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WITMER, EnSys Energy;

and D. ST. AMAND, Navigistics Consulting

Business Trends

Anticipated market and pricing impacts

from new marine fuel regulations
At its MEPC70 meeting in October 2016, the International luctance is seen by companies to invest in LNG infrastructure
Maritime Organization (IMO) announced that it will imple- until a sound demand basis is set from shipowners.
ment the 0.5% Global Sulfur Cap starting on January 1, 2020. The authors’ view is that LNG will continue to gain ground
The new regulation is part of the MARPOL Annex VI regula- as a fuel source for marine vessels over the long term, but will
tion (FIG. 1). have limited market penetration by 2020. Alternative fuels,
In an effort to better inform the industry of the IMO’s de- such as methanol, have also been discussed, but the potential is
cision, the authors delivered a rigorous analysis in mid-2016 small, especially in the short term.
on the likely implications of implementing the regulation in As a result of this scenario, switching to 0.5%-sulfur fuel or
2020.1 Decreasing the allowable percentage of sulfur in marine installing scrubbers are the primary options for compliance by
fuels consumed in international (non-emissions control area, or 2020. Through a survey of Exhaust Gas Cleaning System As-
ECA) waters from 3.5% to 0.5% represents a profound change. sociation (EGCSA) members, the authors found that only 346
Some observers have likened the Global Sulfur Cap to the re- vessels had scrubbers installed, or on order, through December
cent change from 1% to 0.1% sulfur in ECAs, but the fact is that 2015. Virtually all of the scrubbing systems were designated for
the Global Sulfur Rule is likely to have a magnitude ten times use in ECAs. This vessel count represents a miniscule 1.4% of
greater than that of the recent ECA rule, in terms of the volume the 24,000 “candidate” ships worldwide that are economically
of marine fuel that must be “switched” to the new standard. suitable for scrubbers; in other words, a very small degree of
The driver behind the MARPOL Annex VI rule is to po- progress has been made to date.
tentially improve the health of millions of people, particularly Via survey, modeling of scrubber technology takeup and al-
those living in coastal areas. At the IMO’s MEPC70 meeting, it lowance for manufacturing and installation limits, the authors
was clear that the group was keen to avoid the regulation being estimate that scrubbers will be installed on, at most, 5,000 ves-
pushed back until 2025. Nonetheless, this step change in global sels by 2020. These vessels will consume an estimated 48 MMt-
marine sulfur limits will have major impacts on the maritime and py (900 Mbpd) of high-sulfur heavy fuel oil (HS HFO). This
refining industries worldwide, as well as on the environment. assessment is close to the 36 MMtpy projected for 2020 by one
IMO study,2 but well above the more conservative 11 MMtpy
Regulatory uncertainty has limited progress toward projected by a marine analyst.3
compliance. The MARPOL Annex VI Global Sulfur regu- Uncertainties surrounding the use of scrubbers on ships are
lation is unique in the uncertainties it embodies. A five-year a factor affecting expected takeup. These include limited oper-
timing question—implement in January 2020 or delay until ating experience, management and disposal of acidic wash wa-
2025—was settled at MEPC70. ter, and concern over whether scrubbers will be able to meet
However, compliance uncertainty remains, as shipowners
can respond by purchasing 0.5% sulfur-compliant fuel, by in- 5.0
4.5 Global cap
stalling onboard scrubbers and by staying with high-sulfur fuel, ECA zone cap
or they can switch to an alternative fuel, such as LNG. The tim- 4.0
ing and compliance uncertainties, along with a lack of incen- 3.5
tive for either shipowners or refiners to pre-invest before the 3.0
Global Sulfur Rule comes into effect, have deterred all parties
Sulfur, %

from investing.

