IMO 2020: A Sea Change is Comingstillwaterassociates.com/wp-content/uploads/2019/09/R-Grimmer-20… · Delayed Coking Visbreaking Residual Hydrocracking Resid Desulfurization Hydrogen,

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Stillwater Associates LLC

IMO 2020: A Sea Change is Coming


Ralph J. Grimmer


2019 West Coast Harbor Safety Committee Summit

Long Beach, CA

September 19, 2019

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Legal Disclaimer

Stillwater Associates LLC prepared this presentation for the sole

benefit of the 2019 West Coast Harbor Safety Committee Summit.

Stillwater Associates LLC conducted the analysis and prepared this

report using reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are

based on information available at the time of presentation. Changes

in factors upon which the report is based could affect the results.

Forecasts are inherently uncertain because of events that cannot be

foreseen, including the actions of governments, individuals, third parties and competitors. NO IMPLIED WARRANTY OF

MERCHANTABILITY SHALL APPLY.

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Agenda

1. IMO 2020 overview

2. Refiner perspective

3. Marine fuel supply

4. Enforcement

5. Impact on crude oil, diesel/gasoil, and fuel oil prices

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IMO 2020: The Lead Up to This Big Change

4IMO 2020 was scheduled back in 2008.

IMO opted to not defer implementation to 2025 after its 2016 review.

1948United Nations

founds the International

Maritime Organization

(IMO)

1973IMO begins regulating

marine pollution via MARPOL 73

1997IMO adopts MARPOL Annex VI

regulations

2005MARPOL Annex VI

limits marine fuel to 4.5%

sulfur content

2008IMO defines timeline for

sulfur content

reduction

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IMO 2020 is the last of the 2008 MARPOL Annex VI

sulfur content stepdowns

5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Sulf

ur

Co

nte

nt,

wt.

%

MARPOL Annex VI RuleReduced Maximum Sulfur Content for Marine Fuel

Within ECAs Outside ECAs

IMO 2020 reduces maximum marine fuel sulfur content by 85%

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Vessel Operator Marine Fuel Options

1. Low sulfur compliant fuel (0.5% sulfur max.)

• Marine Gasoil (MGO, similar to diesel)

• Very Low Sulfur Fuel Oil (VLSFO) blends

2. “Acceptable” high sulfur heavy fuel oil (HS HFO)

• If vessel equipped with onboard scrubber, or

• If vessel submits FONAR waiver request that is

approved by its Flag State

3. Compliant alternative fuel (e.g. LNG, methanol)

4. Deliberate use of non-compliant fuel (i.e. cheating)

• Ban against carriage of marine fuel above 0.5%S

takes effect March 1, 2020

• Port States will gain authority

6Compliant fuel will be the predominant marine fuel in 2020

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Key Issues on 2020 Marine Fuel Mix

1. How much “acceptable” HS HFO will be consumed?

• 3,000 - 4,000 vessels expected to have scrubbers by

January 1, 2020 (6-8% of global fleet)

• Represents 17-23% of current 3.4 MMBPD of HS HFO

demand

2. How prevalent will deliberate non-compliance be?

3. Will there be sufficient compliant fuel?

4. How significant will marine fuel quality

issues (e.g. compatibility & stability) be?

5. Some smaller ports may not offer HS HFO

in addition to 0.5%S VLSFO & MGO

and 0.1%S ECA fuel

72020 consumption of HS HFO could be 30-35% of 2019 volumes

due to combination of scrubbers, cheating & FONARs

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IMO 2020 for refiners: threat or opportunity?

Threat

• Refineries that produce

significant yields of

HS HFO

• Asphalt refineries?

