Compliance with the International Maritime Organization’s global sulfur limit for marine fuels will likely settle around 90% or 95% in the initial years after 2020, well above some industry estimates that pointed to compliance of 70%-80% a year ago, a bunker industry veteran and senior partner at 2020 Marine Energy, Adrian Tolson, said at an industry event.
“The 2020 HSFO carriage ban, MEPC’s [Marine Environment Protection Committee’s] recent meeting in May and a growing awareness of the high risks of non-compliance have largely changed views on estimates,” Tolson said during S&P Global Platts’ 3rd Annual Bunker and Shipping Asia Conference in Singapore.
Most shipowners of any size who want to trade internationally want to be compliant, Tolson said.
Some industry estimates point to a 5% non-compliance post 2020, which might be too low as enforcement on the high seas will still be difficult, Tolson said. “There will be a lot of whistle-blowing activity. But there will be non-compliance for sure,” he added.
While there may be some divergence about compliance estimates in the industry, this is unarguably the end of the HSFO era to a large extent, Tolson said.
The marine fuel market accounts for about 60% of current global HSFO demand. So, anything that is happening to the marine fuels market will have a significant impact on HSFO demand, Tolson said.
“We have a 300 million mt bunker fuel market. The current market is 85% HSFO. That’s about 230 million mt, or 4 million b/d,” he said.
Post 2020, HSFO demand will likely drop to about 60 million mt and most of the bunker fuel mix will be VLSFO and diesel, he said.
While there is momentum around LNG bunkering, its contribution in the global bunker fuel mix is only expected to be at a maximum of 10% by 2030, Tolson told Platts separately.
LNG can be an extremely viable compliant fuel option, but only if you can get over the infrastructure costs, Tolson said. “Ultimately, everybody will want to buy the cheapest form of the product for compliance, which will be blended VLSFO,” he added.
WHAT HAPPENS TO ALL THAT HSFO?
Tolson said there will be well over 3,000 scrubbers by the end of 2020 and scrubbed HSFO will likely be around 0.80 million b/d by the end of 2020.
“We have to wait and see how this [uptake of scrubbers] plays out,” he said, adding that HSFO demand could increase if the use of this technology accelerates more dramatically. “Meanwhile, we will see coker optimization between refineries regionally and co-operation between refining groups,” he said.
For example, Repsol in Spain says it will take fuel oil production from Tarragona and move it to Bilbao and La Coruna and that is how it is going to optimize, he said.
The overall impact is about 0.6 million b/d of HSFO being sucked into cokers, Tolson said.
“We currently count a lot of LSFO in the high sulfur fuel oil pool. They’re part of the VLSFO pool like the Argentinian residuals, Brazil residuals and some of the fuel that comes out of West Africa,” he said. “So, about 0.2 million b/d just disappears because it is LSFO and not HSFO. We just count it at as HSFO right now,” he added.
HSFO blended into the VLSFO pool will likely be about 0.3 million b/d, he said. “There’s also a lot of mid-sulfur barrels and a lot of optimization that could take place,” he added.
“Crude slate adjustments will also take place… there is an obvious natural shift replacing high sulfur crudes with low sulfur crudes and we may see some HSFO’s blended into crude ,” he said. “I give crude slate optimization about 0.4 million b/d,” he added.
Power generation is the easy solution to absorbing surplus HSFO, Tolson said.
Countries such as Saudi Arabia, Pakistan and Russia will likely use HSFO in their domestic markets for power generation, he added, estimating the sector to take away 0.5 million b/d of HSFO.
But power generation is a low price solution; it will drag down all HSFO prices as HSFO competes with LNG and coal as the energy source in the segment, he said.
Ultimately storage tanks will fill up because there will very likely be an oversupply of HSFO, Tolson said, estimating storage to absorb about 0.35 million b/d or even more of HSFO.
“If you can still find available storage, I think storage is a great play. There’ll probably be some potential refinery closures and significantly reduced runs once storage runs out. Some of that is already happening as refiners pre-assess the impact of 2020,” he added.