Expectations for increasing scrubber installations and thus, high sulfur fuel oil bunker demand, is highlighting challenges for European oil refiners as they look to adapt to an evolving demand landscape, refining industry body Concawe said in its most recent outlook piece.
Increased uptake in scrubber installations reduces demand – and potentially prices — for low sulfur marine fuels, “making investments in desulfurization less profitable or even redundant,” Concawe said.
Since IMO 2020 took effect this year, seafarers can only burn 3.5%S high sulfur fuel oil with an exhaust gas cleaning system – also known as a scrubber — installed on board their engines. For ships without scrubbers, the sulfur cap was reduced from 3.5% to 0.5% on the high seas.
High sulfur fuel oil has remained resilient so far this year, in line with persistent scrubber demand. This comes despite worsened economics which have lengthened the payback period on costly scrubber investments.
“The degree of on-board scrubber uptake will be crucial [in refiners’ decisions],” the report said. “Refiners may be unwilling to invest for low sulfur marine fuel in an uncertain long-term environment where scrubber uptake may increase.”
Furthermore, some analysts expect scrubber uptake to gain more traction in the future. Scrubber uptake is expected to rise to 20% of total marine fuel demand in the EU, rising from a forecast of 14% in 2020, the report said, citing the latest Wood Mackenzie forecasts.
Additionally, “a key uncertainty remains on the export of high sulfur fuel oil,” the industry body said. “Historically, European refiners have exported to Asia.”
In the run up to IMO 2020, the amount of HSFO heading from Europe’s Amsterdam-Rotterdam-Antwerp region to Asia hit a peak at 960,000 mt in March 2019, which has since declined to a three-month average of 102,000 mt for October 2020.
But despite reduced trade flows to Asia, the European market has not been awash with supply. It has been plagued with sourcing difficulties due to reduced refinery runs throughout Europe as the coronavirus pandemic continued to weigh on refinery margins, sources said.
Sources have also been keeping an eye on tightening sour crude oil availability such as Russian medium sour Urals, the main baseload sour grade for European refineries.
Declining middle distillate demand
Meanwhile, declining demand for middle distillates could see more entering the marine fuel blending pool, they said.
“Between 2020 and 2025, overall products and middle distillates demands decrease, allowing for more flexibility to produce 0.5%S marine fuel in 2025 than in 2020,” Concawe said.
“Through many different simulation cases, the model shows a clear evolution of the MF 0.5%S towards lighter fuels, i.e. an increasing content of middle distillates to meet demand requirement.”
However, the addition of light material in 0.5%S marine fuel blends resulted in significant viscosity and density giveaway, raising “serious questions” over fuel compatibility, the body said.