Oil producer group reports in its annual outlook that it believes compliance will grow after 2020.
The decision by the International Maritime Organization to lower the maximum allowed sulfur content for marine bunkers from 3.5 percent to 0.5 percent (on a weight basis) as of Jan. 1, 2020, “will be disruptive to both the shipping and refining sectors,” says the Organization of Petroleum Exporting Countries (OPEC).
“Due to a sudden switch in the fuel mix, potential shortages of compliant fuel are possible, especially middle distillates, which could spread to other sectors too. It is hoped that there will be sufficient flexibility in the refining system in order to avoid any extreme events in the years to come,” said OPEC, which devoted a section in its annual World Oil Outlook publication, released last week, to a discussion of the IMO regulation.
The 2020 sulfur cap is “expected to have a significant impact on both the shipping and refining industries, with a large degree of uncertainty regarding the implementation path, including the compliance rate.”
The outlook also is clouded by uncertainty about whether shipowners will try to comply with the sulfur cap by installing scrubbers to remove sulfur from their engine exhaust or purchase low-sulfur fuel. (While shipowners also can fuel their ships with LNG, which has negligible sulfur, OPEC notes LNG “lacks bunkering infrastructure at a global level.”)
IMO said its “reference case” does not assume full compliance with the IMO regulation “within the medium-term period. It is more likely that the compliance rate during the first year of implementation will be about 75 percent, with an expected gradual increase towards levels around 90 percent in 2023, in line with the increasing number of vessels with onboard scrubbing facilities.”
OPEC said it assumes that installing scrubbing facilities will take off only from 2019, shortly before the IMO decision comes into force and once the financial incentive materializes in the form of a widening discount for high- sulfur fuel oil (HSFO) versus low-sulfur fuel oil (LSFO) that complies with the regulation.
“In 2020, it is estimated that there will be around 2,000 vessels with installed scrubbers. This is anticipated to be followed by a strong increase in the number to the end of the medium term, with an estimated level between 4,500 and 5,000 scrubbers.”
OPEC noted that the IMO regulations do not specify the type of fuel ships must use, only the sulfur content, and that this means “compliant fuel, in principle, can be anything between LSFO to diesel, including blends of high sulfur with low-sulfur barrels, to arrive at compliant specifications. Nonetheless, the limiting factor in making blends is compatibility with existing vessel engines.
“The uncertainty related to the composition of the bunker fuel mix, alongside the insufficient time to adjust, are the major reasons why the global refining system is not likely to engage in any significant additional investments on top of the ones that are already on track,” it said.
However, OPEC said it should be noted that there has been “some small-scale refurbishments and ‘debottlenecking’ geared toward IMO regulations.”
Reuters reported that on Monday the Vienna-based consultant JBC Energy said the U.S. is “likely to become a strong supplier of compliant fuels in the coming quarteres in the context of the IMO sulfur spec switch.” according to a Reuters report.
“In line with revamps, the existing refining system — including the expected additions in the medium term — does have a certain level of flexibility to change yields in order to ensure sufficient supplies of compliant fuel. The flexible mode of operation will help the global refining system to maximize the output of middle distillates and LSFO (low sulfur fuel oil) in 2020,” said OPEC.
It also referenced the shale oil boom in the United States: “In addition, some limited volumes of LSFO, currently used in other sectors, will likely be rerouted to the marine bunkers sector. Some relief will also likely come from the changing global crude slate, with increasing volumes of U.S. light tight oil coming on stream. This should help to produce additional volumes of LSFO.
“Nevertheless, the flexibility of the global refining sector is limited and assessed as insufficient to meet required demand,” said OPEC. It said it saw “an increase in global refining runs in 2020 as the most likely way to produce sufficient volumes of compliant fuel.”
OPEC says shortages of IMO-compliant fuel possible
