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Special Report: Implications of IMO bunker fuel rules

by Guest on Feb 14, 2018


IMO bunker fuel quality change requires sulphur content to be reduced from 3.5% by weight to 0.5% by weight (Image for illustration only. Image courtesy:  Bay Ismoyo/AFP/Getty Images)
IMO bunker fuel quality change requires sulphur content to be reduced from 3.5% by weight to 0.5% by weight (Image for illustration only. Image courtesy: Bay Ismoyo/AFP/Getty Images)

New low-sulphur requirements for marine bunker fuels are causing scramble for refiners and shippers, according to IHS Markit report.

The International Maritime Organization (IMO) confirmed that global refiners and shippers must comply with new regulations to reduce the sulphur content in marine bunker fuels by January 2020 – five years earlier than many expected.

As a result, both the global refining and shipping industries will experience rapid change and significant cost and operational impacts, according to an analysis from IHS Markit.

“While the IMO is taking positive action to address the environmental impacts of air pollution from ships, the rapid change creates significant disruption for both the refining and shipping industries,” said Kurt Barrow, vice president, downstream research, IHS Markit. Barrow, along with Sandeep Sayal, senior director, refining and marketing research, IHS Markit, are two authors of an IHS Markit report entitled ‘Refining and Shipping Industries Will Scramble to Meet the 2020 IMO Bunker Fuel Rules’.

“The two industries are vastly unprepared,” Sayal said. “Neither has made the necessary investments for compliance, which means that the 2020 implementation date will result in a scramble. Both industries are taking a wait-and-see approach until firm signals are in place by the IMO for compliance with the regulation,” added Sayal.

“Shippers will face significant compliance costs by having to upgrade equipment or switch to more expensive fuels,” Barrow said. “Refiners will experience significant price impacts as they shift production to deliver more lower-sulphur fuels to the market and, at the same time, find a market for the higher-sulphur fuels they produce. Refineries, like ships, do not turn on a dime, so it takes significant investment and market demand to retool a refinery to deliver new supply,” added Barrow.

Options for shippers

Shippers will have several options to meet the new IMO regulations. Low-sulphur bunker fuels (primarily for smaller vessels), and liquefied natural gas (LNG) (primarily for new builds) will be part of the solution. However, IHS Markit researchers expect that on-board ship scrubbers, devices that clear harmful pollutants from exhaust gas, will be the primary compliance path for ships, which could continue to burn higher-sulphur fuels.

“From the shipping industry point of view, IHS Markit estimates that about 20,000 ships account for around 80% of heavy fuel-oil bunker fuel use,” said Krispen Atkinson, senior consultant, maritime and trade research, IHS Markit. “Currently only about 360 ships have installed scrubbers, since there is currently no economic incentive for the ships to add scrubbers. However, based on the price spreads between low-sulphur bunker fuel and high-sulphur fuel oil during the scramble period, it will be economic for many of them to install scrubbers,” added Atkinson.

The payback period for installing a scrubber on the largest vessels, Atkinson said, would be two-to-four years in 2022-2025, and less than one year based on peak-price spreads in 2020.

A key uncertainty also lies in the actual level of compliance to the IMO regulation in 2020. “Not only is it hard to enforce compliance in the open seas, but it is still uncertain if sufficient supplies of compliant bunker fuels will be broadly available in all ports,” Sayal said.

Overall, the installations of scrubbers and some level of non-compliance will not be in time to halt the disruption on refined products markets. According to the IHS Markit report, the primary challenge with the bunker fuel quality change (which requires sulphur content to be reduced from 3.5% by weight to 0.5% by weight) is the disposal of high-sulphur residual fuel – not the production of low-sulphur bunker fuel.


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