EnSys and Navigistics Still See Major Impacts and Big Risks from the IMO 2020 Sulphur Rule in Full Update to 2016 Study

EnSys Energy and Navigistics Consulting just completed a full update of their Supplemental Marine Fuel Availability Study covering the IMO’s 2020 marine fuel regulation limiting Sulphur content to 0.5% – unless subject to the 0.1% limit inside of special Emission Control Areas (ECAs). The original Supplemental Marine Fuel Availability Study was submitted to IMO at MEPC 70 (October 2016) by BIMCO and IPIECA.

As 2020 gets closer the picture is becoming clearer and it does not look good for the global economy.  The significant findings from the updated study include:

• Lower than previously expected uptake of exhaust gas cleaning systems (scrubbers – that enable continued use of higher sulphur marine fuels).
• Higher total global demand for distillates and other fuels.
• Global refinery projects and so expected 2020 distillate manufacturing capacity are moderately higher than previously expected.
• There will likely be a “Scramble” period in which less complex refineries will bid up the price of light sweet (low sulphur) crude in a scramble to produce more low-sulphur distillate and less residual fuel.

It is quite likely, based on EnSys’ WORLD model (a global oil industry model that uses a linear programming algorithm to match demand with regional refining capability and crude oil production) that during the “Scramble” period in 2020 distillate prices will exceed $1,000 per ton and U.S. retail gasoline prices will spike at over $5 per gallon (if crude oil prices enter 2020 at around $80 per barrel [Brent] and spike to the $120 per barrel range).

 

Navigistics Consulting’s analysis shows that nearly 4 million barrels a day (mb/d) of high Sulphur residual fuel will need to be “switched” to 0.5% Sulphur marine fuel by 1 January 2020 to achieve full compliance. Even with slowdown to the economic speed of ships associated with a price spike to $1,000 per ton for marine fuels (assuming that current non-compensatory freight rates still prevail in 2020 – higher freight rates would incentivize higher speeds), well over 3 mb/d will still need to be “switched.”

 

Martin Tallett, president of EnSys Energy, states:
Our detailed, up-to-date assessment of the overall global liquids supply-demand-refining balance points to a maximum capability to supply marine fuels in the first half of 2020 of around 3 mb/d. Especially if allied to a strong determination to strictly enforce Annex VI, this outlook leads to severe market strains affecting all products in all regions – not just marine fuels.  Mirroring the history of 2007/2008, there is a distinct risk that prices will be bid up in a “scramble” for sweet crude. (Prices for Brent, gasoline and diesel more than doubled in 2008.)  Some entities will be winners and the market will correct but potentially with significant economic damage resulting.  Barring a trade war or other event that cuts economic growth, trade and oil demand going in to 2020, the increase in product “supply costs” could take $0.5 to $2 trillion out of the global economy over the course of the year.

 

David St. Amand, President of Navigistics Consulting, states that a “strict” implementation approach by IMO will also likely lead to severe economic disruption in the maritime industry itself. In addition to substantial increases in the delivered costs of goods – including crude oil and petroleum products – shipped by sea, “strict” implementation could lead to trade being impacted through potentially “problematic” implementation of IMO’s Annex VI Regulation 18 involving how to handle situations where “compliant” fuel is not available. More will be known about this and other potential problem areas as the implementation plan for IMO’s 2020 Marine Fuel Rule is debated at a special Intersessional meeting of IMO’s Pollution Prevention and Response (PPR) Sub-Committee beginning on July 9 in London. How this meeting turns out will do much to set how severe the Rule’s impacts will be in 2020.

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