Opportunity

• Refineries with resid

upgrading (e.g. cokers)

o Especially for refineries

that process heavy sour

crudes

o Especially for refineries

with high distillate yield

8In aggregate, U.S. & Canadian refineries should find IMO 2020

to be an opportunity

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Global Refining Capacity by Continent

9

*********************************** Processing Capacity, MBPCD ************************************

Continent Totals Crude Flexicoking

Delayed Coking Visbreaking

Residual Hydrocracking

Resid Desulfurization

Hydrogen, MMCFD

Sulfur, Tons/day Asphalt

Africa 3,298 9 69 60 0 0 113 890 46

Asia 43,085 344 753 1,009 297 1,304 5,578 29,592 616

Europe 16,594 88 368 1,105 78 120 2,927 16,147 315

North America 22,920 367 2,580 74 155 247 4,595 59,506 829

Australia/New Zealand 555 0 0 0 0 0 97 191 10

South America 5,188 17 291 131 0 0 325 2,440 80

Total World91,640 825 4,061 2,379 530 1,670 13,635 108,766 1,895

Source: Oil and Gas Journal 2017 Worldwide Refining Survey

More than 90% of all resid processing capacity is in

North America, Asia, and Europe

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Capacity to upgrade high sulfur resid varies by region

10North America refining capability to handle surplus high sulfur resid is

substantially greater than both Europe & Asia

************************************* Percent of Crude Capacity *************************************

Continent Totals Flexicoking

Delayed Coking Visbreaking

Resid Hydrocracking

Resid Desulfurization

Hydrogen, MMCFD

Sulfur, Tons/day Asphalt

Africa 0.3 2.1 1.8 0.0 0.0 3.4 27 1.4

Asia 0.8 1.7 2.3 0.7 3.0 12.9 69 1.4

Europe 0.5 2.2 6.7 0.5 0.7 17.6 97 1.9

North America 1.6 11.3 0.3 0.7 1.1 20.0 260 3.6

Australia/New Zealand 0.0 0.0 0.0 0.0 0.0 17.5 34 1.9

South America 0.3 5.6 2.5 0.0 0.0 6.3 47 1.5

Total World0.9 4.4 2.6 0.6 1.8 14.9 119 2.1

Source: Oil and Gas Journal 2017 Worldwide Refining Survey

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Refineries will optimize amidst changing market prices

Key refining price differentials are likely to widen appreciably in

2020:

1. Light sweet crude vs. heavy sour crude

2. LSFO (and VLSFO) vs. HSFO

3. Diesel/gasoil vs. HSFO

4. Diesel/gasoil vs. gasoline?

11Refiners will optimize short-term & longer-term processing strategy

for their existing “kits” as market price direction solidifies

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Refiners and traders will be challenged to adjust to new

global requirements

Stillwater estimate,

MMBPD

• Continued HS HFO consumption 1.2

• HS HFO replaced with VLSFO or MGO 2.2

• HS HFO surplus to power plants & other 0.7

non-refinery consumption

• Net distillate demand increase 1.0

• Refinery crude runs increase 1.7

• Crude oil, products, and intermediates trade

flows will be altered

Note: Above figures assume 2020 and that 35% of 2019 HS HFO demand will be kept in 2020

12As vessel owners continue to add scrubbers in 2020 and beyond,

surplus HS HFO will be consumed and distillate demand will decrease

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Refiners face tough investment decisions

High sulfur resid displaced from HS HFO pool

1. Potentially a bigger 2020 problem than compliant fuel supply

2. Displaced volume very likely to exceed global refineries’

ability to process in 2020

3. Net surplus HS HFO primarily to power plants?

Lead time to engineer, permit, and construct new processing

facilities typically 5 years

Pace of non-refinery changes will influence refinery investment

decisions

1. Scrubber installations

2. Fleet conversion to alternate fuels

3. IMO marine greenhouse gas (GHG) regulations

13Since the IMO decision (Oct. 2016), there has not been a marked

increase in announced global resid processing projects

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Marine fuel quality concerns are a significant issue

Two primary quality concerns for IMO 2020-compliant Very Low

Sulfur Fuel Oil (VLSFO) marine fuel blends

1. Compatibility

2. Stability

2018 HS HFO quality issue in Houston, Panama, & Singapore

Fuel specifications for new IMO 2020-compliant VLSFO

1. New ISO 8217 standard unavailable until ~ 2022

2. Publicly Available Specification (PAS) available as an

interim solution

Vessel operators will want to:

