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Opinion: Managing the sulphur cap

by Arabian Oil & Gas Staff on Jan 10, 2017


Dave Ernsberger, head of energy pricing, S&P Global Platts.
Dave Ernsberger, head of energy pricing, S&P Global Platts.

The Middle Eastern refineries are well positioned to benefit following the decision by the International Maritime Organisation (IMO) to reduce the sulphur cap on marine fuels for ships by January 2020, if they can partner with the shipping sector to discourage the use of cheaper and non-compliant fuels.

The new cap announced in October of a 0.5% sulphur emission limit will be a drastic reduction from the current 3.5%. The Middle East’s more modern and more flexible refineries, thanks to recent investments, should thrive and generate wider profit margins. This means the region will likely emerge as a key exporter of low-sulphur fuel. This in turn could reshape Russia’s role as a key exporter of high-sulphur fuel oil (HSFO) to Europe and Asia.

Greater trade flows add to the bullish narrative that has characterised the Middle Eastern refiners’ activities for over a decade, with the services offered by Europe’s dwindling traditional refinery projects being reborn in the Middle East. An expansion to the UAE’s Ruwais refinery brings capacity up to 900,000 b/d and Kuwait’s 615,000 b/d Al Zour refinery is scheduled to come online by 2020 – both are on the list of the world’s top 10 largest such facilities.

Manageable changes to the Middle Eastern refineries’ crude slates to meet the new sulphur caps could also reaffirm the influence of local ports – such as the UAE’s Port of Fujairah – as global energy and trading hubs alongside Rotterdam and Singapore. For the less modern refiners, a challenging three years lie ahead as they will need to invest in expensive desulphurisation units and hydrocrackers or face a grim outlook on margins for their high sulphur output. The cap could also lead to fragmented availability of the 0.5% product, as financial considerations affect refiners’ modernisation plans.

On a macro level, global market opinion is divided on whether there will be enough supply of 0.5% product by 2020. Netherlands-based environmental consultants CE Delft expects there will be capacity to produce compliant fuels, despite its base-case scenario forecasting the global demand for marine fuels to increase by 6.6% to 320 million mt in 2020, from 300 million mt in 2012. Conversely, the US counterpart, Ensys expects that up to 60-75% of additional sulphur plant capacity will need to be built by 2020 to meet demand, compared with planned projects.

Fitting more Exhaust Gas Cleaning Systems (EGCS) or scrubbers, as they are better known, is a short cut to reducing marine sulphur emissions by 2020. Scrubbers enable ship owners to meet the cap while still burning high sulphur fuel oil by spraying alkaline water into a vessel’s exhaust to remove sulphur. Fitting scrubbers to existing fleets and new ships – installation is a simpler process for the latter – would significantly ease the pressure on refiners up to 2020. But, retrofitting a vessel costs up to US$5 million and a global glut of ships has stalled the pipeline for new ships, which leaves little clarity for refiners on the number of EGCS installations.

Opponents to the IMO’s 2020 decision cite a lack of flexibility that piles more strain on to their already crippled balance sheets, while advocates point to refineries’ and ship owners’ ability to rapidly adjust.

Refineries and ship owners must collec-tively enforce a level playing field that deters the use of cheaper and non-compliant fuels from 2020, as it undercuts the commercial success of the majority abiding by the IMO’s new rule book. Today’s vague legal framework and weak detection methods, which provide easy loopholes for non-compliant actions, must be improved by 2020. But, this is easier said than done.

The volume of 0.5% product that is required from refineries may be alleviated by the unfavourable economic outlook for oil carriers. Global oversupply of ships has significantly dampened profit margins since 2014, with the average earnings of very large crude carriers (VLCCs) plummeting from as much as US$200,000 a day in 2006 and 2007, to US$70,000 a day in 2015, to a current rate of US$39,000. The financial strain could mean more ships are converted to storage, or scrapped. The challenging market conditions for the industry are starkly illustrated by South Korea offering a US$9.6 billion lifeline to the domestic shipbuilding sector, which comprises the world’s three biggest shipbuilders by order volume.


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