Limited LNG or scrubber penetration seen by 2020. 1.5

LNG has virtually no sulfur and very low particulate and nitrous 1.0
oxide (NOx ) emissions. As such, it represents a potentially at- 0.5
tractive fuel under MARPOL Annex VI; however, it suffers from 0.0
the “chicken-or-the-egg” syndrome. Shipowners cannot justify

investing in vessels capable of running LNG until the promise

FIG. 1. IMO MARPOL Annex VI sulfur limits.
of LNG supply infrastructure is well established. Similarly, a re-
Hydrocarbon Processing | FEBRUARY 2017 9
Business Trends

more stringent emissions regulations in the future, should they ery system. According to Steve Bee, Global Business Director
be implemented. Prior to MEPC70, shipowners commonly at Intertek ShipCare Services, the blending of two bunker fuels
expressed unwillingness to invest $3 MM–$8 MM to install a that are each perfectly within ISO 8217 specifications can lead
scrubber. Retrofitting is achievable, but is unlikely to be consid- to incompatibility and an unusable product. The risk, however
ered economic by the owner where the remaining vessel life is small, of engine issues cannot be passed along in the same man-
short or where vessel sale is anticipated. ner as fuel costs for vessels on term charter.
In addition, the shipping industry is experiencing severe fi- Consequently, the authors see the bulk of the 0.5%-sulfur
nancial difficulties, based on vessel oversupply and trade uncer- fuel as being marine distillate, especially in early 2020 (FIG. 2).
tainties, and will need to deal with a new IMO Ballast Water The industry is facing a demand to convert nearly 4 MMbpd of
Convention coming into effect in September. The net effect is HS HFO supply to much lower-sulfur fuel (mainly distillate)
that the bulk of the burden, from what is fundamentally a ship- over a short period of time. This trend equates to a shock to the
ping-sector regulation, will fall on the refining sector—at least supply system. To put this into context, it equals:
at the immediate onset of the rule in 2020. This situation also • 8 yr–9 yr of past growth in (inland) gasoil/diesel
raises the question of whether the refining industry will be able • Five years of growth (2015–2020) in total main light
to meet the demands placed on it by the Global Sulfur Rule. products (gasoline, jet fuel, kerosine, gasoil and diesel)
• A 45% reduction in total residual fuel demand.
The switch constitutes a major market impact. If the
authors’ outlook holds true, the 2020 requirement will be to Refining industry to the rescue? Hydrogen and sulfur
switch roughly 200 MMtpy (3.8 MMbpd) of HS HFO to 0.5% plant limits foreseen. Will the refining sector be able to fully
fuel, with a range of uncertainty of approximately +/– 10%. A respond and meet the switch requirements on January 1, 2020?
forecast for all marine fuel types in 2020 is shown in TABLE 1. Evidence indicates that this is unlikely.
The magnitude of a 3.8-MMbpd switch volume, and the Through a compilation of data from Hydrocarbon Processing’s
corresponding market impacts, should not be underestimated. Construction Boxscore Database and other sources, the authors
While economic incentives exist to produce heavier marine believe crude distillation capacity and secondary (upgrading)
fuels to the 0.5% sulfur standard, the expectation is that these capacity to be adequate to fully respond to the Global Sulfur
will initially play only a small role, partly because of the need to Cap in 2020. The authors also project that available desulfur-
establish acceptability for onboard-ship operation. Testing new ization and hydrocracking capacity will be adequate to handle
fuels can be done safely (shippers generally perform onboard increased feed sulfur loads, albeit with potential strain and im-
fuel compatibility tests before committing to fuel use), but fuel plications for catalyst life. The notable exceptions are sulfur re-
compatibility is a concern for shipowners. Asphaltene-like sedi- covery plant and, to a lesser degree, hydrogen (H2) plant capac-
ment can form in fuel storage tanks and clog the ship fuel deliv- ity; both are vital for desulfurizing refinery streams.
The authors estimate that further additions, equating to
60%–75% over and above planned 2016–2019 projects, will be
≤ 0.5% fuel (mostly distillate) needed to meet the industry’s sulfur recovery needs; likewise,
350 HS HFO H2 plant additions of 20%–35% of firm projects will be needed.
300 The authors estimate that SRU base capacity in 2016 was just
over 128,000 short tons per calendar day (st/cd). Even with
the additional 13,366 st/cd of SRU capacity that is likely to be

