IMO 2020: A Sea Change is Coming

Transcription

1 Ralph J. Grimmer The Sulphur Institute Sulphur World Symposium Philadelphia, PA April 24, 2018

2 Legal Disclaimer Disclaimer prepared this presentation for the sole benefit of The Sulphur Institute, Sulphur World Symposium 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. 2

3 Agenda 1. IMO 2020 overview 2. Shipowner perspective 3. Refiner perspective 4. Marine fuel supply 5. Enforcement 6. Impact on global sulfur production 3

4 IMO 2020: The Lead Up to This Big Change 1948 United Nations founds the International Maritime Organization (IMO) 1997 IMO adopts MARPOL Annex VI regulations 2008 IMO defines timeline for sulfur content reduction 1973 IMO begins regulating marine pollution via MARPOL MARPOL Annex VI limits marine fuel to 4.5% sulfur content IMO 2020 was scheduled back in IMO opted to not defer implementation after its 2016 review. 4

5 IMO 2020 is the last of the 2008 MARPOL Annex VI sulfur stepdowns Sulfur Content, wt. % MARPOL Annex VI Rule Reduced Maximum Sulfur Content for Marine Fuel Within ECAs Outside ECAs IMO 2020 reduces maximum marine fuel sulfur content by 85% 5

6 Vessel Operator Marine Fuel Options 1. Low sulfur compliant fuel (i.e. 0.5% sulfur max.) 2. Acceptable high sulfur heavy fuel oil (HS HFO) If vessel equipped with onboard scrubber, or If IMO implements a waiver process 3. Compliant alternative fuel (e.g. LNG, methanol) 4. Deliberate use of non-compliant fuel (i.e. cheating) Compliant fuel will be the predominant marine fuel in

7 Key Issues on 2020 Marine Fuel Mix 1. How much acceptable HS HFO will be consumed? 2. How prevalent will deliberate non-compliance be? 3. Will there be sufficient compliant fuel? 4. How long until vessel operators are comfortable with compliant fuel blends? 7

8 Agenda 1. IMO 2020 overview 2. Shipowner perspective 3. Refiner perspective 4. Marine fuel supply 5. Enforcement 6. Impact on global sulfur production 8

9 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 Scrubbers are expected to cost $4-7 million 9

10 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 Scrubber installations and conversions to alternate fuels appear more likely to occur for new builds and liner vessels 10

11 Expectations of HS HFO consumption have decreased 25% HS HFO as % of total 2020 marine fuel 20% 15% 10% 5% 0% 19% Summer 2016 EnSys/Navigistics study 20% Summer 2017 Anecdotal Indications 10% March 2018 View 4% of vessels The pace of scrubber installations is slower than many expected 11

12 Agenda 1. IMO 2020 overview 2. Shipowner perspective 3. Refiner perspective 4. Marine fuel supply 5. Enforcement 6. Impact on global sulfur production 12

13 IMO 2020 for refiners: threat or opportunity? Opportunity 1. Refineries with resid upgrading Especially for refineries that process heavy sour crudes Especially for refineries with high distillate yield Threat 1. Simple refineries 2. Sour crude refineries that produce HSFO 13

14 Capacity to upgrade high sulfur resid varies by region ************************************* Percent of Crude Capacity ************************************* Continent Totals Flexicoking Delayed Coking Visbreaking Resid Hydrocracking Resid Desulfurization Hydrogen, MMCFD Sulfur, Tons/day Asphalt Africa Asia Europe North America Australia/New Zealand South America Total World Source: Oil and Gas Journal 2017 Worldwide Refining Survey North America refining capability to handle surplus high sulfur resid is substantially greater than both Europe & Asia 14

15 Refineries will optimize amidst changing market prices Key refining price differentials will widen appreciably 1. Light sweet crude vs. heavy sour crude 2. LSFO vs. HSFO 3. Diesel vs. HSFO 4. Diesel vs. gasoline? Refiners will optimize processing strategy for their existing kits as market price direction solidifies 15

