and, whereas it took some 20 years to go from 5pc sulphur in fuel to 0.5pc, we believe that the environmental lobby is gaining the upper hand politically—and there will be resulting greater pressure to move the decarbonisation agenda forward quickly.

There is a gamut of options, and the race is on. Will it be hydrogen, derived from the splitting of water through electrolysis? Or will it be LNG as an interim phase, followed by ammonia or solid oxide fuel cells?

What will win the race is unknown, but as we may be seeing with Covid-19, throw enough money at a problem and a solution—in its case a vaccine—will be found in a very short time. The imposition of a global carbon tax that incentivises carbon reduction will change our views on the speed of change radically.

Charles Daly is founder and chairman of international oil and gas consultancy Channoil.

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