200 added between 2016 and 2019, the authors believe that an ad-
150 ditional 8,000 st/cd–10,000 st/cd of SRU capacity, above that
which has already been announced, will be needed to meet the
Global Sulfur Rule.
50 These findings are based on rigorous, integrated modeling
0 using two scenarios: one without the Global Sulfur Rule in
Without regulation With 0.5% sulfur regulation 2020, and one with it included, at different levels of switch vol-
FIG. 2. Global marine fuel consumption in 2020 (excluding LNG). ume and light/heavy marine fuel mix. Full compliance with the
Global Sulfur Rule will require the removal of approximately
15,000 st/cd of additional sulfur from marine fuel products
TABLE 1. Marine fuel consumed globally in 20201 (TABLE 2). The authors’ modeling does not place this burden
Global fuel Global 0.5% ECA/
solely on additional SRU capacity. It allows for increases in
HS HFO with fuel switched other coker throughput, with rejection of sulfur into petroleum coke,
scrubbers from HS HFO distillate2 LNG Total limited increases in FCC sulfur oxide (SOx ) emissions, limited
MMtpy 48 195 88 11 342 increases in throughputs on base 2020 SRU capacity (including
firm projects), and close to 10,000 st/cd of needed additional
MMbpd 0.9 3.8 1.7 0.4 6.8
SRU capacity.
Global 2020, % 12.5 55.4 25.6 6.5 100 In short, even allowing for flexibility within the projected
Source: EnSys-Navigistics Supplemental Marine Fuel Availability Study. 2020 refining system, the authors see a shortfall in SRU—and
ECA fuel already at 0.1%, other marine distillate either already at 0.5% (EU EEZ,
China DECAs) or will need to be reduced to 0.5%; entails only limited further also H2—capacity needed to achieve full adaptation to the
desulfurization from present levels. Global Sulfur Rule.
10 FEBRUARY 2017 |
Business Trends

An official IMO study also projected substantial SRU and Refiners have indicated concern over these projects
H2 plant shortages.2 These two sets of modeling analyses beg because of uncertain long-term justification for them.
the question of whether the refining industry is willing and able The scenario that puts refiners in a quandary is that
to “fill the gap,” now that the timing is set for the Global Sulfur a surge in distillate costs in 2020 will lead to a rush
Rule implementation. It would need to build significant addi- by shipowners to install scrubbers. This will, in turn,
tional SRU and H2 capacity before 2020. The authors, as well as lead to a partial reversion to high-sulfur marine fuel
other industry analysts, are not optimistic that the refining in- after a few years. Economic justification for a project
dustry will make the required investments to the scale needed, must usually extend significantly beyond a 2 yr–5 yr
for three main reasons: payback window. Therefore, however profitable
1. Insufficient time. Historical refining project 2020–2024 may be for building a new SRU, the
completion times and discussions with experts in investment may not make sense.
this area indicate a build time of at least 2 yr–3 yr for 3. Marine fuels not strategically necessary for many
newbuild SRUs. The authors perceive a low likelihood refiners. Marine fuels comprise a relatively small
of new major SRU projects (i.e., those not already in the percentage of total global liquids demand (an estimated
advanced planning to engineering stage) entering into 6% in 2020), and are not a significant driver of
service by 2020. Significant time is needed to complete refiner planning and investment. While maintaining
a project, from idea inception to startup, even with the compliance with regulations for gasoline, onroad
ability to deliver skid-mounted and modular units. diesel and jet fuel is a strategic necessity for nearly
2. Unclear long-term economics. Economic justification all refiners; participation in the marine fuels market
for refining projects is always a key factor. The authors is more of an option. Several oil majors are leading
estimate that the necessary incremental SRU and suppliers of marine fuels, but other refiners do not
H2 capacity additions needed to fully comply with participate directly—hence the large and active bunker
the Global Sulfur Rule will entail an investment of fuels blending and supply sector.
approximately $5 B. With uncertainty on how the Moreover, while major bunkering centers are
regulation will be met post 2020, it remains to be located in places such as Houston, Rotterdam, Fujairah
seen whether sufficient new refining projects will be and Singapore, volumes sold can be more fluid than
announced and materialize. those of fuels for inland consumption. Ships can and
do alter where they bunker, based on supply and
2.0 80
pricing. Therefore, there is not the same onus on many
1.8 70 individual refiners to be involved in the marine fuels
60 market as there is for other transportation fuels.
1.4 Deferrals
1.2 50
Bunching of refinery projects in 2019 represents a
$ B, 2015

