The Arab Petroleum Investments Corporation (APICORP), a multilateral development bank focused on the energy sector, recently published a report analysing the impact of IMO 2020, which introduces a global 0.5% sulphur cap for marine fuel, on the Gulf’s oil dynamics.
In short, it believes the shipping industry’s choice of option to meet IMO 2020 compliance will directly impact the supply/demand dynamics of the Gulf’s oil industry, and the results will be varied.
“The IMO regulations will create winners and losers across the industry,” says Mustafa Ansari, Senior Economist at APICORP.
“Uncertainty around the availability of LSFO, HSFO prices and scrubbing technology makes it difficult for ship-owners to take a decision on what outlet to adopt for IMO compliance.
“What is more clear is that demand for HSFO is likely to decline, whilst demand for compliant fuels such as marine diesel and LSFO will increase. This means that refineries that have the means to reduce fuel oil production, or that are geared to producing middle-distillates such as those across the GCC will benefit from the additional demand.
“By contrast, countries without this capability, and with fewer alternative sources of demand, such as Iran and Iraq, will not be able to absorb excess supplies of fuel oil.”
A summary of the APICORP report is below:
In 2017, demand for fuel oil averaged 7.5 million barrels per day (mb/d) of which 3.5mb/d was HSFO, used mainly in bunkering. Going forward, the IMO regulations will reduce demand for HSFO whilst demand for both LSFO and marine diesel will increase. Other things being equal, the differential between sour-sweet crudes, HSFO-LSFO and distillate-HSFO could widen. In the short term, the ability of the global refining industry to produce an estimated 8mb/d of compliant bunker fuel for the world’s ships by the IMO target of 2020 will be tested. Depending on assumptions about scrubber uptake, the resulting boost to demand for marine diesel alone is expected to be around 2.1-2.5mb/d.
In the likely scenario that there will be more reliance on LSFO and marine diesel, the downstream sector will create winners and losers, with simple refineries at most risk. Refineries that failed to invest in cokers and other residue destroying equipment needed to contain HSFO production will find it difficult to market the fuel. On the other hand, more complex refineries will benefit from higher margins. In the highly competitive refining market, this could pave the way for further closures. In particular, Saudi Arabia could benefit significantly if shippers choose to switch to LSFO or marine diesel, as it will be able to meet this demand and increase exports. On the other hand, if scrubbing is the preferred route, there is enough demand from the country’s power sector to absorb its existing HSFO production, and at a reduced cost.
Geared to producing more diesel, the GCC will be in a good position to adjust to the IMO rules, with ample opportunities for the likes of Saudi Arabia and Kuwait to utilise excess HSFO in their respective power sectors. The GCC as a whole has embarked on many initiatives across the oil value chain that has helped them adapt to global developments. Some of these investments, such as additional refining capacity were built with an eye to supplying a growth in Asian demand for diesel driven by China. But the decision taken by the Chinese government to rebalance the economy and shift away from manufacturing and more towards consumer goods and services dampened the prospects for diesel exports. Luckily, the timely changes in IMO regulations have provided the GCC with an alternative market for diesel exports.
For Iraq and Iran, on the other hand, the picture is gloomy. Already struggling to meet domestic demand, the damage to Iraq’s Beiji refinery drastically reduced the country’s capacity. In addition, the refining sector as a whole is not as sophisticated as those in the GCC, and their ability to produce low sulphur fuel is questionable. Worse, with lower demand for HSFO, Iraq will struggle to get rid of the fuel, whilst the domestic power sector is not large enough to absorb higher quantities of HSFO, especially given that the majority of new power generation will be gas-fired plants.
As for Iran, whilst fuel oil consumption has been increasing in the region driven predominantly by Saudi Arabia, and demand in the region more generally has been relatively stable, only Iran is exhibiting a fall in fuel oil consumption, declining from 382kb/d in 2014 to 214kb/d in 2017. This means that it will struggle to find a market for its excess HFSO, a situation made worse by the re-imposition of US sanctions; whilst its refining sector is not sufficiently sophisticated to produce LFSO, nor is there sufficient demand from the power sector.
The full version of the report IMO 2020 on MENA: Impacts Varied is available here.
Dr. Abdulwahab Al Sadoun, Secretary General, Gulf Petrochemicals & Chemicals Association earlier shared an article (below) with Singapore-based independent bunker publication Manifold Times on how IMO 2020 will impact the Middle East chemical industry.
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