IMO 2020: The Next Big Thing for the Oil Supply Chain
May 1, 2017
by David Hackett
The term “oil supply chain” is a way to describe the activities that are required to produce crude oil out of the ground, move it to the refinery, transform the crude oil into fuel, and move the fuel to consumers. The chief air pollutant in crude oil is sulfur. Governments and industry have been working to take the sulfur out of fuel to reduce the air pollution it causes. This work began in earnest with the US Clean Air Act which led the drive to get almost all the sulfur out of gasoline and diesel fuel.
The last bastion of high sulfur levels in transportation fuels is in bunker fuel oil. Bunker fuel is burned by ships at sea and is considered as “the bottom of the barrel”. The maximum sulfur level that bunker fuel can contain is 3.5%. In October 2016, the International Maritime Organization (IMO), a United Nations agency with responsibility for the prevention of pollution by ships, announced a decision to reduce sulfur levels in bunker fuel to 0.5% by January 1, 2020. This decision had been in the works for some time, but many were surprised that the decision was finally made.
How implementation of this regulation to reduce sulfur emissions proceeds will be the subject of much debate and analysis. The IMO’s decision creates a number of dilemma’s for the stakeholders; ship owners, oil refiners, crude oil producers, and regulators.
The Ship Owners’ Dilemma is choosing how to comply
Demand for bunker fuel within the shipping industry is about 5 million barrels per day (MBD), or about 6% of worldwide demand. Ship owners have four options for dealing with the regulation.
- Ships can reduce sulfur emissions by installing scrubbers on their smoke stacks. Ships with scrubbers can burn high sulfur bunker fuel and the technology can extract the sulfur from the ship’s engine exhaust. Scrubbers cost $5-10 million per installation.
- Other ships can be built or converted to burn liquified natural gas (LNG). There is almost no sulfur in LNG.
- Ships that do not scrub stack gas will need to burn low sulfur fuel, with sulfur less than 0.5%.
- Finally, ship owners can choose to not comply with the regulation. Enforcement will be the responsibility of the ship’s Administration, i.e. the Flag State.
The Oil Refiners’ Dilemma is figuring out what fuel to create for their customers
Oil refineries make bunker fuel when they lack the technology to convert that part of crude oil into higher valued products like gasoline, jet fuel, or diesel. Worldwide, refineries also make about 4 MBD of high sulfur fuel oil (HSFO), like bunker fuel, but that is burned to produce electricity. Many of the power plants have stack gas scrubbers to remove the sulfur from the exhaust.
The sulfur level of bunker fuel is determined by the sulfur level of the incoming crude oil and by the blending of low sulfur diesel or gas oil. Refiners do not employ refining technology to control bunker fuel sulfur because the high cost to reduce sulfur levels in HSFO has not been recoverable in the marketplace. Relative to compliance, there is not enough time between now and 2020 to build the process units to convert all that bunker fuel to low sulfur fuel oil (LSFO). Refiners of HSFO are looking for alternative markets like power generation or making asphalt. They will likely have a very large problem in 2020 because they can’t supply the LSFO required by the regulation.
Market analysts and industry stakeholders expect that LSFO will be considerably more expensive than HSFO because of the shortage of low sulfur fuel supply, relative to the demand.
The Crude Oil Producers’ Dilemma is to figure out how this is going to impact price
Low sulfur (sweet) crude oil producers will be happy because refiners will be able to make the bottom of the barrel of their crude into LSFO. The high sulfur (sour) crude producers will be over a barrel because refiners will not be able to make LSFO from their crude. Refiners will pay more for sweet crude and less for sour crude.
Regulators have a dilemma in this as well
The participants all along the supply chain know there are not enough scrubbers, LNG burners, or LSFO to meet the demand to comply with the regulation in 2020. Some mechanism for legal non-compliance will need to be created. If a mechanism for legal non-compliance is not implemented, illegal non-compliance will be inevitable.
Stillwater expects that it will take until around 2025 before enough engineering changes are made to get sulfur emissions to the level the regulators are targeting. This rule creates a cascading set of issues that impact every level of the transportation fuel supply chain. We will be watching the developments around the IMO 2020 rule closely and will be providing analysis as the effects take shape.