The regulations will slash emissions of sulfur, which is blamed for causing respiratory diseases and is a component of acid rain that damages vegetation and wildlife.
But the energy and shipping industries are ill-prepared, say analysts, with refiners likely to struggle to meet higher demand for cleaner fuel and few ships fitted with equipment to reduce sulfur emissions.
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Will Everyone Follow the Rules?
Many vessels may try to dodge the new rules, unable to afford the cost of scrubbers and reluctant to pay the premium for cleaner fuel. But how much of the industry will cheat is open to debate, with estimates ranging from 10 to 40 percent.
The IMO says it will ban ships that do not have scrubbers from carrying any fuel oil, making it easier to catch cheaters.
Oil major BP expects 10 percent of ships could cheat, while consultancy Wood Mackenzie expects a figure of about 30 percent when the rules launch in 2020. Consultant Citac says industry polls indicate cheating could be in a range of 25 to 40 percent.
Can Refiners Meet New Demand?
The global refining industry needs to process an extra 2.5 million bpd of crude to make distillates for cleaner fuel, says Robert Herman, refining executive at Phillips 66.
Some refiners have invested in cutting sulfur in their output, but fitting hydrocracker or coker unit so that a refinery produces more distillates with lower sulfur content while reducing fuel oil output can cost about $1 billion, analysts say.
Small refineries, unable to afford the upgrade, may find they are churning out fuel oil without finding buyers.
A KBC consultancy survey showed 40 percent of Middle Eastern and European refineries are not prepared. European plants, which tend to be less complex than those in other regions, produce more fuel oil and may face the biggest challenge.
Morgan Stanley says refineries of Spain’s Repsol (REP.MC), Turkey’s Tupras, India’s Reliance (RELI.NS) and U.S. independent Valero (VLO.N) are among the best prepared because they already produce high middle distillate and low high-sulfur fuel oil.
What Will Happen to the Crude Market?
The simplest way for refineries to produce fuel with less sulfur is to buy and process crude that contains less sulfur, a shift that could change demand for different oil grades and lead to greater oil market volatility.
For example, processing Iraq’s Basra Heavy grade with high sulfur content produces as much as 50 percent fuel oil, while using light, sweet North Sea crude with less sulfur produces about 12 percent fuel oil.
“There will be a bidding war for sweet crude,” said Stephen George, chief economist with KBC Advanced Technologies.
This could hike the price of sweeter crudes, including several grades used to make dated Brent, the benchmark for three quarters of the world’s oil. Meanwhile, the cost of refining “sour” crudes with more sulfur, such as those from Venezuela, Mexico, and Ecuador, “could be more than its value,” he said.
Who Will Pay the Price?
Energy firms and shippers may face a squeeze on margins. But, ultimately, extra costs are likely to fall on consumers of everything from household appliances to gasoline that are shipped around the world. Roughly 90 percent of world trade is by sea.
Wood Mackenzie estimates that global shipping fuel costs are likely to rise by a quarter, or $24 billion, in 2020. Others estimate extra costs for container shipping alone will be $35 billion to $40 billion.
In addition a surge in distillate demand by shippers could push up prices of other products, such as jet fuel and diesel.
“It’s going to make moving anything more expensive,” said AlphaTanker’s Wilson.
Read more at New Rules on Ship Emissions Herald Sea Change for Oil Market
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