16 Refiners and traders will be challenged to adjust to new requirements Stillwater estimate, MMBPD Displaced HS resid will be significant Distillate demand will increase Refineries crude runs will increase Crude oil, products, and intermediates trade flows will be altered 16

17 Refiners face tough investment decisions High sulfur resid displaced from HS HFO pool 1. Likely a bigger problem than supply of compliant fuel 2. Displaced volume very likely to exceed refinery ability to process in 2020 Lead time to engineer, permit, and construct new processing facilities typically 5-7 years Pace of non-refinery changes will influence investment decisions 1. Scrubber installations 2. Fleet conversion to alternate fuels 3. Marine greenhouse gas regulations Since the IMO decision (Oct. 2016), there has not been a marked increase in announced global resid processing projects 17

18 Agenda 1. IMO 2020 overview 2. Shipowner perspective 3. Refiner perspective 4. Marine fuel supply 5. Enforcement 6. Impact on global sulfur production 18

19 Where will future prices land? Forward view of prices 1. ICE and NYMEX futures thinly traded beyond Jan No futures contract yet for IMO 2020-compliant fuel 3. Liquidity also an issue at present with swaps market 4. Platts and Argus not yet reporting forward prices The LSFO - HSFO differential widens (Jan. 19 vs Jan. 20), but not as much as some might expect 19

20 Marine fuel quality concerns are a significant issue Two primary quality concerns for 2020 marine fuel quality 1. Compatibility 2. Stability Fuel specifications for new compliant fuel 1. New ISO 8217 standard unavailable until ~ Publicly available specification (PAS) likely available as interim solution Vessel operators will want to: 1. Revisit fueling patterns and fuel sources 2. Draw on existing relationships with bunker suppliers 20

21 2020 & Beyond Will Not Be Static Any Time Soon 1. Early 2020 Significant use of straight marine gas oil (MGO) Key price differentials: wider and more volatile Refineries optimizing in volatile pricing environment HSFO supply to power plants begins to ramp up 2. Later in & beyond Stillwater expects significant market volatility during the first couple years starting 2H

22 2020 & Beyond Will Not Be Static Any Time Soon 1. Early Later in 2020 Compliant fuel blends become far more common More clarity on fuel pricing Enforcement improves Larger HSFO volumes to power plants & beyond Markets should begin stabilizing 22

23 2020 & Beyond Will Not Be Static Any Time Soon 1. Early Later in & beyond Greater penetration of scrubbers via retrofits & new builds Refinery resid processing capacity grows HSFO to power plants should decline LNG vessel share grows, especially after 2024 New IMO regulations (e.g. GHG, ocean acidification)? 23

24 Agenda 1. IMO 2020 overview 2. Shipowner perspective 3. Refiner perspective 4. Marine fuel supply 5. Enforcement 6. Impact on global sulfur production 24

25 Current IMO 2020 Enforcement Authority Current enforcement mechanisms are weak 1. IMO itself has no enforcement authority 2. Only flag states have authority to enforce open oceans compliance Potential new enforcement mechanisms 1. Provide authority to Port States Recently proposed amendments are promising 2. Possible loss of insurance coverage 3. Public pressure through large corporations The proposed changes coming out of IMO s PPR sub-committee are the most promising to date to drive enforcement 25

26 Agenda 1. IMO 2020 overview 2. Shipowner perspective 3. Refiner perspective 4. Marine fuel supply 5. Enforcement 6. Impact on global sulfur production 26

27 Stillwater s expectations when IMO 2020 rolls out 1. Spare refinery resid processing capacity will quickly fill # 2. HSFO inventories will start building 3. HSFO prices will drop significantly 4. HSFO consumption by to power plants will increase markedly # 5. Economic driver for deliberate non-compliance will be magnified 6. IMO s new enforcement mechanisms will be tested 7. Vessel stack gas scrubbing and refinery resid destruction projects will be energized Sulfur production will increase as spare refinery capacity is utilized and as power plants ramp up HSFO consumption 27

