A sea of challenges. The impact of IMO 2020 on petrochemicals

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What are the IMO 2020 bunker fuel changes?

During the past few years, shipping worldwide has come under increased scrutiny for its role in contributing to various environmental pollutants, with sulfur emissions dominating all discussions now as the deadline for the International Maritime Organization’s global sulfur limit for marine fuels draws closer. The IMO will cap global sulfur content in marine fuels at 0.5% from January 1 next year, down from 3.5% currently. This applies outside the designated emission control areas where the limit is already 0.1%.

Shipowners will have to either switch to more expensive cleaner fuels or use high sulfur fuel oil with scrubbers to comply with this rule. Scrubbers, or exhaust gas cleaning systems, clean a vessel’s emissions on board, allowing it to burn HSFO while still complying with the new sulfur limit. The technology works by spraying alkaline water into the vessel’s exhaust, capturing sulfur and some other emissions as they are produced.

While restrictions on sulfur emissions in shipping are not entirely a new concept, as emission control areas in certain regions have long existed, the transition to the IMO 2020 rule is expected to be daunting because of the magnitude of the change as well as the costs involved and that too at a global level.

According to S&P Global Platts Analytics, the total global impact of this rule on various sectors in the energy space as well as other industries will cost in excess of $1 trillion over five years. Some 60% of the bunkers will have to switch from HSFO to 0.5% sulfur overnight, calling for extensive planning among shipowners, charterers, ship crew and refiners, which will have to ultimately supply this 0.5% sulfur compliant fuel to help international shipping comply with this rule.

The petrochemicals industry will not be immune to this sea change as it will bring with it changes in feedstock pricing and supply chain economics — potentially higher freight rates for very large crude carriers, more bunker surcharges by container liners — for producers, who may be left with no choice but to pass the extra burden to consumers in the end.

The market price for crude oil and naphtha feedstocks will likely rise as crude runs increase to meet rising demand for distillate bunker fuels. Platts Analytics’ outlook, for example, assumes an average $5/b Brent price increase in 2020 above baseline trends over this year. The rule is also set to undermine margins for simple refineries that turn a significant share of their crude run into HSFO while potentially boosting margins for complex refineries able to take advantage of it.

Accelerated refinery runs will likely lead to an oversupply of naphtha, ultimately benefiting naphtha-based petrochemicals production. Industry participants are divided on the potential impact of naphtha supply and pricing, but Platts Analytics forecasts the supply of naphtha could grow by nearly 200,000 b/d or some 2.8% globally in 2020. However, refiners trying to maximize middle distillates output will likely deliver tighter gasoline supply, in turn pressurizing naphtha as it gets drawn towards gasoline supply.

Meanwhile, some petrochemicals products such as methanol are also emerging as alternative fuel options, particularly for smaller vessels, to comply with the IMO 2020 rule.

Supporters of methanol as a bunker fuel argue that it is economically viable and amply available worldwide. In addition to restricting sulfur emissions, it can also meet long-term challenges pertaining to nitrogen oxides and aid greenhouse gas emissions cuts, particularly because stricter rules are imminent.

In April 2018, the IMO announced its GHG strategy and targets to improve CO2 ef ciency in shipping. IMO has set targets that include a 50% cut in the shipping sector’s GHG emissions by 2050 compared with 2008. While the easiest way to decrease carbon emissions is to reduce a ship’s speed, new fuels will also need to be embraced to meet this as well as other upcoming rules.

That may throw shipping and even petrochemicals into another phase of disarray but for now there’s just enough time to focus on the immediate impact as well as the ripple effects of the fast approaching global sulfur limit rule.

Platts initiatives

S&P Global Platts started publishing daily cargo and barge assessments for residual marine fuels re ecting a maximum sulfur limit of 0.5% starting January 2, 2019 at Singapore, Fujairah, Rotterdam, USGC and USAC. Platts will also start publishing bunker assessments for the grade at major bunkering destinations globally from July 1, 2019.

The new cargo and bunker assessments will reflect specifications for RMG fuels as defined by the ISO 8217:2010 specifications of marine fuels, but with a sulfur cap of 0.5%.
— Surabhi Sahu, Rajesh Nair and Wu Kang

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