IMO 2020 Will Bring Higher Costs, More Volatility And Cleaner Air
It will take years before we know what the true cost of IMO 2020 will be to consumers in the U.S. and around the globe, and whether that cost will be offset by better health and savings in medical care. But nothing good in life comes free, an immutable fact of life that makes no exception for regulations designed to create cleaner air.
The impacts of the IMO 2020 regulations mandating the use of low-sulfur marine fuels in all ships, which go into effect on January 1, 2020, are already beginning to cascade throughout the global economy. Refiners and ocean carriers around the world are busy implementing plans and efforts to comply with them. At the same time, the customers of those ocean carriers – which include pretty much every manufacturer, wholesaler and retailer – are implementing plans to mitigate higher transportation costs that will inevitably come about as a result of the changeover.
If you’re a consumer (aren’t we all?) you should prepare to ultimately foot the bill for those higher costs, since they will inevitably be passed along in the form of higher prices for consumer goods.
For those who are not aware, IMO stands for International Maritime Organization, a UN agency that is charged with the “responsibility for the safety and security of shipping and the prevention of marine and atmospheric pollution by ships.” IMO 2020 requires that all ships must quit using the current standard 3.5% sulfur content fuel in favor of a cleaner fuel with just .5% sulfur. Better for the environment, obviously, a move that IMO Secretary General Ketak Lim said is “expected to have a significant beneficial impact on the environment and on human health, particularly that of people living in port cities and coastal communities, beyond the existing emission control areas,” when he announced the 1/1/2020 deadline on October 28, 2016.
The IMO considered delaying the transition date to 2025, but rejected the idea when studies it commissioned indicated that ample .5% fuel would exist as of the original date. Accomplishing that goal will create significant impacts on refiners, according to industry advisory firm DrillingInfo:
Refiners who produce high sulfur resid…need to change their configuration or switch their crude supply. There are very few crudes that have the chemical composition that make the resid possible to blend away easily. These are light, sweet crude oils with atmospheric residue sulfur content below 0.5% and vacuum residue content below ~0.75% like Cabinda (Angola), Qua Iboe (Nigeria), & Eagle Ford (USA)…There is only a limited amount of these crudes available, however, meaning that the value of these crudes should increase for refiners that don’t have the downstream refining capacity to upgrade the bottom of the barrel.
All of this means that the price for the new fuel will inevitably be higher, and will go higher still should it be a scarce resource when the rule goes into effect. Although IMO 2020 provides four options to shippers to achieve compliance, including blending, installing scrubbers and the very expensive option of modifying their engines to use an alternative fuel such as liquefied natural gas (LNG), the vast majority are expected to choose to simply purchase and burn the new fuel.
Jenny Vander Zanden, COO of Breakthrough Fuel at Breakthrough – a leading supply chain and fuel management advisory firm that works with manufacturers, distributors and retailers – told me in a recent interview that “70 to 80%” of ocean carriers are expected to choose that latter, simpler option. “Some carriers are actually implementing scrubbers to clean their current bunker fuel in the process of using it,” she said. “That approach takes a full retro-fit and takes the ship out of service for a period of time. We expect that to happen, at most, in 10% of the cases. So it’s a small number that will use that approach and an even smaller number of ocean carriers that will convert to an alternative fuel, such as LNG.”
Vander Zanden expects that to change over time, as conversions become less costly and alternative fuels make more inroads and become more competitive in the shipping business. But for now, the shipping industry will rely mainly on refiners to be ready with ample fuel supplies, a process that places the U.S. in a better position than other nations. “The U.S. is well-positioned with a high capacity of complex refining, where as other countries don’t really have that available in the short-term,” according to Vander Zanden, “The efficiencies of U.S. refining process and high levels of production give us a two-pronged approach to be able to meet the domestic market needs.”
Breakthrough’s clients, meanwhile, will be impacted in multiple ways. IMO 2020 will “displace about 2 million barrels per day of high-sulfur fuel oil with a composition similar to off-highway diesel,” Vander Zanden said. “That will certainly have upwards price pressure on global energy prices, and it will impact both marine and domestic fuel costs, and will fundamentally change how the market operates.”
Breakthrough also expects the near-term displacements in the refining sector and realignment coming in global trade and import/export balances in maritime shipping fuel to create a much higher degree of price volatility for her clients. Higher volatility in fuel costs almost invariably results in higher costs of transportation. Breakthrough’s function is to help its clients implement strategies to manage such costs, but no strategy will eliminate them entirely.