International Maritime Organization legislation looks to lower emissions from ships to 0.5% from 3.5% by 2020

A push for cleaner fuels in the world’s maritime industry could drastically change the appetite of the world’s refineries, and the producers of heavy crude oil. By 2020, ships around the world will have to cut their sulfur emissions to 0.5% from 3.5% currently, based on new standards being adopted by the International Maritime Organization.

Currently, the world’s 90,000 shipping vessels use about 5 MMBOPD of petroleum products, and their emissions are expected to grow as much as five-fold by 2050, according to a Bloomberg View article.

“It will drastically change the crude diet of refiners,” Hindustan Petroleum Corporation Limited’s former head of refineries, B.K. Namdeo, said of the shipping change.

The bulk of 90,000 vessels are burning high-sulfur fuel oils now, but those could be replaced by distillates by 2020

Lighter crudes like North Sea crude typically produce 12% fuel oil, while heavier crudes like Iraq’s Basra Heavy make as much as 50% fuel oil. With fuel for the marine sector currently making up nearly 4% of global refined product demand, the shift toward cleaner fuels made from lighter crudes could have a serious impact on countries producing high-sulfur crude like Saudi Arabia, Iraq, Venezuela, Mexico and Brazil, reports Reuters.

In order to comply with the lower sulfur targets, ship owners have several choices, including burning middle distillates, which are lower in sulfur content, but are more expensive. Groups like FGE estimate that in 2020, the new emissions rules could shift 700 MBOPD of demand from fuel oil to distillates, though the IEA puts the number much higher at 2 MMBOPD.

Wood Mackenzie estimates that by 2020, middle distillate margins could average as much as $25 per barrel, roughly 2.8-times this year’s average of just over $9 per barrel. The increased demand for middle distillates will likely lead to lower costs for fuel oil as the product looks for new outlets.

Will refiners invest to upgrade their capacity?

Downstream, oil companies are increasingly looking to gear their refineries for lighter crude grades that offer a more attractive margin. PBF Energy (ticker: PBF), which operates five refineries in the U.S., produces very little fuel oil, while new complexes such as Saudi Aramco’s Jubail or Reliance’s Jamnagar in India produce virtually none. They typically transform high-sulfur products into asphalt, or produce higher volumes of more valuable refined products like gasoline and diesel.

“You’ll see a huge uplift for those refineries,” said Alan Gelder, head of refining and marketing for Wood Mackenzie, adding they will see “all the uplift and no downside.” But older complexes face an expensive decision: do they invest in upgrading their refining capacity?

Adding a residual hydrocracker, which could strip fuel of sulfur, costs close to $1 billion, according to Wood Mackenzie, and the entire process can take as long as a decade. It is difficult to say if such a large, long-term investment will pay off in the end, and compounding the problem further, many ships are beginning to make the change to liquefied natural gas (LNG) for propulsion.

Will the shipping industry make the move to LNG bunkering?

Projects like Tacoma LNG boast that they can provide cleaner fuel options for maritime vessels, and create jobs for the region at a fraction of what it would cost a refiner to add a residual hydrocracker.

Tacoma LNG is a proposed project of Puget Sound Energy for an LNG facility at the Port of Tacoma to provide a clean gas supply resource for PSE’s natural gas customers. The facility will also provide a cleaner fuel alternative for maritime vessels. The project is expected to be completed and fully operational by early 2019. PSE’s proposed LNG facility will serve domestic natural gas customers and provide fuel for ships traveling between Tacoma and Alaska. The LNG is not for export.

The $275 million Tacoma LNG project is expected to create 18 permanent jobs, 250 construction jobs, and create the need for more than 125 other permanent jobs in the region.

Tacoma LNG estimates on carbon output by fuel source

Source: Tacoma LNG

A comeback for fuel oils is not out of the cards yet, though

While Energy Aspects product analyst Nevyn Nah believes the sulfur-cap on fuel used by ships will be “like the final nail in the coffin” for refiners geared toward heavier crudes, there is still a potential for fuel oil to make a comeback.

Another option available to ships is to install a “scrubber,” which captures the sulfur emitted from the fuel burned to power the vessel. The equipment cost $3-$10 million to retrofit onto existing vessels, and scrubbers are becoming increasingly standard on new ships. The expected drop in the cost of fuel oil following higher demand for middle distillates could encourage the maritime industry to upgrade its fleets to use cheaper fuel oil.

“If the shipping industry invests quickly, by 2025 the demand for fuel oil could be back,” Gelder said.

Source: Royal Caribbean ---    World’s 3 largest cruise ships converge off Florida Coast:  Royal Caribbean International’s Oasis of the Seas, Allure of the Seas and Harmony of the Sea meet off the coast of Florida November 4, 2016.

Source: Royal Caribbean — World’s 3 largest cruise ships converge off Florida Coast: Royal Caribbean International’s Oasis of the Seas, Allure of the Seas and Harmony of the Sea meet off the coast of Florida November 4, 2016.


Legal Notice