1. Revisit fueling patterns and fuel sources

2. Draw on existing relationships with bunker suppliers

14Protection of ships’ engines is a paramount concern for vessel owners

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IMO 2020 Enforcement Authority

Current enforcement authority is weak

1. IMO itself has no enforcement authority

2. Only Flag States have authority to enforce open oceans

compliance and set non-compliance fine amounts

New enforcement mechanisms

1. At its MEPC 73 meeting in October 2018, IMO provided

enforcement authority to Port States effective March 1, 2020

• Carriage of marine fuel in bunker tanks with more

than 0.5% sulfur content prohibited

2. Possible loss of insurance coverage

3. Public pressure through large corporations

15The MEPC 73 changes approved at MEPC 74 in May 2019 are the

strongest IMO actions to date driving enforcement

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Deliberate Non-Compliance

Industry estimates of deliberate non-compliance pre- and post-

MEPC 73

• Pre-MEPC 73 (only Flag States have As high as 35%

enforcement authority)

• Post-MEPC 73 (Port States gain authority) ~ 10%

o Port States do not gain authority until

March 2020

Deliberate non-compliance will look more attractive to unscrupulous

vessel operators if:

1. Enforcement is weak

2. Fines are small

16IMO recognizes the need for effective enforcement if the intended IMO

2020 benefits are to be realized

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U.S. West Coast Aspects of IMO 2020

U.S. Enforcement of IMO 2020

• In the United States, enforcement of IMO 2020 will be managed

by the U.S. Coast Guard, in alliance with the U.S. EPA

• Per IMO’s MEPC 74 Meeting, Port States will gain enforcement

authority March 1, 2020

California’s Ocean-Going Vessels Fuel Rule

• Per California’s Ocean-Going Vessel (OGV) Fuel Rule, vessels

operators are prohibited from utilizing onboard scrubbers or

residual-based ECA-compliant marine fuel within 24 nautical

miles of California’s coastline unless an “expedited research

exemption” has been granted (uncommon)

• Intent of the OGV rule is to reduce particulate matter and oxides

of nitrogen emissions versus what is allowed by IMO

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Where Will Future Prices Land?

Forward view of prices

1. ICE and CME futures thinly traded beyond March 2020

2. Many experts believe futures prices understate key price

differentials after IMO 2020 rollout in January

3. IMO 2020-compliant VLSFO futures contracts not yet

actively traded

4. Spot market price reporting bases are only now shifting to

actual deals

5. Keeping abreast of futures

prices will be crucial to

building and adapting

strategy & tactics

18Key price differentials widen from Oct. 2019 to Jan. 2020, but not by as

much as some experts expect. Differentials decline in 2020 & 2021.

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Current View of Futures Prices – U.S.

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Data source: CME Group. Prices are as of 8-19-19.

ULSD & WTI diffs. to HSFO both widen 7% by Jan. 2020

and then narrow considerably throughout 2020 & 2021

Commodity UnitsOct

2019Dec

2019Jan

2020June 2020

Dec2020

Dec2021

WTI - Cushing $/bbl 56.14 55.21 54.71 53.11 52.02 51.00

NH HarborULSD

$/bbl 77.27 77.45 77.48 75.52 75.95 75.28

USGC3.5% HSFO

$/bbl 40.20 38.13 37.73 38.60 40.68 44.10

ULSD - HSFO Diff.

$/bbl 37.07 39.32 39.75 36.92 35.27 31.18

WTI - HSFO Diff.

$/bbl 15.94 17.08 16.98 14.51 11.34 6.90

ULSD - WTIDiff.

