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IMO Decides on Jan 1 2020 for Global 0.5% Sulphur Cap

On Thursday October 27, 2016 the International Maritime Organization (IMO) decided to implement the MARPOL Annex VI Global Sulphur Cap on January 1st, 2020. EnSys Energy and Navigistics Consulting presented the results of their Supplemental Marine Fuel Availability Study at MEPC70 on Monday October 24th – download the EnSys Energy/Navigistics Consulting MEPC70 presentation here. EnSys Energy and Navigistics Consulting also submitted a Supplemental Marine Fuel Availability Study to the International Maritime Organization (IMO) in the lead up to the Global Sulphur Cap decision during MEPC70 – download the Supplemental Study Summary Report and Full Report for free. Additionally, EnSys/Navigistics recently launched a Marine Fuels 2020 Service to track related developments till 2020.

A more detailed synopsis of MEPC70

Debate was extensive with many national and NGO delegations expressing their views.  Broadly, developed nations aligned uniformly behind 2020 whereas a range of developing countries considered 2020 premature and proposed 2025. Several delegations voiced a range of concerns relating to fuel blending, stability and safety (notably flash point / SOLAS compliance); also the challenges presented by transition on what is an unprecedented scale and on achieving consistent enforcement.  It is understood to be these issues that the IMO Chairman referred to a working group on managing implementation which is to report back at MEPC71 in May 2017.

Where does this leave the refining industry?  David St. Amand and Martin Tallett were at MEPC70, having presented our Supplemental Marine Fuels Availability Study highlights on the Monday. CE Delft had also presented their official IMO fuel availability report. Navigistics and CE Delft had projected similar levels of scrubber penetration by 2020 and required volume of high sulfur marine fuel to be ‘switched’ to the 0.5% standard, at best 20% coverage of affected fuel by scrubbers, leaving 80% of the conversion burden on refiners. Our central estimate of ‘switch volume’ was 3.8 mb/d, 195 million tpa.

With regards to refining, the two studies conclusions were more at odds. EnSys disagreed with many of the details in the CE Delft report and felt numerous factors rendered the quality of their work dubious, yet the ‘bottom line’ was that both studies projected there would be sufficient capacity available in 2020 across the major refining units.

Where matters got critical was in relation to adequacy of H2 and sulfur plant and on economic impacts.  Both studies identified significant capacity deficits for hydrogen and sulfur recover plant in 2020 on the basis of full implementation of the Global Rule – with the main difference being that CE Delft arrived at larger deficits than did EnSys.  For H2 plant, CE Delft identified a deficit of 15,000 million scfd on top of 2020 base capacity of 14,000 million scfd (Table 92) – yes a stated deficit, including the Global Sulfur Cap, of over 100%. EnSys projected a needed increase of 1,800 million scfd on top of 27,400 million scfd assessed base capacity for 2020.  For sulfur plant, the levels were CE Delft approximately 15,000 st/d (13,700 mt/d Table 93) on top of a 2020 base of 96,000 st/d and EnSys 10,000 st/d on top of a 2020 base including projects of 141,500 st/d (all numbers rounded).  In short, EnSys identified a January 2020 sulfur plant capacity deficit of around 75% of the level of firm projects 2016-2019 and CE Delft a deficit of over 110% of the projects assessed by EnSys. Arguably these findings (and those on H2 plant) raised key questions over the adequacy of 2020 capacity and therefore the potential for a shortfall in 2020 Global Fuel supply.

We leave readers to gauge which of the two sets of findings is the more credible but, while both studies found substantial deficits, they parted ways in the treatment of this information.  Per CE Delft page 47: “Globally, H2 consumption increases owing to the overall tightening of the sulphur fuel specification in middle distillate oil. Refiners anyway have to meet the hydrogen consumption requirement calculated when capacity is added.” And page 48: “Sulphur plants usually have a higher capacity, so that the operation of the hydroprocessing units is not constrained, this is not always supported by our data analysis, however. If this assumption is not accurate, refineries will need to expand the capacity of their sulphur plants capacity to fulfill 2020 demand.” In other words, CE Delft effectively declared that the refining industry simply will invest and so the problem is waved away. In contrast, EnSys raised the potential capacity deficit as a serious concern.  Some refiners may elect to add sulfur plant – or H2 – capacity, especially if low-cost, but for others it will be difficult to justify what could be a $20 million to $50+ million expenditure.  Allowing for some additional sulfur plant to be built beyond firm projects before end 2019, the capacity shortage could still equate to of the order of a 50 million tpa shortfall in available 0.5% Global Fuel.

We see refinery investment being limited because there is a common – and we would say correct – perception that the advent of the Global Rule will first bring strained markets with wide light-heavy price differentials (as our modeling cases project) but that this will in turn induce rapid take-up of scrubbers with the likely effect that by say 2023/2024 all hint of a distillate premium due to the Global Rule will have gone and that there could a reversion of demand away from 0.5% fuel and back toward more 3.5% because of the increase in scrubber penetration.  The expected short term nature of this phenomenon is likely to deter many refiners from making major investments specifically for the Global Rule.

On economic impacts, EnSys/Navigistics highlighted the potential for a painful and uneven transition in the form of significant market strain impacting essentially all products in all regions; i.e. that extremely wide 0.5% marine distillate – 3.5% IFO differentials would spill over into the inland products that are the bulk of the market because of the refining industry’s co-product nature.  CE Delft confirmed that they did not consider economics/economic impacts because these were not covered under the IMO study terms of reference.

European countries especially declared the CE Delft study to be “comprehensive”, “sound” and “robust”.  It goes without saying that the above concerns were not enough to sway the decision! In the real world though they may not be so easily wished away.  One day after the IMO decision, 2019 price spreads for Northwest Europe Brent-3.5% HFO and ULSD-Brent were already reported by Bunkerworld as being at their highest levels on record.

Post MEPC70 EnSys-Navigistics Links

EnSys-Navigistics work was also recently featured in a December 2016/January2017 BunkerSpot article “Can Refiners Meet the Sulphur Deadline”, a Platts Special Report: “The IMO’s 2020 Global Sulfur Cap What A 2020 Sulfur-Constrained World Means For Shipping Lines, Refineries And Bunker Suppliers”, and a Platts Global Oil Markets Podcast.

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