Cleaner shipping fuel regulation presents new opportunities

Dave Ernsberger –

Nineteen months. That is how long the world’s oil and shipping markets have left to adjust to the International Maritime Organization’s (IMO) ruling to reduce the sulfur cap from 3.5 per cent to 0.5 per cent at the start of 2020. The change will be immense for the shipping, refining and trading industry but could also present opportunities for Middle East ports who have invested in cutting edge infrastructure.

The new legislation will force ship owners to switch to using cleaner, more expensive alternatives to High Sulphur Fuel Oil (HSFO). They also have the option of installing scrubbers to continue using HSFO, but the high up-front capital cost of fitting the technology has deterred many in the shipping industry.
The echo of surprise that has reverberated around the market in the Middle East and beyond since the ruling was announced in October 2016 — a 2025 start date was on the cards — has finally fallen silent. There is widespread acceptance that there will be no last-minute grace period. Stakeholders along the value chain — from refiners, traders, ports to shipowners — are now united in their efforts to make compliance an affordable reality in less than two years.
Adjusting to the most disruptive event ever to hit the shipping, refining and trading industry will be a tall order and carries a hefty price tag, especially for beleaguered industries, such as shipping. S&P Global Platts Analytics forecasts the impact of these changes will increase the cost of bunker fuels and onshore fuels including diesel and jet. It will also uplift crude prices by at least $7 a barrel in 2020 in our conservative estimate — approximately a 10 per cent gain on current prices. But the higher costs for consumers will be a boon for refiners and some others in the industry with a total shift of roughly $1 trillion over five years.
The sweeping change will be evident from mid-2019 and will be disruptive and even chaotic at times in 2020, though most of the price changes will subsequently ease and be largely gone by 2025, according to a S&P Global Platts Analytics research note to clients. The net effect will be to temporarily increase most light product prices and freight costs in a shift of magnitude and breadth that the market has not yet fully grasped.
Earlier in May, investment bank Goldman Sachs was reportedly planning to help ship owners finance the installation of scrubbers on board their vessels to allow them to continue burning high sulfur fuel oil after sulfur limits are tightened in 2020.
Ace Card
What many see as a dark cloud of uncertainty could have a silver lining for some, including the UAE’s Port of Fujairah and the wider Middle East. The port is the world’s second largest bunkering hub — Singapore has the top spot — and sits at the heart of the world’s maritime, refining and oil producing crossroads, between east and west.
Speedy steps to comply by 2020 could deepen Fujairah’s global reputation as a world-class and world-relevant port. Showcasing an ability to flex to shifting market dynamics is pertinent as competition to capture market share along the coveted east-west trade route intensifies. Oman’s Port of Duqm and Pakistan’s Gwadar port are both widening their influence, for example. In readiness, Dubai-based Earth Wealth Energy plans to build a 360,000 cubic metres of fuel oil storage and treatment facility at the Port of Fujairah. This includes 12-15 storage tanks and a facility to treat up to 12,000 b/d of fuel oil to reduce the sulfur content. The blending and fuel quality checks required for LSFO means more storage and onshore testing facilities are part of the port to manage the rise in volumes post-2020.
Fujairah has already declared its support for IMO 2020, which is in line with energy stakeholders’ expectations. Regional port owners should take the lead when it comes to preparing a post-2020 roadmap, 56 per cent of respondents said in a GIQ Industry Survey in April. A quarter of respondents said ports’ enforcement of the ruling will also help accelerate the establishment of a regional oil products benchmark; a long-discussed effort that is gaining considerable traction. Associated changes are already under way, with S&P Global Platts’ plans to publish daily assessments for marine fuels reflecting a maximum sulfur limit of 0.5 per cent globally from January 2019.
Refining Rewards
The Middle East has another ace card thanks to good timing. Efforts over the last decade to leverage its refining potential have paid off, as its portfolio of modern and sophisticated refineries is growing as Europe’s historically firm grip on the industry diminishes. For example, an expansion to the UAE’s Ruwais refinery brings capacity up to 900,000 b/d and Kuwait’s 615,000 b/d Al Zour refinery is expected to start up. Both are on the list of the worlds’ top ten largest such facilities. As 2020 nears, Middle Eastern refineries will be able to tweak their crude palette to support rising demand for LSFO with relative ease. This not only supports Fujairah’s compliance, but sharpens the port’s competitive edge against other ports facing supply shortages.
The financial and logistical tension in the market to be ready for the deadline of the IMO’s ruling is clear. But there may be more surprises in store, for quick and strategic action by the Port of Fujairah and the wider Middle East could reveal that the strain is a golden goose in disguise.
(Dave Ernsberger is Head of Energy Content, S&P Global Platts)