In just a few months, on January 1, 2020, a new, sweeping global regulation is scheduled to go into effect that caps the amount of allowable sulfur content in all marine fuels used by ocean-going vessels from its current level of 3.5% m/m (mass/mass) to 0.5% m/m. Enacted in 2016 and set to be enforced by the International Maritime Organization (IMO), the new regulation is expected to have wide-ranging implications to the downstream energy sector, including oil refiners, traders, marketers and the shipping industry. The rule will also force dramatic changes in the demands for certain bunker fuels.
Matt Flanagan, Opportune partner who leads the firm’s Downstream sector and Process & Technology practice, shares his thoughts on prevailing concerns swirling within the industry about how the IMO 2020 regulation offers both short- and long-term challenges and opportunities for all stakeholders involved.
What are the main challenges awaiting the shipping and refining industries as IMO 2020 approaches?
Flanagan: The main concerns we are hearing across the industry are supply availability and price impacts. For example, will there be enough supply overall and will it be readily available at fueling ports? There are several new ventures in place coming online to try and meet the demand for lower sulfur fuels, but none of those are a short-term solution. In the near-term, it is expected that supplies will be tight, and prices will be elevated for at least a year. Bunker fuel demand in 2018 was 3.5 million barrels per day (MMbbl/d), representing about 5% of total global fuel demand, and the market likely won’t quickly shift to cover that demand.
The international shipping community has really two options when it comes to meeting the new IMO 2020 standard: implement fuel scrubbers on their fleet or purchase the low-sulfur fuel from refiners globally. Shipping companies have realized that, for the most part, scrubbers aren’t the answer as they don’t adequately address the new low-sulfur fuel standard, and many shippers were simply dumping the sulfur byproduct in the world’s waterways—clearly a violation of global shipping laws.
For refiners, we expect to see margin uplift into 2020 and 2021 as a result of the IMO 2020 regulation coming into effect as demand far outstrips supply in the near-term. The real questions are: how long will that “bull” market last? And, which refiners are best prepared to capitalize on this opportunity?
Is there an emerging market for technology to help solve these upcoming challenges or is the industry looking at other solutions (i.e. LNG, etc.)?
Flanagan: We’ve seen a few new technologies entering the marketplace. For instance, Rigby Refining has taken a unique approach with their technology of hydroprocessing finished high-sulfur marine fuel to produce compliant very low-sulfur fuel oil. While not technically a new technology, scrubbers are seeing resurgent demand due to the expected price spread between high and low-sulfur fuels. With the new requirements to have the Bunker Delivery Notes (BDN) certify ISO 8271 compliance, there have been discussions among companies of how to move the BDN from a straight paper system to a more technical solution.
Additionally, as part of the new fuel change and the reporting requirements associated with it, there is software change. One of the primary integrated maritime software companies, Veson Nautical, has invested in new features related to the reporting and tracking of compliant fuels. There also appears to be investment at several companies aimed at improving their optimization tools. Most of this work so far appears to be custom development.
In a broad sense, does the downstream industry seem prepared at this point to comply with the IMO 2020 regulation? Flanagan: It will not be perfect, but the industry will weather the storm. Most shipowners will fully comply and, while there will be increased shipping costs, the market will find a way to fill the demand. There will be increased prices the first year or two as the market adjusts to the increased demand, but as supply and new technologies come into play the market will eventually find balance.