IBIA: Half Percent Marine Fuel Sulfur Cap Likely by 2020

There are signals that the global 0.5 percent sulfur cap for marine fuels could enter into force by 2020, according to the International Bunker Industry Association (IBIA).

The International Maritime Organization’s (IMO) Marine Environment Protection Committee (MEPC) is expected to decide on the timing of the global sulfur cap in October this year, based on the result of a low sulfur fuel availability study required under MARPOL Annex VI.

CE Delft, a consultancy employed to assess sulfur fuel availability on behalf of the IMO, told a Platts conference on May 24 that there may be sufficient refining capacity to produce enough compliant marine fuels by 2020 because demand growth for distillates in other sectors is slowing down.

The study suggests that global middle distillate production capacity will grow faster than demand, which “potentially creates capacity to produce low sulfur marine fuels”.

This could persuade most of the 87 signatories to MARPOL Annex VI at the IMO to go for 2020. The outcome is widely expected to be a political decision and unless the availability study is clearly saying 2020 is impossible, most observers believe it will be 2020 as that is the signal from those member states that have expressed an opinion, IBIA said.

The CE Delft study’s figures for 2020 assume ships will only use fuels with maximum 0.1 percent sulfur within emission control areas (ECAs) or in small engines, and use fuels with up to 0.5 percent sulfur outside these areas.

In addition, the study assumes that 3,800 ships will have exhaust gas cleaning systems (EGCS or scrubbers) installed by 2020, allowing ships to use some 36 million mt of HFO accounting for 11 percent of global shipping’s total energy demand.

Assuming the global cap takes effect in 2020, there would be 2,845 vessels with scrubbers installed by then, before increasing to almost 4,000 in 2022 and then growing year by year to close 5,000 in 2024, according to the Exhaust Gas Cleaning System Association (EGCSA).

EGCSA said in May this year that the exhaust gas cleaning industry is ready for 2020 both in terms of system and installation capacity, saying EGCSA members can outfit vessels with “thousands of new scrubbers” in time for 2020.

On the other hand, there are several parties not sharing CE Delft’s view on the feasibility of introducing the global sulfur cap in 2020.

The International Energy Agency (IEA) estimates that shipping will go from accounting three percent of global distillate demand in 2015 to nine percent in 2020. In addition, the majority of 0.50 percent fuels would need to come out of the distillate supply pool and it estimates that a 2020 implementation date would see 2 million barrels per day (b/d) of marine fuel demand switch from HFO to MGO, in turn leading global demand for distillates to jump from 28 to 30 million b/d. By comparison, the fall in the ECA sulfur limit from 1 percent to 0.1 percent in 2015 led to a 0.1 million b/d switch from HFO to MGO.

The IAE predicts that scrubber uptake prior to 2020 is to be limited due to the low price of MGO and relatively narrow price differential between HFO and MGO. It also predicts that 2020 is to be the peak year for MGO demand and that the demand will increase after this year. LNG uptake is also expected to increase rapidly.

Full compliance with the global cap in 2020 means that demand growth for distillates will be equivalent to nine years of average increases, according to Robin Meech, IBIA Chairman and head of Marine and Energy Consulting (MEC). However, Meech was not optimistic regarding the full compliance, but even assuming 30 percent non-compliance the 2020 increase would still equate to 6 years of average demand increases occurring overnight.

The International Petroleum Industry Environmental Conservation Association (IPIECA) pointed out that the refining industry is already reducing residual production and increasing output of distillates to address rising demand for the latter, but it is a gradual process.

The “overnight” shift from HFO to distillates and/or desulphurised HFOs in 2020 would see demand for these product groups jump by 3 million b/d or more, compared to an increase of less than 0.5 million b/d in 2015 when the ECA switch took place. IPIECA based this assessment on combined data from BP, Marine and Energy Consulting, IEA and OPEC.

Even if assuming that the capacity exists globally to produce sufficient marine fuels meeting a limit, refineries will not necessarily be geared towards the marine fuel market, according to IPIECA.

“Producing sufficient 0.5% bunker fuel by 2020 may be technically feasible but not economically viable for refiners, resulting in a shortfall,” Meech said.

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