IMO 2020 will cause upheaval for shippers and refiners

With fuel oil recently trading at a premium to motor gasoline, one may be excused for asking what all the fuss is about the forthcoming fuel oil specification changes for the shipping industry?

Those changes, adopted by the International Maritime Organization, still pose the largest and most disruptive change that the shipping and oil refining industry have had to face. Those changes, which go into effect in 2020, will require ships to shift to cleaner fuels to meet environmental standards.

In less than 10 months, we forecast an immediate drop of more than 2 million barrel per day of high sulfur fuel oil demand as shippers switch to low sulfur fuel oil or marine gasoil increasing the demand for diesel/gasoil by over 2 million barrels a day. In the short term, we estimate the cost of compliance for shipping to be $60 billion.

At face value, the direct impact of higher shipping costs on consumers should be limited. The additional cost of shipping 6,500 new Mercedes from Hamburg to Shanghai, for example, would add about $70 to cost of each car.

But what will hit the consumer is an estimated increase of $5 to $7 a barrel in the price of Brent crude driven by increased refinery runs in 2020. This will most likely impact consumers at the pump as they refuel their cars, leaving them with less money in their pockets at the end of each month to spend on discretionary items such as trainers, going out for a meal or taking a holiday (especially as higher jet fuel prices will make flying more expensive).

Increased crude prices will also hit industry, meaning the impact will be felt across the whole economy. Global trade will slow down, which will affect container ship profits as utilization falls.

Many have accused both the shipping and refining industries of having their heads in the sand about the unwanted quantities of HSFO. One avenue for the surplus HSFO is power generation in parts of the world with less stringent sulfur restrictions .Of course, the irony of all this is that legislation intended to reduce sulfur dioxide emissions, especially where it has a health impact (close to coastlines) has simply pushed some of it into static sources such as power plants, which tend to be closer to populations.

The main problem the shipping industry has to address is how it will cope with an unfamiliar set of new fuels in 2020. There is some uncertainty about the new low- sulfur blends the refining industry is developing, with wide range of products is expected to be on offer.

The risk of a spate of engine failures across the world in 2020 is currently keeping marine engineers awake at night. A contamination crisis in the bunker fuel industry in 2018, after harmful off-specification product seen first in the U.S. Gulf of Mexico was exported across the global supply chain, has also concentrated minds on how similar problems may arise with the new fuels.

Fuel oil suppliers will need to supply a range of fuels from high sulfur fuel oil, marine gasoil and a range of low- sulfur blends, creating even more complexity to fuel management and supply chains, especially on bunker barges.

So who stands to benefit from IMO 2020? The winners will be modern refiners, whose margins will be elevated in order to incentivize increased production of distillates to meet demand. Clean oil products values will be elevated while dirty products, such as high sulfur fuel oil, will be cheaper to clear the volumes into power generation displacing plants using natural gas or LNG today.

In the short term, IMO 2020 will cause severe upheaval for both shippers and refiners, as well as hitting consumers and impacting the global economy, potentially pushing it into recession. However, while these factors will be disruptive in 2020, the industry is remarkably resilient and will quickly adapt to the new circumstances.
Source: Houston Chronicle