Bunker Fuels Focus: IMO2020 Update #4

Transcription

1 Stormy Seas Bunker Fuels Focus: IMO22 Update #4 Short-Term Global Oil Service July 3, 218 Highlights Bunker Pricing, Refinery Investment & Fuel Availability: Refiners respond to IMO although it won t do much to help HSFO surpluses in 22 Shipping Market Moves: Improved deal structuring for scrubbers sees orders accelerate for larger ships with reports that the orderbook is nearly full for Jan Bunker Pricing, Refinery Investment & Fuel Availability: Refiners respond to IMO although it won t do much to help HSFO surpluses in 22 Refiners have been much busier for longer in the run up to the IMO22 sulphur cap, as the preparation for a switch over to low-sulphur bunkering has always been considered a small part of a much broader longterm strategy of a need to switch away from fuel oil production. Last week Exxon announced a raft of refinery project updates. Some of these were clearly 3-4 years in the making; however, there was clearly an IMO focus in the latest round of announcements: Rotterdam s 15 kb/d hydrockracker expansion is on course and due for completion by the end of the year, which would allow it to produce more marine fuels and lubes from the refinery; It is considering a multibillion-dollar investment to expand the Singapore refinery. While it did not disclose the exact plans it did suggest that the new unit (slated for startup in 223) would focus on cracking crude for the provision of low-sulphur marine fuels and lubes; At both Exxon s Rotterdam and Texas Baytown refinery it was looking to provide a new EHC12 lube, which could be used as a base stock to meet the additional requirements for lubrication for low-sulphur marine fuel oils. Exxon has also just commissioned its new 5 kb/d coker at the Antwerp refinery in another upgrade that will reduce Exxon s exposure to high sulphur fuels in favour of low sulphur light and middle distillates. Whether focused specifically on IMO or a broader switch away from fuel oil, refiners are starting to respond to impact on balances that we may see in 22 and beyond. Exxon isn t the only refiner making moves on investment to switch away from HSFO. Total, Shell and BP were all looking at increasing upgrading capacity all focused on shifting their yields away from high sulphur fuel towards low sulphur, higher value products, as well as looking to increase the provision of lubricants. Based on what has currently gone post-fid (Final Investment Decision) and is firm from our perspective, by 223 we see another 23 kb/d of upgrading capacity additions, with another 13 kb/d likely to come online. Despite these capacity additions, as well as increased utilization of secondary capacity, refiners can only go some way towards reducing the surplus HSFO in the market in 22 These announcements, in conjunction with other moves in the refining sector, will be significant in reducing surpluses of fuel oil, particularly as we head into the early 22s helping to reduce the surpluses of HSFO alongside an increase in scrubbed HSFO within the shipping sector. However, it only goes some way towards cracking/blending the amount of fuel oil surplus in the market in 22. Ultimately, we estimate there to be a net fuel oil surplus of around 1 mmb/d in 22 even despite a large pick up in upgrading capacity expansions, increased utilization of existing secondary capacity, and blending of HSFO into BFO (see Fig 1). Page 1 of 5

