Euronav claims “second mover advantage” in developing a strategy that effectively removes its fleet from any post-IMO 2020 fuelling chaos
Euronav held a conference call on 5 September 2019 for investors and analysts, to explain its strategy regarding disruption to its activities during the IMO 2020 low sulphur fuel transition on 1 January 2020. As a public limited company, the management must show shareholders it is assessing and mitigating any risk to the profitability of the business.
Before the presentation, Euronav chief executive Hugo De Stoop said “The introduction of new sulphur emissions regulations as part of IMO 2020” is one of the most progressive and significant developments for all shipping segments over the past 50 years. Reducing shipping’s sulphur footprint is a critical step forward for all seaborne transportation and Euronav wholeheartedly welcomes the new regulations and looks forward to fully complying with them.”
“Leveraging our balance sheet strength and operational capability to purchase and secure tested compliant product should provide a natural hedge for Euronav against any lack of fuel oil availability, poor quality compliant fuel or unwanted price spikes and help establish strong, direct B2B relationships for future fuel sourcing.”
The main aim of the presentation was to assure stakeholders it has sufficient fuel and funds to ride out the expected chaos of the IMO low sulphur fuel transition in early 2020. This presentation included an assessment of using scrubbers which the company had often expressed some firm views.
The scrubber remarks are likely to be the main focus of most headlines, but that should not be the main takeaway from the presentation. The main takeaway is that the Belgium tanker giant’s IMO 2020 strategy is a useful checklist for all tanker companies to compare to their own strategy for a post-IMO 2020 environment.
Euronav started the presentation by comparing what was known in 2018 compared to what we now know in Q3 2019. This was followed by an evaluation of the risks, what the management is doing to mitigate those risks, and how it will continue to do so in the future.
Euronav’s assessment of the IMO 2020 situation in 2018 was that it was difficult to justify the capital cost of fitting scrubbers to its fleet when 70% of the vessels were of the ECO-type. It also assessed retrofitting LNG at US$15M per vessel which it also regarded as an unjustifiable cost. It considered scrubbers as a potential reputational risk as the general public might regard fitting scrubbers as an attempt to ’work around’ the intention of the regulations. In the presentation, Euronav emphases its stance has always been “compliant fuel and scrubber technology” and not “compliant fuel or scrubber technology”.
In 2018, it was estimated that only 450 vessels would be fitted with scrubbers, and the outlook from the oil majors and refiners regarding low sulphur fuel oil production was uncertain. By Euronav’s account there were only three main scrubber manufacturers and their capacity to produce sufficient scrubbers was unproven.
By Q3 2019 the picture has changed to 3,500 vessels with scrubbers and most of the oil majors and independent refiners have committed to producing low sulphur fuel oil. In addition, more than 20 scrubber producers are now in the market and there are significant delays being experienced in delivery and retrofitment. Euronav also estimates that scrubber capex and opex has more than doubled in the intervening period.
The main argument for fitting scrubbers was the price spread between high sulphur and low sulphur fuel, which in 2018 was estimated at US$400/tonne and has now narrowed to US$200/tonne for January 2020 delivery, according to Euronav. Nor is having a scrubber a unique selling point, with 36% of the VLCC fleet and 27% of the Suezmax tanker fleet using scrubbers (DNV GL, DnB figures).
Then there is the question of open-loop scrubbers, which was not an issue in 2018, but as at Q3 2019 are restricted in more than 70 ports.
To mitigate against the risks inherent in IMO 2020, Euronav has taken the following steps:
Euronav has established direct relationships with refiners and purchased 420,000 tonnes of 0.5% sulphur and 0.1% sulphur marine fuel from the wholesale market which is stored on the 2003-built ULCC Oceania, which offers unique economies of scale. Euronav has bought a range of fuels progressively during 2019 at various prices. The average price of the purchased very low sulphur marine fuel was US$477/tonne versus the retail average of US$520/tonne. The average of US$447/tonne compared favourably to a bunker price (HFO-3.5% sulphur content) of US$400/tonne over the same procurement period.
Euronav stressed that the new compliant fuel was ISO 8217:2017 standard and not a blended product. Oceania is currently sailing from Malta to a location off Malaysia to service Euronav VLCCs and Suezmax tankers sailing past Singapore.
One reason for the physical hedge of storing fuel on Oceania is that Euronav could not find a reliable price correlation – Euronav’s fuel procurement division has tried to find a workable correlation between the low sulphur fuel price and other fuels, and reports there is no stable correlation available. It is expected a paper hedge will form once the physical price is established post-IMO 2020.
Mr De Stoop also made it clear that although there is sufficient quantity for the initial 6-9 months of 2020, using Oceania-stored fuel is optional. If the retail price of low sulphur fuel post-2020 falls below the cost of Oceania fuel, then Euronav will buy in the open market. Euronav has a US$100M rolling credit from its banks to support the Oceania fuel purchasing operation, which does not affect its balance sheet.
In addition to knowing the exact provenance of the fuel stored on Oceania, Euronav has also tested all the fuels purchased to establish the stability and mixability (Oceania has a fuel blending unit). The company has also tested samples of all available fuels and reports there were some surprises in the laboratory testing, including some 0.5% sulphur content fuels that in themselves were stable but proved to be unreliable when mixed. Purchased fuel batches have been burnt on Euronav tankers to provide data from real-life conditions. In this way, Euronav has created a unique database of fuel compatibility.
Does this mean Euronav is going into the bunker business? The short answer is no. Although Euronav has established a global-size bunker trading operation in Geneva, this is for internal use only and to provide a competitive advantage. Due to trading patterns, not all Euronav tankers will be able to use the Oceania facility, and will need to bunker elsewhere. Establishing the fuel procurement division and the compatibility matrix minimises the risk of receiving incompatible fuel.
Euronav also observed that as a Suezmax tanker operator, there will be significant arbitrage opportunities with the current trade of high sulphur fuel oil trade from the Americas and Europe to Asia being bolstered by low sulphur fuel oil trade from Europe to North America, Latin America to southeast Asia and China to southeast Asia. The company also expects that post-2020, what it calls “quality dislocations” will take place, leading to Suezmax tankers being used for storing low sulphur marine fuel in ports without access to local sources.
Furthermore, if the price of high sulphur fuel decreases significantly, Euronav has the option of using its financial resources to purchase cheap high sulphur fuel and storing this on another ULCC (currently on time charter to the end of 2019). Retrofitting some of the Euronav fleet with scrubbers would allow the company to operate vessels far below the returns needed by the first movers. This was referred to by Euronav as the “second-mover” advantage.
Post-IMO 2020 strategy checklist