As the deadline to IMO 2020 nears, there remains considerable doubt that refiners will be able to meet requirements
A failure to determine the availability of compliant fuel, and the desire of refiners to provide such fuel, before the Sulphur Cap kicks in now appears to be a fundamental mis-judgement.
It has been assumed that bunker providers will simply switch to supplying compliant fuel, but this is not in the gift of bunker suppliers. Talking at the Asian Tanker Conference, bunker supplier Fratelli Cosulich’s chief executive and board member Timothy Cosulich noted that the bunker supplier is simply the last link in a supply chain and can only provide the fuel that is available from its supplier. “The availability and type [of fuel] post 2020 remain unknowns….it is down to the oil majors,” he said.
“While in today’s environment it is possible to mix one heavy fuel with another, post-2020 the oil majors may be supplying fuels of different type, making interoperability all but impossible and resulting in fuel management operations all but disappearing from smaller ports, which generally do not have enough storage or barges to offer a wide range of fuels,” he added.
Euronav’s former chief executive Paddy Rodgers went a step further, suggesting that although the tanker industry works closely with the oil majors, many do not understand the nature of the relationship between the availability of marine fuel and the fundamentals of the refining industry.
To paraphrase his speech as the 2018 Tanker Shipping & Trade Conference, Exhibition and Awards, it is not the role of the refining industry to provide fuel for the shipping industry. The profit in the barrel of crude oil is realised from demand for the individual oil products that are extracted, and refiners trim the supply according to demand. The days of residual fuel oil being a throwaway by-product have long gone.
Nor is shipping the only user of heavy fuel oil. There has long been a rivalry for the high sulphur residual product from the power-generation sector, but the increase in demand for diesel has created a situation where in some parts of the world, heavy fuel oil is in high demand for re-refining into diesel.
“It is not the role of the refining industry to provide fuel for the shipping industry”
Speaking at the Tanker Freight Derivatives Forum, ICE Futures Europe’s director of market development Mike Davis noted that shipping and IMO 2020 has jumped to the top of the agenda with refiners.
“There is something of a 'perfect storm' going on in the high sulphur fuel market at the moment, even before the entry of low sulphur fuel,” he told the room of freight traders and shipbrokers.
“In the past, the residual fuel oil traded to the crude oil price,” but he noted that residual fuel oil was not traded in the same manner as higher-end products, such as gasoline, and was not regarded as a primary price indicator.
“Right now, (residual fuel) is of primary direction,” he said, “as the basis for that fuel is changing. In the past you could say that the residual fuel price was driven by the crude oil price. Now, you could say the crude oil price is being driven by the decisions in the marine industry.”
He pointed to a set of new paradigms around low sulphur fuel and the rest of the oil refinery slate. One aspect is that the pursuit of higher end oil products has effectively destroyed the bottom of the barrel and products like marine fuel and diesel. “A key to looking at marine fuel is to look at the types of crude oil that are available to make it, but also the kit that is there to turn crude oil into this marine fuel,” he said.
One driver has been lubricity, with fuel oil moving from a standard of 180 cst to 380 cst in the last two decades, driven by the requirements of modern marine engines, but the 0.5% sulphur fuel must still meet this requirement.
“If the refining industry was honest, we are not sure [if] this fuel is going to come from a blend, or a straight run fuel,” he said. “There is no clear signal [of] how much will be produced from the distillate complex or from a 'pure' fuel oil solution.”
He reported that the traditional high discount on heavy fuels encouraged a secondary conversion to cleaner fuels and “people are destroying fuel oil to make more valuable distillate fuels.”
According to Mr Davis, there is a historical example of what happens when demand for a certain oil product conflicts with the crude oil available to produce it. “We have seen this before. In 2008, diesel was US$40-50 barrel over the price of crude oil and the marginal barrel at that time was a Saudi or an OPEC heavy (crude oil). What we [traders and refiners] wanted at the time was more light sweet crude oil, such as Brent or WTI to turn it into diesel,” he said.