28 Recap of EnSys/Navigistics study volumes Global Fuel Oil Consumption Marine Fuel Use 2020 w/o IMO Change 2020 With IMO Change & Vessel Speed Up Delta Consumption mtpa MMBPD mtpa MMBPD mtpa MMBPD HS HFO (205) (3.6) ECA & Global Fuels LNG Total Marine Use (10) 0.2 On Land Fuel Oil HFO Use Total HS HFO + On Land HFO Source: EnSys Energy with Navigistics Consulting Supplemental Marine Fuel Availability Study Final Report dated July 15, The 3.6 MMBPD reduction in marine HS HFO use displaces high sulfur resid from marine fuel into refineries & power plants 28

29 Simple Math: open oceans SOx emissions reduction in 2020 at 100% conversion to compliant fuel Without IMO Assume 4.4 MMBPD (253 MM mt/yr) HS HFO consumed 2. Assume HS HFO sulfur content 2.58 wt. % (same as 2016) MM mt/yr sulfur emissions With IMO MMBPD (241 MM mt/yr) compliant fuel consumed 2. Assume compliant fuel sulfur content 0.40 wt. % MM mt/yr sulfur emissions Reduced open ocean sulfur emissions = 5.5 MM mt/yr 5.5 MM mt/yr would represent an 8% increase over current global production of 70 MM mt/yr 29

30 Incremental Sulfur Production Key Variables 1. HS HFO as a percentage of total open oceans marine fuel 2. Surplus global refinery resid destruction capacity 3. Available power plant capacity for HS HFO 4. % recovery of sulfur produced from refinery processing and power plant consumption of displaced high sulfur resid 30

31 IMO 2020 Impact on Sulfur Industry Sulfur production will increase Initial bump from increased utilization of existing refinery resid processing capacity 2 nd bump from increase usage of HSFO in power plants 3 rd bump from refinery capacity debottlenecking Longer term bump from new refinery facilities Sulfur production increases will be dampened as vessels with scrubbers come onstream Processing of effluent water from closed loop scrubbers could represent another source of sulfur Stillwater expects sulfur production to increase by MM mt/yr, depending on the key variables 31

32 In summary, IMO 2020 will have a significant impact 1. Most impactful sudden global change for shipowners and refiners ever 2. Q Q2 2020: Significant market turbulence 3. Markets will restabilize over time 4. Shipowners and refiners have been slow to invest thus far 5. Compliant fuel forward prices not readily transparent 6. Sulfur production increase will be significant initially and potentially longer term 32

33 experience runs deep A Sea Change Is Coming Presenter: Ralph Grimmer Senior Associate, Stillwater Associates rgrimmer@stillwaterassociates.com For more information, please contact us: Stillwater Associates website IMO 2020 newsletter articles 33

34 Appendix 34

35 Global Refining Capacity by Continent BPD Basis *********************************** Processing Capacity, MBPCD ************************************ Continent Totals Crude Flexicoking Delayed Coking Visbreaking Residual Hydrocracking Resid Desulfurization Hydrogen, MMCFD Sulfur, Tons/day Asphalt Africa 3, Asia 43, , ,304 5,578 29, Europe 16, , ,927 16, North America 22, , ,595 59, Australia/ New Zealand South America 5, , Total World 91, ,061 2, ,670 13, ,766 1,895 Source: Oil and Gas Journal 2017 Worldwide Refining Survey 35

36 Largest Bunker Fuel Supply Ports Source: 20/20 Marine Energy The above 5 ports supply almost 30% of the 300+ MM mt/yr global bunker fuel demand 36

37 Sulfur production will be a function of spare refining capacity and power plant stack gas scrubbing Incremental Elemental Sulfur Production (MM MT/yr) Sulfur Production - View % 19% 29% % of Marine Fuel that is HS HFO Displaced high sulfur resid volume projected to exceed spare refinery capacity to handle by 1-2 MMBPD 37

38 Incremental Sulfur Production Estimates Incremental Elemental Sulfur Production (MM MT/yr) Sulfur Production - View % 19% 29% % of Marine Fuel that is HS HFO Sulfur recovery effectiveness has a significant impact on incremental sulfur production 38