The decision of the International Maritime Organisation (IMO) to reduce the sulphur cap on marine fuels from the existing 3.5% to 0.5% by 1 January 2020 is going to make watershed changes in the refining and shipping industries worldwide.
One of the anticipated changes is that the more modern and flexible refineries in the Middle East may flourish and make better profit margins as a result of the sulphur cap. The decision gives refiners an opportunity to position themselves on the profitable side of a major change taking place in the market.
The impending regulation by the IMO, a sanctioning body for the world’s shipping fleet, aims to significantly reduce the amount of sulphur in bunker fuels that are relied on for commercial shipping. Collectively, these ships burn more than three million barrels a day of residual fuel oil, which has a sulphur content that exceeds levels found in automotive gasoline by more than 1,000 times. Burning fuels with a higher sulphur content leads to a greater level of toxic air emissions, including sulphur oxides, which are considered a threat to the environment and human health.
By some estimates, in a full compliance scenario, shipping costs could rise by up to $60bn annually from 2020 onward.
First announced in 2008, the IMO confirmed in 2016 that global refiners and shippers would have to comply with these new environmental regulations by 2020 – five years earlier than many anticipated, which sent tidal waves through two industries that typically take many years to adapt to such significant change that requires tens of billions in investment.
According to a research report published by Arab Petroleum Investments Corporation (APICORP) in September 2019, in the likely scenario that there will be more reliance on low sulphur fuel oil (LSFO) and marine diesel, the downstream sector will create winners and losers, with simple refineries at most risk. Refineries that failed to invest in cokers and other residue destroying equipment needed to contain high sulphur fuel oil (HSFO) production will find it difficult to market the fuel.
On the other hand, more complex refineries will benefit from higher margins. In the highly competitive refining market, this could pave the way for further closures. In particular, Saudi Arabia could benefit significantly if shippers choose to switch to LSFO, or marine diesel, as it will be able to meet this demand and increase exports.
Geared to producing more diesel, the GCC will be in a good position to adjust to the IMO rules, with ample opportunities for the likes of Saudi Arabia and Kuwait to utilise excess HSFO in their respective power sectors.
The GCC as a whole has embarked on many initiatives across the oil value chain that has helped them adapt to global developments. Some of these investments, such as additional refining capacity, were built with an eye to supplying a growth in Asian demand for diesel, driven by China.
But the decision taken by the Chinese government to rebalance the economy and shift away from manufacturing and more towards consumer goods and services dampened the prospects for diesel exports. Luckily, the timely changes in IMO regulations have provided the GCC with an alternative market for diesel exports. Refineries that have the means to reduce fuel oil production, or that are geared to producing middle-distillates such as those across the GCC will benefit from the additional demand.
For example, UAE’s ADNOC is well-positioned to benefit from the IMO 2020 sulphur regulation, as the state-run company has complex refining facilities that can produce cheaper heavy crude, while maximising output of distillates.
“The Carbon Black and Delayed Coker Project announced in Q3-2018 will strengthen our ability to market and sell marine fuels, following the International Marine Organisation’s decision to reduce the sulphur content in marine fuels to 0.5% by 2020.Our Crude Flexibility Project will be able to process heavy crude to produce high-value products. ADNOC will produce zero sulphur content bunker fuels by 2020,” said Abdulaziz Abdulla Alhajri, director, Downstream Directorate, ADNOC, in an interview given to Refining & Petrochemicals Middle East.
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