1.0 40
danger. A critical determinant for the refining industry is
0.8 30 whether scheduled capacity additions between 2016 and 2019
20 will materialize in time. The drop in crude oil prices has im-
10 pacted the timing of refining investments. It has led to the defer-
0.0 0 ral of planned refinery additions, such that now a peak of ap-
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 proximately 1.7 MMbpd of new capacity is projected for 2019
(FIG. 3). This capacity includes projects that have not started
FIG. 3. Annual distillation capacity additions and total projects
investments, 2012–2021.
construction, adding a concern that any further slippage will ex-
acerbate 2020 marine fuel supply issues.

TABLE 2. Sulfur reduction/recovery mechanisms from authors’ Potential for widespread economic strain on markets,
modeling analysis1 with winners and losers. In a situation that calls for full
Amount, st/cd % of total compliance in 2020, the authors’ outlook is for severe strain on
Sulfur into petcoke (increased petroleum product markets. This outlook is based on sharp in-
4,500 30%
coking unit throughputs) creases in marine gasoil-intermediate fuel oil (MGO-IFO) price
Sulfur into increased FCC stack gas SOx 250 < 2% differentials, which translate into higher prices for inland diesel/
Sulfur recovered via increased
gasoil, jet fuel, kerosine and gasoline throughout the world be-
throughputs on existing 2020 SRUs cause of the coproduct nature of refining. Prices for HS HFO are
5,400 36% expected to drop significantly. Initial “spike” differentials could
(close to 4% utilization increase,
worldwide average) hit or exceed $500/t, $60/bbl for diesel vs. HS HFO.
Sulfur recovered from needed 2020 This points to winners and losers among refiners. Deep-con-
SRU capacity additions beyond
4,850 32%
version, high-complexity refineries (those able to process high
projects (nameplate capacity volumes of heavy, sour crude) are clear winners, especially where
approximately + 9,500 st/cd) the orientation is toward distillate yield. Conversely, less com-
Total incremental sulfur 15,000 100% plex refineries producing high HS HFO yields look to be losers,
Source: EnSys’ World Oil Refining Logistics and Demand (WORLD) Model with implications for possible additional refinery closures.
12 FEBRUARY 2017 |
Business Trends

