The Marine Environment Protection Committee (MEPC) of the International Maritime Organization (IMO) is expected to decide on the timing of the global 0.50% sulphur cap for marine fuels in October this year, based on the result of a low sulphur fuel availability study required under MARPOL Annex VI. There are strong signals that the study’s conclusion will support a 2020 introduction, although there are other assessments that do not share that view.
The case for 2020
On May 24, the consultancy employed to undertake the low sulphur fuel availability assessment on behalf of the IMO, CE Delft, told a Platts conference that there may be sufficient refining capacity to produce enough compliant marine fuels by 2020 because demand growth for distillates in other sectors is slowing down. In short, the study suggests that global middle distillate production capacity will grow faster than demand, which “potentially creates capacity to produce low sulphur marine fuels”.
This could persuade most of the 87 signatories to MARPOL Annex VI at the IMO to go for 2020. The outcome is widely expected to be a political decision – so unless the availability study is clearly saying 2020 is impossible, most observers believe it will be 2020 as that is the signal from those member states that have expressed an opinion.
The CE Delft study has made a number of marine fuel demand projections from 2012 to 2020, as per the table below showing heavy fuel oil (HFO), marine diesel oil/gas oil (MDO/MGO) or other low sulphur oil-based fuels coming into the market for 2020, and liquefied natural gas (LNG) demand in million metric tonnes (mt).
|DEMAND IN MILLION MT||2012||2020|
|MDO/MGO (or other LS fuels for 0.1%S and 0.5% limits)||64||39 (max 0.10% S)
233 (max 0.50% S)
The figures for 2020 assume ships will only use fuels with maximum 0.10% sulphur within emission control areas (ECAs) or in small engines, and use fuels with up to 0.50% sulphur outside ECAs.
The CE Delft study also assumes that 3,800 ships will have exhaust gas cleaning systems (EGCS, or scrubbers) installed by 2020, allowing ships to use some 36 million mt of HFO accounting for 11% of global shipping’s total energy demand. This is a higher scrubber uptake than the industry itself is predicting, according to a presentation given by the Exhaust Gas Cleaning Systems Association (EGCSA) in London in May this year. Assuming the global cap takes effect in 2020, there would be 2,845 vessels with scrubbers installed by then, before increasing to almost 4,000 in 2022 and then growing year by year to close to 5,000 in 2024. EGCSA nevertheless issued a press release at the end of May stating that the exhaust gas cleaning industry is ready for 2020 both in terms of systems and installation capacity, saying EGCSA members can outfit vessels with “thousands of new scrubbers” in time for 2020. It also stressed that delaying the global 0.50% sulphur cap “will kill today’s innovation and investments in developing emission reduction technology,” and hinder research into alternative fuels.
Doubts about 2020
There are several number crunchers who do not share CE Delft’s view on the feasibility of introducing the global 0.50% marine fuel sulphur cap in 2020, heard at both the Platts conference in May and the International Bunker Conference (IBC) in April.
The International Energy Agency (IEA) estimates that shipping will go from accounting for 3% of global distillate demand in 2015 to 9% in 2020. The majority of 0.50% fuels would need to come out of the distillate supply pool and it estimates that a 2020 implementation date would see 2 million barrels per day (b/d) of marine fuel demand switch from HFO to MGO, in turn leading global demand for distillates to jump from 28 to 30 million b/d. By comparison, the fall in the ECA sulphur limit from 1.00% to 0.10% in 2015 led to a 0.1 million b/d switch from HFO to MGO, according to IEA estimates.
The 2020 jump in MGO demand, from 0.7 million b/d to 2.7 million b/d, will result in a supply gap, leading to a big distillate deficit in Europe, while Asia will go from a 1 million b/d surplus to a 0.5 million b/d distillate shortage if Singapore is to retain its current position as a major bunkering hub, the IEA told the Platts conference in May.
The IEA’s predictions assume that scrubber uptake prior to 2020 will be limited due to the low price of MGO and relatively narrow price differential between HFO and MGO. It predicts that 2020 will be the peak year for MGO demand, as post 2020 scrubber uptake will increase due to higher HFO/MGO price differentials. LNG uptake has likewise been slowed by low oil prices, but is expected to increase rapidly.
Robin Meech, IBIA Chairman and head of Marine and Energy Consulting (MEC), told IBC in April this year that full compliance with the global cap in 2020 means that demand growth for distillates will be equivalent to 9 years of average increases. He was not, however, optimistic that there will be full compliance, but even assuming 30% non-compliance the 2020 increase would still equate to 6 years of average demand increases occurring overnight.
Also in the camp of 2020 sceptics is the International Petroleum Industry Environmental Conservation Association (IPIECA), which told the Platts conference that essentially all major refinery production facilities that will be operational by 2020 are already known by now through project announcements. IPIECA pointed out that the refining industry is already reducing residual production and increasing output of distillates to address rising demand for the latter, but this is a linear, gradual process. The “overnight” shift from HFO to distillates and/or desulphurised HFOs in 2020 would see demand for these product groups jump by 3 million b/d or more, compared to an increase of less than 0.5 million b/d in 2015 when the ECA switch took place. IPIECA based this assessment on combined data from BP, Marine and Energy Consulting, IEA and OPEC.
IPIECA and an oil major active in refining present at the conference also stressed that refining is a complex integrated business that caters to a range of product demands, and that refinery unit utilisation and investment decisions are made by individual refineries, not by the industry as a whole.
Even if assuming that the capacity exists globally to produce sufficient marine fuels meeting a 0.50% sulphur limit, refineries will not necessarily be geared towards the marine fuels market. IPECA warned at the Platts conference that there needs to be realistic assumptions about interregional trade of refinery products as well as inter-refinery trade of intermediate product streams. The looming oversupply of residual fuel is another headache as refineries need to have outlets for all product streams.
Robin Meech explains: “The analysis undertaken for the IMO hinges on linear programming refinery models. The contractor has split the world into several regions and assumed each can be represented as one optimised refinery with intermediate streams flowing freely between refineries within each region. There is one “tank” for each region into which all the blend streams are directed to create the required 0.50% sulphur marine fuels. This ‘one region, one refinery’ model assumption may not be realistic and result in over-optimisation. Producing sufficient 0.50% bunker fuel by 2020 may be technically feasible but not economically viable for refiners, resulting in a shortfall.”