“There is something of a 'perfect storm' going on in the high sulphur fuel market at the moment”
In the 2008 example, the Chinese tried to stockpile diesel ahead of the Olympics. Eventually, the refiners were able to respond by increasing output and there was a price crash. “Price is the lever that will force refiners to produce what is required,” he noted.
The fact is that traditional heavy fuel has become valuable as a secondary feedstock and is being used as an alternative to crude oil to make more distillate.
This, he noted, is going to be an issue for those who have fitted scrubbers. The scrubber-fitted fleet is going to be in competition for heavy fuel oil with the secondary refiners seeking heavy fuel oil to convert into high-value distillate – some of which may end up as ship fuel.
James Morgan (Opportune LLP): "Refiners have limited options"
According to Opportune LLP’s process and technology director James Morgan, who has experience in managing projects in the refinery sector, the challenge now for the oil and gas industry is to try and work out how the shipping market is going to drive a complex matrix of interlinked options that starts with the type of crude oil and ends with the fuel burnt on the ship; this puts shipping in the driving seat of the crude oil market.
The impact on refiners
“There is no single path for refiners to prepare for the impending IMO 2020 regulation,” says Mr Morgan, explaining that refiners’ options were limited to pursuing expensive modernisation projects that will further process HSFO and produce more IMO-compliant fuels; and/or proceeding with a business-as-usual approach and hoping the market takes care of these issues.
He noted that crude oil refiners on the US Gulf Coast are best equipped to upgrade residual oils into more valuable and lower-sulphur fuel products. These complex units can process heavier and high-sulphur (sour) crude oils that yield large quantities of residual oil.
The question of the content of fuels is tackled by IPIECA, an NGO formed from stakeholders in the oil industry. Addressing delegates at the International Parcel Tanker Conference (IPTA), IPIECA technical director Rob Cox explained that refiners cannot discuss plans to tackle marine fuel output as the refinery industry is subject to anti-trust legislation, especially in Europe and the USA: “Anti-Trust legislation is why you are not hearing anything [from refiners],” he said.
Another problem is the misconception that refineries can easily alter the slate: “There is no switch that can be reset,” he explained. A refinery is built to fulfil as efficiently as possible a strict range of criteria and Mr Cox said there is very little profit in running a refinery. The profit is generated downstream and in the case of the majority of modern refineries, the output is geared toward distillates.
In Mr Cox’s opinion, this limited adaptability gives rise to issues with the resulting marine fuel mix in terms of flash point and pour point; stability; and consistency.
The flash point and pour point for each individual blended fuel will be different, and Mr Cox warned that operators need to avoid mingling fuels. This includes mingling road-quality fuels, which have a flash point of 52oC and marine fuel, which has a flash point of 60oC. In his opinion, rapid fuel testing needs to be introduced based on refinery methods to determine what can be mixed.
“The scrubber-fitted fleet is going to be in competition for heavy fuel oil with the secondary refiners”
Mr Cox also cautioned that operators need to have contingency plans in place and referred to the fact that several ships blacked out after the introduction of the 0.1% fuel on the West Coast of the USA.
And while he believes refineries will ultimately respond to demand, he does not think this will happen as quickly as the shipping industry would like.
BP’s global head of marine fuels, Eddie Gauci, told the Fujairah Bunkering and Fuel Oil Forum bunkering conference in Fujairah in March 2019 that the oil majors had invested US$1Bn in marine fuel since 2015. He noted that BP, Royal Dutch Shell and Exxon Mobil have all declared that they will offer low sulphur fuel on global basis, but none are willing to commit to specific volumes of availability or pricing.
US$1Bn sounds like a lot, but according to Wood Mackenzie, there are 550 refineries worldwide with a capacity of more than 50,000 bpd, and each one is worth several hundred millions of dollars. With just nine months to go before implementation, it looks like there is still a big gap between the requirements of shipping to meet IMO 2020, and what the refiners will be able to provide.