$/bbl 21.13 22.24 22.77 22.41 23.93 24.28

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Current View of Futures Prices – Northwest Europe

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LS Gasoil & Brent diffs. to HSFO widen 4% & 9% by Jan 2020

and then both diffs. narrow considerably throughout 2020 & 2021

Commodity UnitsOct

2019Dec

2019Jan

2020June 2020

Dec2020

Dec2021

Brent Crude $/bbl 59.74 58.70 58.32 57.53 56.72 56.22

ARA Low Sulphur Gasoil

$/mt 561.9 556.6 554.3 547.0 545.3 541.7

Rotterdam1% LSFO

$/mt 351.0 351.9 350.1 347.3 345.2 347.5

Rotterdam3.5% HSFO

$/mt 256.7 240.9 237.0 241.9 254.8 276.3

LSFO - HSFO Diff.

$/mt 94.3 111.0 113.1 105.4 91.4 71.2

LS Gasoil -HSFO Diff.

$/mt 305.2 315.7 317.3 305.1 290.5 265.4

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Current View of Futures Prices – Singapore

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Gasoil & Brent diffs. to HSFO widen 10% & 16% by Jan 2020

and then both diffs. narrow considerably throughout 2020 & 2021

Commodity UnitsOct

2019Dec

2019Jan

2020June2020

Dec2020

Dec2021

Brent Crude $/bbl 59.74 58.70 58.32 57.53 56.72 56.22

Singapore Gasoil 0.05%

$/bbl 74.10 73.51 73.23 72.48 72.05 71.48

Singapore380 cSt HSFO

$/mt 288.0 269.0 263.7 262.2 273.9 292.9

Brent – HSFO Diff.

$/bbl 14.69 16.61 17.06 16.50 13.87 10.39

Gasoil - HSFO Diff.

$/bbl 29.05 31.42 31.97 31.46 29.20 25.65

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In summary, IMO 2020 will have a significant impact

1. Most impactful sudden specification change for shipowners and

refiners … ever (because it’s global)

2. Q4 2019 - Q3 2020: Significant market turbulence

3. Markets will restabilize over time. How long with that take?

4. HSFO and heavy sour crude prices will be driven lower relative

to light sweet crudes, compliant marine fuel, and clean refined

products in 2020

5. Refiners in general have been slow to invest thus far

6. Compliant fuel forward prices not yet readily transparent

7. Shipowner and refiner investments post- 1-1-2020 will cause

widened price differentials to narrow

8. Higher diesel, jet fuel, and gasoline prices will be felt by

businesses and consumers

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“A Sea Change Is Coming”Presenter: Ralph Grimmer

Senior Associate, Stillwater Associates

[email protected]

888-643-0197

For more information, please contact us:

Stillwater Associates website www.stillwaterassociates.com

IMO 2020 articles https://stillwaterassociates.com/tag/imo-2020

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Appendix

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Largest Flag States

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Source: Harley Marine

Top 8 Flag States by vessel count

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Largest Bunker Fuel Supply Ports

26The above 5 ports supply almost 30% of the 300+ MM mT/yr

global bunker fuel demand

Source: 20/20 Marine Energy

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Shipowner Decision Factors on Scrubber Installation

1. Shipowner financial condition

2. Other IMO regulations (e.g.

ballast water; future GHG)

3. Capital costs and operating

expenses

4. Ability to recoup capital

investment

• Owner/operator - fuel and

other operating costs

• Charter out - charter rate

differential

27Vessel scrubbers are expected to cost $3-5 million plus port time

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Shipowner Decision Factors on Scrubber Installation

5. Existing vessel or new build?

a. Existing vessel

• Vessel age

• Shipyard time

• Structural compatibility

b. New build

• Compliant fuel vs.

HSFO vs. LNG

6. Fuel availability

a. Tramper vs. liner vessels

28Scrubber installations and conversions to alternate fuels appear

more likely to occur for new builds and liner vessels

Documents

IMO 2020: A Sea Change is Comingstillwaterassociates.com/wp-content/uploads/2019/09/R-Grimmer-20… · Delayed Coking Visbreaking Residual Hydrocracking Resid Desulfurization Hydrogen,