The impact of IMO 2020 on limited water resources
There is no shortage of data on the expected costs of IMO 2020, as refineries scramble to meet new market demands. Much less attention has been paid to the likely impact on limited water resources, writes Seth Clare
Few topics in energy have been more discussed than the International Maritime Organization (IMO) regulations set to take effect in 2020. Mountains of research have been produced on the economic changes these regulations will bring, but less thought has been given to IMO 2020’s environmental consequences, which are often assumed to be benign.
The adverse health effects of sulfur dioxide emissions are well documented and reducing them will be a boon to public health, but these regulations will also come at a rather steep cost, measured not just in dollars, but gallons of water.
The US refining complex will need more water than ever before after IMO 2020 comes into effect. This conclusion is based primarily on forecasting from S&P Global Platts Analytics and the US Energy Information Administration along with the findings of recent academic research. The sheer scale of this issue is difficult to appreciate, but simply considering the US refining complex processed some 17.2 million b/d in 2018, using approximately 1.5 barrels of water for each barrel of oil, any marginal increase in the sector’s water usage demand is worth discussing.
Without a doubt, modern societies could not exist without sufficient energy or water and, vexingly, their production is highly interdependent. In other words, producing one tends to require a vast amount of the other. Scholars have named this problem the “energy-water nexus” and solving it will be one of the greatest challenges of the 21st century, given this interdependency should become more dramatic over time. The International Energy Agency (IEA) says the global energy complex accounts for about 10% of global water withdrawals, or the amount of water removed from the source, and about 3% worldwide water consumption, defined as the volume of water withdrawn but not returned to the source. By 2040, water consumption by the energy sector is expected to rise by almost 60% to over 75bcm, compared with 2014 levels.
Most of the energy sector’s water demand comes from electricity, but creating liquid transport fuels is another thirsty business, because each refinery processing units needs ample water for cooling. Diving a bit deeper, Estimation of US refinery water consumption and allocation to refinery products, a paper authored by a group of scholars with the Argonne National Laboratory and Jacobs Consultancy last year, offers a look not only at the amount of water needed to make various refined products, but also at how those figures are sensitive to refinery complexity.
The authors modelled three different refinery configurations: cracking, light coking, and heavy coking. They assumed the simplest configuration uses light, sweet crude while the most complex refinery uses heavier, sour barrels. The research is nuanced, but it broadly shows a refinery’s water needs will rise higher if:
- The crude processing rate increases
- The facility becomes more complex, adding new processing units
- The crude slate becomes sourer
- The crude slate becomes heavier
Most crucially for IMO 2020, the research shows that destroying high sulfur fuel oil through a heavy coking system to make more diesel is highly water intensive. Diesel at a simple cracking refinery uses about 0.2 gallons of water per gallons of water, while a heavy coking refinery uses double that. These findings have critical implications for water demand, given expectations for the post-IMO 2020 oil sector.
The regulations coming into force next January will move the maximum sulfur cap for marine fuels on the high seas down to 0.5% from the current 3.5%. Platts Analytics predicts this adjustment will cause more than $1 trillion to change hands from 2020 to 2025 as refiners and oil producers cash in on the production of cleaner, more expensive marine fuels.
Almost overnight, makers of bunker fuel will have to find a way to replace 3 million b/d of high sulfur fuel oil, which will no longer be compliant with marine fuel regulations. Platts believes the missing fuel oil in the global bunker pool will be supplanted by 1.3 million b/d of new low sulfur fuel oil paired with as much as 2 million b/d of increased distillates for bunkering.
In the US, the EIA forecasts the refining complex will process 17.9 million b/d in 2020, an all-time high. Margins on diesel production could double after the sulfur cap goes into effect, and the EIA predicts US distillate refinery yields will increase from 29.5% of US production in 2018 up to 31.5% of US production in 2020. Residual fuel yields should meanwhile decrease from an average of 2.4% in 2018 to an average of 2.2% in 2020.
Speaking on the Platts Capitol Crude podcast series in February, Susan Grissom, chief industry analyst for the trade association, American Fuel & Petrochemical Manufacturers, said US refineries with sufficient complexity to run heavier, more sour crude slates will be best positioned to reap the gains of IMO 2020. This will be because simpler refineries, especially outside the US, will need to pay steeper premiums for lighter, sweeter barrels if they wish to increase middle distillate creation.
