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LNG to help meet new marine fuel regulations

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Hydrocarbon Engineering,

The International Maritime Organization (IMO) has confirmed that global refiners and shippers must comply with new regulations to reduce the sulfur content in marine bunker fuels by January 2020 – five years earlier than many expected. As a result, the global refining and shipping industries will experience rapid change, as well as significant cost and operational impacts, according to a new report from IHS Markit, ‘Refining and Shipping Industries Will Scramble to Meet the 2020 IMO Bunker Fuel Rules’.

Shippers will have several options to meet the new IMO regulations, IHS Markit said. Low-sulfur bunker fuels and liquefied natural gas (LNG) will be part of the solution. However, IHS Markit’s researchers expect that on-board ship scrubbers will be the primary compliance path for ships, which could continue to burn higher-sulfur fuels.

“While the IMO is taking positive action to address the environmental impacts of air pollution from ships, the rapid change creates significant disruption for both the refining and shipping industries,” said Kurt Barrow, vice president of downstream research at IHS Markit.

“Refiners will experience significant price impacts as they shift production to deliver more lower-sulfur fuels to the market and, at the same time, find a market for the higher-sulfur fuels they produce,” Burrow added.

“The two industries are vastly unprepared,” commented Sandeep Sayal, senior director of refining and marketing research at IHS Markit. “Neither has made the necessary investments for compliance, which means that the 2020 implementation date will result in a scramble."

The installation of scrubbers and some level of non-compliance will not be in time to halt the disruption on refined products markets, IHS Markit said. According to its report, the primary challenge with the bunker fuel quality change (which requires sulfur content to be reduced from 3.5% by weight to 0.5% by weight) is the disposal of high-sulfur residual fuel—not the production of low-sulfur bunker fuel.

“When we account for all the supply and demand factors for the sour residual balance, including new conversion projects, capacity creep, scrubber and LNG capacity, as well as quality compliance, our bottom line is that a sizable portion of today’s fuel oil will be pushed into lower-price tiers, notably oil-fired power-generation plants,” Barrow said. “Refining capacity will most likely exist in 2020 to produce the low-sulfur bunker fuel, but higher overall crude runs will be required.”

As ship owners respond to the large-scrubber investment incentives, high-sulfur bunker fuel demand will rebound, although not to prior 2020 levels. Due to increasing demand and addition of debottlenecking capacity for residue conversion, IHS Markit estimates price spreads will moderate within a few years, but the timing of price recovery will be dependent upon a number of variables.

Refiners will produce more distillates (higher-value components derived from crude) as new demand arises for these products during the disrupted years, IHS Markit said. With HSFO priced at coal-thermal parity and demand for middle distillates (kerosene, jet fuel, diesel) increasing to blend to low-sulfur bunker fuel, refining margins will benefit, but in different ways.

“Refiners of sour-crude will be negatively impacted by the nearly valueless sour-crude residue, while refiners of sweet-crude conversion will experience moderately higher margins, but sweet-crude prices will reflect the low-sulfur residue value,” Barrow said. “It is the high-conversion refiners of sour crude that are expected to have extraordinary margins.”

Highly complex refineries will benefit the most from the IMO specification change, IHS Markit said. Highly complex refiners will produce the least amount of residual fuel oil and the highest amount of distillate and gasoline as compared to lower-complexity refiners.

Crude-price relationships, specifically between light-sweet and heavy-sour crude, will widen around the compliance timeframe, IHS Markit said. Assuming the specification change implements as announced on a global and instantaneous basis with no phase-in timing or quality transition allowances, the margin uplift will be acute in the compliance period from 2020 to 2021.

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