2 FGE - Stormy Seas: IMO Bunker Report July 3, 218 Fig 1: Surplus HSFO Fuel Oil in 22 net of refinery use, mmb/d Lost HSFO demand 5% increase in coking & SDA utilisation Increased processing in FCC & Hydrocrackers Distillate cutter stock released from HSFO pool (less gasoil diluent) LSFO absorbed in.5%s BFO pool Surplus HSFO net of refinery use 2. Shipping Market Moves: Improved deal structuring for scrubbers sees orders accelerate for larger ships with reports that the orderbook is nearly full for Jan 22 Much of the recent activity in scrubber adoption through 2H217 and in 1Q218 this year has been focused on the large trading houses which had long shipping positions through large fully owned fleets notably Trafigura, Vitol and BP. Big trading houses with large balance sheets (a good cash position), strong risk management and analytics teams, meant that they could act on all sides of the deal, laying out the capital cost for the scrubber installation themselves (or refinance at relatively low costs such as through Vitol s recent issuance of panda bonds). Moreover they had the know-how and risk management teams to properly implement the trade, locking in the gasoil/fuel oil differentials in to payback the installation of the scrubber and more. In effect, most of these trading houses could be in the money already if they have fully hedged their scrubbed fuel exposure in 22 and 221. However, it was always much more difficult for the rest of the shipping industry to implement such a trade particularly the smaller ship-owners/ship-managers. Until early June this year, where we started seeing TC deals agreed, charterers were not agreeing premiums being asked for to cover capital costs for the installation of scrubbers. And coming from 3-4 years of poor freight economics with weak balance sheets, scrubbers were frowned upon by a large amount of ship-owners as another onerous capital intensive solution with a lot of upfront risk. A clear path to scrubber profit sees orders accelerate However, recently, improved deal-making, both from charterers and on the financing side of things, have started to see a shift in this perspective and a much larger increase in scrubber orders now accelerating. Some reports have suggested it s difficult to find slots for scrubber installations before January 22. POSCO shipping recently agreed a deal with the KDB (Korean Development Bank) to help pay and finance scrubbers for a group of three ship-owners with ships on charter. Goldman Sachs, DNB and other financial institutions have also been in discussions looking at other financing structures to help ship-owners make a painful leap forward in 22. Some well-capitalized ship-owners have been even more aggressive in their scrubber posturing, looking to actively secure supplies for scrubbers (presumably with concern of constrained capacity in 22). John Frederickson s Frontline just agreed a 2% equity stake in a lesser known scrubber manufacturer called Feen Marine, looking to vertically integrate along the scrubber supply chain. As part of the deal it put 12 scrubbers on order with options for another 22. We estimate the amount of scrubbers on order or having been installed is around 87 and we expect this to accelerate, as current constraints are ironed out. Scrubber installation lead times reduce, wet retrofits should become more commonplace and we see more and more companies enter the space. Page 2 of 5

3 FGE - Stormy Seas: IMO Bunker Report July 3, 218 Fig 2: Scrubber count - Number of Ships with Scrubbers on Order or have been installed Importantly, we think this recent shift in scrubber orders has been driven by a real improvement on structuring scrubber deals, making a scrubber ventures much more accessible, lower risk and making the path to profit clearer: Charterers - Charterers are becoming much more aware of the ability to lock-in differentials even further out along the fuel oil / gasoil curve for fuel procurement that covers the lion s share of the scrubber premium that they offer ship-owners (and more!); Ship-owners Premiums on offer for 3 year TCs on scrubber equipped vessels make the economics much clearer now for some ship-owners. Some shippers have even opted for more risky deals, willing to share in the profit of widening gasoil/fuel oil spreads in a premium plus profit share deal. In this situation, a much smaller premium is offered to partially pay back the capital costs of a scrubber and the profit between the spreads and the hedging program is shared between the both the charterers and the ship-owners; Financing - With much of the credit risk of higher fuel costs mitigated through this TC arrangement and active hedging program, a fixed income cash flow stream is secured on the scrubber creating an asset to lend against. With this in place, some banks have been much more willing to provide asset-backed financing for scrubbers. Financers will then also receive some uplift over and above the principal of the loan in a variable portion based on widening gasoil/fuel oil spreads. Fig 3: Potential Deal structure for a VLCC Scrubber Lender disburses circa $5mn for the installation of the scrubber to be fitted on a VLCC Ship-owner purchases and installs a scrubber at circa $5mn Lender Ship-owner Charterer Charterer hedges gasoil/fuel oil differentials above $3/t covering fuel requirements for the scrubber Ship-owner repays lender principal of loan with a variable portion dependent on gasoil/fuel oil spreads. Charterer, with fuel exposure hedged, offers scrubber equipped premium to ship-owner on a VLCC of circa $5,/day (for a 3-year TC) covering the capital outlay for the ship-owner and funds borrowed Page 3 of 5

