Eugene Lindell, team leader at JBC Energy, unpacks the implications of the 2020 deadline for bunker fuel and the effect it could have on global oil and tank storage markets
The year 2020 will be a seminal one for the global oil market on account of the implementation of tighter sulphur requirements for global shipping (referred to as bunkering) fuels. Basically, at the turn of the year the maximum permissible sulphur in bunker fuel will drop from 3.5% to 0.5%.
Provided shippers do not flout the law by burning non-compliant fuel, they have only four options: 1) use compliant gas oil; 2) use compliant fuel oil; 3) invest in emission abatement technologies (i.e. scrubbers); or 4) use alternative fuels (e.g. LNG, methane).
The situation is not really comparable to other changes in sulphur specifications due to the scale involved: we're not talking about a single country or region, but rather the entire world. We see total global bunker demand in 2020 growing to 3.9 million barrels per day (b/d). This compares to 3.65 million b/d in 2016, of which 2.9 million b/d were met by high sulphur fuel oil (HSFO). As HSFO bunker fuel has a sulphur content of up to 3.5%, using this fuel will no longer be possible in 2020, implying that up to 3 million b/d worth of HSFO bunker demand will have to be switched to a compliant fuel, depending on compliance and the use of scrubbers.
A new bunker fuel mix
A key question in the industry is therefore what the bunker mix in 2020 will look like. There is no consensual answer to this question and indeed many market participants assume a large role for gas oil. We disagree with this assumption for several reasons, one being the lack of available residue conversion capacity to produce enough gasoil range material and the other being that gasoil is still trading at such a premium to several low-sulphur residue streams that it simply has to be one of the last solutions to the problem. In fact, the emergence of 0.1% ultra-low-sulphur fuel oil blends in ECA zones proves this point quite nicely, with a 0.5% limit offering even more volumetric potential for fuel oil-based blends.
While we have thus solved the bunker question on the fuel oil side, we still see some 700,000 b/d of HSFO being bunkered in 2020, due to increased scrubber use and some initial non-compliance. However, by far the largest chunk (some 2.4 million b/d) of bunker demand is seen being met by 0.5% fuel oil. We should point out that these volumes do not come from mass desulphurisation of HSFO, but rather from better residue stream separation and improved global blending operations.
This is where one key storage aspect comes in, as many refiners will need to build more storage tanks to enable the increased separation of streams. Such improved 'house-keeping' needs will also affect blending operations, specifically in the key hubs such as ARA, Singapore or the US Gulf Coast, with blending economics likely offering great opportunities for players that have enough capacity to accommodate the different components, many of which will experience rather substantial price increases around the time of the specification switch.
Besides these separation aspects, large scale storage of low sulphur blending components and finished bunker blends will be an essential operation in the run up to January 2020 in order to meet that rather swift and dramatic demand increase that will be felt as of Q4 2019. On the flip side, we also deem it as very likely that large amounts of consequently unused HSFO will find their way into onland and offshore storage once the demand switch gets going, until depressed prices can unlock fresh end-user demand and give an incentive to refiners to invest into and process these fuels in their conversion units.
Lindell will be speaking more about the IMO regulations and refining developments in 2020 on the first day of the StocExpo Europe conference on March 28. For more information visit www.stocexpo.com.
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