IMO 2020: Are Asian refineries ready?

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The upcoming change in global standards for marine fuels will transform oil product flows. Asia is well placed to capitalize on the shift, despite the challenges of rising costs and oil prices, write JY Lim and Kang Wu of S&P Global Platts Analytics

The refining industry is on the brink of a major shift in the demand structure of bunker fuels, and refiners are making plans to meet changing product demand brought about by the IMO 2020 deadline.

The initial effect will be to create a huge disposition issue for some 3 million barrels per day (b/d) of high sulfur fuel oil (HSFO), globally. That volume will need be replaced by low sulfur fuel oil (LSFO), marine gasoil (MGO) and various low sulfur blends of gasoil and residuals, with some volumes absorbed by the power sector with the expected drop of HSFO prices.

In order to make those changes, relatively expensive steps are required throughout the refining industry to rebalance products. S&P Global Platts Analytics forecasts that the spec change will have a widespread effect on price spreads of refined products in 2020.

For middle distillates, cracks are forecast to surge. HSFO cracks are expected to fall and HSFO absolute prices may drop to low levels towards the end of 2019, incentivizing increased use in power generation.

Despite all these challenges, Asia is set to benefit from IMO 2020 more than most other regions due to its surplus of gasoil and its relatively high complexity of refineries. Asian refiners have continued to upgrade, allowing them to achieve greater yields of valuable lighter products and strip out sulfur. This will set them on a better footing to adjust for IMO 2020.

China and India are well-placed to take advantage of the bunker spec change with their high ratios of coking and hydrocracking versus crude distillation capacities. Japan is a major LSFO producing and consuming country in Asia while South Korea is a major gasoil exporting country. Both stand to benefit from high distillate cracks.

The IMO bunker spec change in 2020 will be the most disruptive event to hit the refining sector in decades, even as Asian refiners have made concerted efforts to supply compliant fuels. But Asia’s rising surplus of gasoil will help to ease the region’s transition.

The IMO 2020 spec change will have a widespread effect on price spreads of refined products. Specifically for middle distillates, cracks are likely to increase significantly in the fourth quarter of 2019, and peak sometime in early 2020. Both HSFO flat prices and cracks are expected to fall in 2020.

Installation of exhaust gas cleaning systems, also referred to as scrubbers, is one alternative solution that the shipping industry can choose, leading to the continued use of some volumes of HSFO. Other solutions for the shipping industry include LNG bunkers, and the use of other fuels meeting the sulfur requirements, or simply non-compliance. But these are expected to represent a tiny percentage of bunker fuels used: Platts Analytics expects that the compliance rate will be high.

The change will also mean a significant shift in the composition of Asian oil demand, with the gasoil share rising by 2 percentage points from 2019 to 2020 and fuel oil share declining by 2 percentage points.

Singapore, as the world’s largest bunkering hub, will have to make major changes. Singapore’s product demand composition will undergo a drastic change, with HSFO demand dropping in 2020 while demand for MGO and LSFO rises. Market participants are keeping an eye on how Singapore will gear up to meet its bunker demand. Singapore is the world’s largest bunkering market and today imports huge volumes of HSFO.

In 2020, Singapore will still be a net importer of HSFO as vessels installed with scrubbers will continue consume the fuel, but most of its demand will switch to 0.5% LSFO and MGO, creating new challenges to its supply chains.

Overall, the changes are likely to benefit refining in Asia, which is long on gasoil, and the major bunker suppliers and China are developing supply options for LSFO. The Maritime and Port Authority of Singapore (MPA) is working with stakeholders to ensure an adequate availability of compliant fuel oil at its port ahead of 2020, with a list of suppliers made available in mid-2019.

Since 2000, Asian refiners have added substantial volumes of refining capacities as well as upgrading capabilities. In fact, the region has been adding conversion capacities more rapidly than crude distillation units (CDUs) over the past few years.

India’s conversion ratio – or the amount of more complex conversion capacity, such as fluid catalytic cracker (FCC), resid catalytic cracker (RCC), hydrocrackers (HCU), or coking capacity relative to CDU capacity – has improved the most among Asian refiners. It is expected to reach a new high this year after a series of upgrading works to prepare refineries for a nationwide rollout of the Bharat VI standard, which applies to gasoline and gasoil and mandates a limit of 10 ppm sulfur, equivalent to Euro 6, in April 2020.

However, China’s conversion ratio is still ahead, although the improvement has slowed over the last few years. China implemented the Nation 6 standard with 10 ppm sulfur levels (equivalent to Euro 6) nationwide in January 2019.

Japan’s refinery conversion ratio has improved due to CDU closures as part of the METI’s Refinery Ordinance. Japan is well ahead in its preparations as it has substantial residue desulfurization facilities, which were originally built mostly to make LSFO for power generation. South Korea’s conversion ratio also improved over the years due to upgrading.

In addition, Asian refiners added significant hydrotreating or hydrodesulfurization (HDS) capacity to meet government mandates for tighter product specifications. Asia’s HDS to CDU ratio has improved sharply over the last several years, and will increase further this year.

The higher conversion and HDS ratios in the region will enable refineries to have more flexibility in terms of their choices on crude slates, and more fuel oil will be converted into valuable lighter products. Asian refineries are now on a better footing to make changes to meet IMO 2020 bunker specs.

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