Market will ‘clear’—but when and how are uncertain. light sweet oil (notably North American LTO) and
These predictions of tight/inadequate capacity and severe eco- lower production of heavy sour crudes (such as
nomic strain raise the question of what will actually happen in Canadian oil sands).
2020. For a start, 100% compliance with the Global Sulfur Rule
seems unlikely because of supply tightness and limitations on Takeaway. The next scheduled step in the IMO Annex VI pro-
what the shipping sector can afford to pay for fuel. Also, MAR- cess was for an implementation plan to be developed at a meet-
POL Annex VI allows for waivers in the event of non-availabil- ing of the subcommittee on Pollution, Prevention, and Response
ity of compliant fuel. (PPR) in late January, with submission to MEPC 71 in July 2017
Equally, enforcement is a prospective issue, opening up the for approval. This timeline is only part of what is sure to be a
potential for illegal non-compliance. Strained economics could long and complex process with far-reaching consequences.
also lead the market to enter into additional adaptations and Recognizing the amount of time needed for the shipping
clearing mechanisms, driven by price elasticity effects: and refining industries to adapt—and that the outcome is un-
• Depressed prices for HS HFO could open up more certain, with a lot of “moving parts”—it will be essential for all
outlets, thereby boosting demand to a limited extent: stakeholders to stay on top of developments. This will entail
o Industrial boiler/power sector (although widespread tracking and evaluating the outlook from the present to 2020
restrictions on sulfur apply) and beyond, with a keen focus on progress in necessary refinery
o Seasonal demand for asphalt investments, scrubber installations, fuel demand mix, formula-
• Increased prices for diesel/gasoil, jet fuel/kerosine and tions and compatibility, market supply/demand, compliance
gasoline could curb demand, but with the associated risk and price impacts worldwide.
of adverse economic impacts
• A strong market contango on HS HFO could instigate a LITERATURE CITED
move to build HFO stocks—effectively following in the 1
EnSys Energy and Navigistics Consulting, “Supplemental marine fuel availability
study,” July 2016, sponsored by IPIECA, BIMCO, CONCAWE/Fuels Europe,
footsteps of the crude oil inventory build of recent years Canadian Fuels Association and Petroleum Association of Japan.
• Over the medium term, increased premiums for light 2
Faber, J., “Assessment of fuel oil availability—final report,” July 2016.
sweet crudes and higher discounts for heavy sour grades 3
Field Upgrading, “Ship and bunker update: IMO decides on 2020 for 0.5% global
could affect supply in regions where production is bunker sulfur cap,” October 2016.
economically sensitive; think increased production of
MARTIN TALLETT is founder and President of EnSys Energy,
a consulting practice specializing in quantitative assessment
of the global downstream petroleum industry, covering refining,
logistics, trade, regulations, investment and related strategic
issues. He co-leads, with David St. Amand, the EnSys-Navigistics
Marine Fuels 2020 service. His early background was in a variety
of refining and planning positions with Exxon and Amoco.
Since 2007, he has been involved in marine fuels assessments for a range of
government, refining and shipping industry clients. He holds a BSc degree
in chemical engineering from the University of Nottingham in the UK.

DAVID ST. AMAND is President of Navigistics Consulting, a

management consultancy dedicated to the maritime and energy
fields. He has extensive expertise on marine fuel consumption,
marine fuels (including LNG and hybrid fuels) and marine fuel
markets. He has conducted global and regional studies of
TRI-CON TRI-CHECK TRI-BLOCK marine air emissions, marine fuel efficiency, marine bunker fuel
markets and technical issues for a wide variety of public and
private clients. Mr. St. Amand began his career with a major oil company and was
technical lead on its tanker energy conservation efforts before moving into crude
oil supply. He holds a BS degree in naval architecture and marine engineering from
Webb Institute in Glen Cove, New York, and an MBA from Dartmouth’s Tuck School
of Business in Hanover, New Hampshire.

THOMAS WITMER is a consultant for EnSys Energy, where he

supports technical and business strategy throughout the

THE NEXT GENERATION upstream and downstream. His most recent assignments
include analysis of marine fuels issues and the US Strategic
Petroleum Reserve. He holds BS degrees in industrial
engineering and finance from Lehigh University, and is an active
member of the Society of Petroleum Engineers.

DANIEL DUNBAR has been associated with EnSys since 1984.

He has more than 30 years of experience in the petroleum and
related industries, with particular expertise in petroleum
technology and economics, oil and gas production, electric
utilities and computer-based simulation. Prior to his association
with EnSys, he held supervisory and executive positions with
Getty, Chemico and Commonwealth Oil, Nuclear Power Services
TRI-SHARK TRI-CONTROL TRI-JACK Co., Gordian and ICF. Mr. Dunbar received a BS degree in chemical engineering
from Columbia University in New York, New York.

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