IMO: Smooth Transition into Sulfur Cap Regulations
The IMO says information from various sources has indicated a relatively smooth transition to the 0.5 percent sulfur cap for bunker fuel.
Prices for compliant fuels, very-low sulfur fuel oil (VLSFO) and marine gas oil (MGO), rose quickly initially but now appear to be stabilizing. As of January 20, 10 cases of compliant fuel being unavailable had been reported in IMO's Global Integrated Shipping Information System (GISIS), and the dedicated email address established by the IMO Secretariat (email@example.com) has not received any specific correspondence reporting issues with implementation.
Since January 1, 2020, the global upper limit on the sulfur content of ships' fuel oil has been reduced to 0.5 percent from 3.5 percent (under the so-called "IMO 2020" regulation). This is significantly reducing the amount of sulfur oxide from ships and is expected to have major health and environmental benefits, particularly for people living close to ports and coasts.
IMO Secretary-General Kitack Lim said: “I believe it is testimony to the diligence and dedication of IMO, its Member States, the shipping industry, the fuel supply industry and other relevant industries that such a major rule change is being implemented successfully without significant disruption to maritime transport and those that depend on it.”
The next important date for shipping is when carrying non-compliant fuel oil on board ships becomes prohibited on March 1, 2020. “I urge all shipowners, operators and masters to comply with the carriage ban, where applicable, when it comes into effect,” says Lim. “IMO will remain vigilant and ready to respond and provide any support.”
Shipbroker Intermodal said in its weekly report that so far it seems that major problems have not occurred. “Lack of availability of the VLSFO, massive breakdowns of main engines from poor blends, detentions from non-compliance where just some of the warnings and the possible problems that many were expecting, and none of it has happened so far, at least to a widespread extent.”
Intermodal says the biggest problem is the price of the fuel, which is very similar to MGO and very close to the highest levels that the shipowners have ever paid for heavy fuel. “This is not entirely an IMO 2020 effect, the high oil prices are mostly courtesy of the trade wars, torpedo attacks, air strikes, missile strikes and the other events that sent the oil price to the recent highs. However, the spread between the compliant fuels and the HFO, which is currently getting cheaper, has peaked from $280/mt up to more than $400/mt in some major bunkering ports, and the fact is that most owners are experiencing high and uncertain heavy fuel oil price levels. So this is good news for those owners who rushed to install scrubbers.”
Refiners Face Turbulent Start to the Year
However, Wood Mackenzie says it expects some turbulence this year for refiners as a number of factors come together – geopolitical risk, the impact of IMO 2020 regulations and U.S. tight oil production slowing, among them.
Refining margins in last few months of 2019 were weak – for many in Europe and Asia, refining margins were below historical five-year lows. High sulfur fuel oil prices collapsed rapidly during October and November, as shipowners stopped buying this as bunker fuel and started to transition to very low sulfur compliant fuels.
The fuels being purchased were low-sulfur fuel oil components from stocks built up during 2019, so while high sulfur fuel oil prices collapsed, there was no corresponding rise in the price of marine gas oil and other clean products, as there was no change in demand for them.
Alan Gelder, vice president, refining and chemicals, says that a number of forecasts around IMO implementation appear robust, notably:
• Compliant low-sulfur fuels will be costly, so priced at a premium to crude oils such as Brent;
• the installation of scrubbers on ships will be economically attractive as there will be a wide pricing spread between low-sulfur compliant fuels and high-sulfur fuel oil;
• crude differentials will change, with very low sulfur crudes attracting a significant premium to global markets, such as Brent.
“Critical uncertainties remain, as full global compliance is not expected. The legislative framework is far from watertight. And some countries, such as South Africa, are yet to enshrine the IMO regulations into their national legislation. Others, however, have legislated significant fines for non-compliance.”
The expectation of stronger refining margins was based upon a lack of supply of low sulfur compliant fuel oil, he said. This is looking increasingly likely, as low availability is now being reported, along with an increase in the demand for middle distillates.
“We will find out in the coming weeks as to how much more marine gas oil is required by the shipping sector and this will determine how much better refining margins are in 2020,” Gelder said.