This view seems to gel with Platts Analytics’ forecasting, which foresees low sulfur versus high sulfur crude oil spreads widening “sharply” with the 30 API Mars crude discount to Light Louisiana Sweet Crude at 38 API in 2020 nearly doubling from 2018. With sweet-sour spreads widening, “deep conversion refineries will see much stronger margins as they produce essentially all light products and no fueloil, and they can do that using ‘cheap’ heavy high sulfur feeds,” Platts Analytics said in an April 2018 report, Making Waves. Despite higher prices for light, sweet crudes, simpler US refineries will also run at higher rates: “even cracking refineries should see healthy margins.”
Higher refinery runs, heavier crude slates, the addition of new conversion units, and increased high sulfur fuel oil destruction to boost distillate output all point to the same inescapable conclusion: more water than ever before will be needed to run the US refining complex in 2020. What’s more, the global refining complex will continue to grow more sophisticated after 2020.
To get a sense of what this could mean for individuals and businesses, just look to Galveston County, Texas. That is where the Marathon Petroleum Galveston Bay Refinery and Valero Texas City Refinery are located, with a combined capacity of nearly 800,000 b/d.
By virtue of its location, this mini-refining hub gets 100% of its water from the Brazos River under the auspices of the Gulf Coast Water Authority, an independent government agency. These refineries compete with over 18,000 acres of irrigated rice crops in the region, the 50 million gal/d Thomas S. Mackey Water Treatment Plant, and other industrial users such as a Dow Chemical Plant, for allocations of river water.
In this microcosm transport fuels, consumer goods, food, and drinking water are all in competition for the same increasingly scarce river water. If these refineries increase their utilization rates without decreasing their water footprint after IMO 2020, it will heighten competition for water in an area that has already dealt with shortages. According to environmental consultancy SWCA, “the Brazos’ 2011–2015 drought period was the worst in recorded history” for certain parts of the river, and the risk of drought can only worsen, given the Brazos River Basin population could swell to 5.4 million people by 2060.
On the bright side, because refining companies know water is a critical input for their business models, they have a constructive role play in its conservation. In a report for investors last year, Marathon Petroleum said: “Since taking ownership of our Galveston Bay refinery in 2013, we have been implementing a water optimization program that has already reduced water consumption by over 750 gallons per minute.”
“We are currently studying a reverse osmosis process that would enable the reuse of treated wastewater effluent in the refining process,” the report continued. “This effluent reuse could potentially reduce water usage by another 4,000 gallons per minute and make operations more sustainable in the event of drought.”
Marathon Galveston Bay claims to be the second largest refinery in the US with a Nelson Complexity index ranking above 15: it is precisely the kind of facility Platts expects will ramp up distillate output after IMO 2020, using more water than ever before. But as the Gulf Coast Water Authority warns, “even senior water rights will not meet customer demands in low river flows.” In other words, a prioritized legal right to use water from the Brazos will not do these refineries much good during a severe drought.
This will only get worse after IMO 2020 comes into effect but it is by no means unique to Galveston County: the US Department of Energy estimates refineries across the country will have to spend more than $10 billion over the next 50 years to ensure they have access to adequate water supplies. The situation along the US West Coast may be especially challenging as refineries there get about half of their water from municipal or city water sources and the region is especially vulnerable to drought. California – home to 16 different refineries – recently signed new legislation to permanently place restrictions on urban and agricultural water usage to help cope with future droughts. While those restrictions may affect each refinery differently, they raise an obvious question: to what extent will California facilities be able to increase refinery runs after IMO 2020 if they have less water at their disposal?
It is almost certain the US refining complex will consume more water after IMO 2020. While Trucost, part of S&P Global, says that the switch to cleaner marine fuels should save billions in healthcare costs, there may be unintended and unforeseen costs in the amount of water – and money – it will cost to produce them. The lesson is that solutions to problems at a global scale will always require difficult choices and tradeoffs – in the case of IMO 2020 the exchange of potentially vast amounts of water for cleaner air. Only time will tell if this price was right.