4 FGE - Stormy Seas: IMO Bunker Report July 3, 218 IMO Forward Curves and Forward Differentials Brent/Dubai Swaps (EFS), $/bbl NW Europe Product Cracks, $/bbl NW Europe HSFO Crack 6/24/218 6/17/218 4/15/218 ICE LS Gasoil vs. Brent HSFO crack at Coal Parity 75 NWE HSFO Swaps vs. HSFO Coal Parity Forward Curve, $/t European Hi/Lo (1%/3.5%S) Barge, $/t NW Europe HSFO HSFO at Coal Parity ICE LS Gasoil 6/24/218 6/17/218 4/15/ Sing 38 cst 3.5%S Fuel Oil Cracks, $/t ICE LS Gasoil vs. Sing 38 cst Swaps, $/t /24/218 5/27/218 4/15/218 5/29/218 5/22/218 3/13/218 Page 4 of 5

5 FGE - Stormy Seas: IMO Bunker Report July 3, 218 IMO Compliance Monitor List from 1 st June 218 to 3 th June 218 Date of News Shipowner Newbuild/Retrofit Number of Ships Vessel Type Project Stage IMO Compliance Delivery Date (Announced) 6/4/218 Wilhelmsen Retrofit 3 PCC Order/Construction Scrubber Equipped 22 onwards 6/5/218 NYK Newbuild 2 LNG Carrier Order/Construction LNG/MGO 22 6/5/218 K Line Newbuild 1 LNG Carrier Order/Construction LNG/MGO 22 6/5/218 Toyota Newbuild 2 PCC Order/Construction LNG/MGO 22 6/6/218 COSCO Retrofit 1 Unknown Order/Construction Scrubber Equipped 22 6/7/218 Oceangold Newbuild 2 MR Order/Construction Scrubber Ready 22 onwards 6/13/218 Star Bullk Retrofit 1 Newcastlemax Order/Construction Scrubber Equipped 219 onwards 6/13/218 Star Bullk Retrofit 14 Capesize Order/Construction Scrubber Equipped 218 onwards 6/14/218 Bertram Rickmers Newbuild 8 BengalMax Order/Construction Scrubber Equipped 219 onwards 6/14/218 MTT Shipping Newbuild 2 BengalMax Order/Construction Scrubber Equipped 219 6/14/218 Navios Maritime Newbuild 2 VLCC Order/Construction Scrubber Ready 22 6/15/218 Van Oord Retrofit 2 Dredger Order/Construction Scrubber Equipped 22 6/15/218 Maran Tankers Newbuild 7 VLCC Order/Construction Scrubber Equipped 219 onwards 6/2/218 DHT Newbuild 2 VLCC Order/Construction Scrubber Ready 218 6/25/218 BW LPG Retrofit 19 VLGC Order/Construction LPG/MGO 22 6/26/218 Torm Newbuild 6 LR2 Order/Construction Scrubber Equipped 22 6/26/218 Torm Newbuild 7 MR Order/Construction Scrubber Equipped 219-1Q22 6/27/218 Posco Retrofit 2 Large Bulk Carriers Order/Construction Scrubber Equipped 219 6/27/218 Petredec Retrofit 17 VLGC Order/Construction Scrubber Equipped /27/218 Petredec Newbuild 4 VLGC Order/Construction Scrubber Equipped 219 6/29/218 Frontline Retrofit 14 VLCCs/Suezmax Order/Construction Scrubber Equipped /29/218 Frontline Retofit Option 22 VLCCs/Suezmax/LR2s Order/Construction Scrubber Equipped 6/29/218 Frontline Newbuild 2 VLCC Order/Construction Scrubber Equipped December 218/April218 6/29/218 Viken Shipping Newbuild 2 Aframax Order/Construction Scrubber Equipped 218 N.B. This list is not exhaustive. All information above is based on publicly-available information. 218 FGE For queries, please FGE@fgenergy.com The dissemination, distribution, or copying by any means whatsoever without FGE s prior written consent is strictly prohibited. Page 5 of 5