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Consumers reluctant to bear cost of reduced sulfur emissions

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Hydrocarbon Engineering,

Few consumers are willing to pay extra for their goods to reduce the amount of sulfur emissions they are personally responsible for - their own ‘Sulfur Shadow’. For example, in the US, UK and Russia, over 35% of consumers are unwilling to pay anything extra for a car to reduce their ‘Sulfur Shadow’.

This reluctance of consumers to bear the cost of the sulfur emissions regulation was uncovered by research from KBC, a business improvement company for the energy and chemical industry. KBC surveyed over 5000 consumers across the US, UK, China, India and Russia to discover to what extent consumers would be willing to pay to reduce their personal ‘Sulfur Shadow’ so refiners can determine their optimum investment strategies. This is following the news that the IMO (International Maritime Organization) has introduced regulations to cut the sulfur limits in marine fuel from 3.5% to 0.5% by 2020.

Importantly, the research revealed a difference in consumer sentiment between East and West. Globally, 16% of consumers would be willing to accept an increase of more than 10% in the cost of a mobile phone to reduce their ‘Sulfur Shadow’. In China and India, however, this rises to 24%, while in the UK, US and Russia it is only 9%. This means that refiners producing for the US, European and Russian markets (assuming the UK largely reflects Europe) must be much more sensitive to optimising their operations and assets in response to the IMO 2020 regulations than those producing for Asia.

“International shipping accounts for up to 9% of the world’s sulfur gas emissions (mainly sulfur dioxide) and up to 30% of sulfur concentrations in coastal regions as a result of burning fuel oil in their engines. Each consumer’s ‘Sulfur Shadow’ therefore partially reflects the goods they buy from other countries which are shipped across the seas”, explained Simon Wright, EVP of Marketing at KBC.

Enforcement of the new regulation from the IMO will have a massive impact on the economics of shipping. Shippers already operate on razor thin margins. Faced with the enormous cost of scrubbing clean the emissions themselves, shippers are preferring to rely on oil refineries to produce a cleaner fuel that does not require clean-up. This comes at enormous cost to refiners who need to assess if and how they will recover their investments.

Shippers will inevitably have to pass on the higher cost of compliant bunker fuel to their customers which will trickle down to consumers in the form of costlier goods.

But with consumers not willing to pay more for their goods (particularly consumers in Europe, the USA and Russia), those who are responsible for producing the fuel - the oil refiners - need to ensure that they find the lowest cost investment to achieve the newly regulated sulfur level in their marine oil fuel production that will keep consumer prices down.

“The IMO’s cap on ships’ sulfur emissions means that the burden of compliance has fallen to the oil refiners. Many have already started their investments but some are yet to decide on the best course of action. Oil refineries are facing two main choices – both of which could potentially hit the consumer with price rises. Refiners can choose to produce marine fuel oil that contains less sulfur, or they can seek new markets for the high sulfur fuel oil they currently produce. With the new regulations set to have a significant impact on the demand and price of the fuel oil mix, oil refiners need to act now to make their investment decisions,” Wright added. “As we have uncovered, in some regions of the world consumers are willing to absorb some of these costs; in others the refiners are on their own.”

The higher willingness of Asian consumers to pay more for goods could be due to the fact that their consumers are more aware of the effects of sulfur dioxide, on their health. 90% of consumers in China and India are aware that sulfur dioxide is harmful to their health, whereas only 67% were aware in the US, UK and Russia. This might be explained by the severity of pollution already being experienced in Asia.

“As awareness rises this is something that will challenge the oil industry,” added Stephen George, Chief Economist at KBC. “Refineries need to find the optimum strategy to achieve the required sulfur level in their marine fuel oil production. Such an approach will enable refiners to produce compliant fuel at the lowest cost. With refineries suffering in recent years from overcapacity and oversupply, the marine fuel transition is a perfect time to implement new margin-boosting technology and optimally reconfigure assets and operations. But there is no one-size-fits-all solution, so refiners will need support from experts in making their decisions.”

“Implementing such technology for the reduction of sulfur emissions appropriately, and meeting other regulatory requirements at the same time, may help to future-proof refineries while boosting margins and delivering the cleaner fuels that the shipping industry will continue to require, helping consumers reduce their ‘Sulfur Shadow’ at reasonable cost,” Wright concluded.

An in-depth report, titled: ‘IMO 2020 Sulfur cap - oil refiners step up to the plate’ further explores the issue and can be downloaded here.

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