Shipping fuel markets are facing a historic shakeup.
A new global sulphur cap at the start of 2020 will force most vessel owners to switch from burning fuel oil to more expensive, cleaner alternatives. But as the deadline approaches, few are ready for the shift
The decision by the International Maritime Organisation (IMO) in October 2016 to bring down the global sulphur cap from 3.5 per cent to 0.5 per cent omitted instructions, or an outline of responsibilities, leaving a stand-off between shippers and refiners to act. Intermediaries have been caught out by three-years of inaction.
Refiners can no longer offload their lower-grade products and instead will have to supply the ship industry with middle distillates. But vessel operators don’t want to pay the premium for cleaner fuel. The standoff could see unwanted fuel oil build up in storage until its cheap enough to be a substitute for coal or natural gas in power generation. A large proportion of these power plants are in Asia, the Middle East and Russia.
On the flipside, IMO 2020 will also create a 3 million barrel-per-day boom for lower sulphur fuel-oil and distillates, ramping up prices across a large part of the barrel as refiners clamber to meet new demand.
"The market has not appreciated yet the degree and scope of these changes," said S&P Global Platts Analytics’ Rick Joswick. The forward curve for middle distillates currently shows little change between 2019 and 2020, he adds.
Alternatives are limited. Ship owners could install so called ‘scrubbers’ to clean up emissions to avoid a rise in bunker costs and carry on using fuel oil. However, the upfront cost of fitting the pollution cleaning technology to ship engines has largely put off buyers so far.
Although oil producers will benefit from higher demand from refineries, crude quality will play an important role in the IMO 2020 transition. Refiners are likely to switch to sweeter lighter crudes adding a premium to quality. But some refineries could struggle if they are unable to convert residual fuel oil into top dollar distillates even with the extra crude coming their way.
There is also the risk of shippers failing to comply with the environmental curbs. “It was a poorly designed policy… Yes there is going to be an implementation date in 2020 but what is the enforcement date? We don’t have enough information to know,” Jeff Currie, head of commodity research at Goldman Sachs told an S&P Global Platts Crude Oil Summit recently.
:A trading source at the event told Platts “there will be some slippage for sure”. Traders also questioned the sense of multiple marine fuels hitting the market, which aren’t compatible with each other. Platts Analytics’ latest research predicts non-compliance will have a limited impact on global bunker demand as the reputational risk of getting caught will be too high for most owners and operators to attempt.
Meanwhile, the Middle East could capitalise on the confusion. The Port of Fujairah on the east coast of the UAE is the world’s second largest bunkering hub after Singapore and sits in a strategic location amongst top OPEC producers, Asia and Europe. Equipped with one of the world’s most advanced fuel blending operations it is already geared up to meet potentially growing demand for low-sulphur products. If Fujairah, which currently stores over 18 million barrels of oil products, can master the complexity of the new regulations quickly then it will serve to enhance its reputation and capture market share.
S&P Global Platts holds exclusive rights to publish Fujairah oil inventory data and has deployed a Blockchain solution for its collation.
But Fujairah and the UAE aren’t alone in seeing an opportunity in IMO 2020. In Oman, consultants have been hired to manage the development of a new bunkering terminal at Duqm. The sultanate hopes the facility located south of Masirah Island on its Indian Ocean coastline will provide a new gateway for trade vessels heading out of the Gulf of Aden.
The region has also entered into another phase of expanding its modern and sophisticated refinery infrastructure, seizing the initiative from European competitors. Improvements to the Ruwais refinery in the UAE now bring its capacity up to 900,000 barrel-per-day and Kuwait’s 615,000 barrel-per-day Al Zour plant is expected to start up shortly. Both plants are on the list of the world’s top ten largest refineries. As 2020 nears, Middle Eastern refineries will be able to tweak their crude palette to support rising demand for distillates. This not only supports Fujairah’s business model, but sharpens the port’s competitive edge against other facilities in terms of supply.
Most are hoping for a harmonised system but getting to that point will mean navigating some choppy waters. The Middle East could provide a safe port in the IMO 2020 storm.