The International Maritime Organisation’s 2020 (IMO 2020) regulation mandating ships to use low sulphur content bunker fuel is expected to increase the gross refining margins (GRMs) of oil refiners like Reliance Industries and Nayara Energy in India by $4 per barrel from the January-March quarter of 2020, a senior S&P Global Platts official told FE.
As more and more shipping companies will substitute for low sulphur fuel oil, the price of bunker fuel is bound to go up globally from January 1, 2020, which would give higher margins to oil refiners. The total impact on the global economy is expected to be around $1 trillion over the next five years, he said.
Kang Wu, head of analytics at S&P Global Platts, said, “For large Indian refiners, like RIL and Nayara Energy, who can handle the production of gas oil well over coming months, and source sour crude after Iran sanctions, the IMO regulation will impact their GRMs positively by $4 per barrel. Plus, Indian refiners have a premium over Singapore refining margin, which is an added advantage.”
“If the Indian refiners are not able to source the sour crude after Iran sanctions and they import more of sweet crude, their costs may go up, but still the benefits will be a lot higher,” Wu said.
IMO 2020 will mean ships can no longer simply burn untreated high-sulphur fuel oil. This leaves three options available to shippers; first, to install scrubbers (exhaust gas cleaner systems that extract the sulphur as the fuel burns); second, switch fuel intake to low-sulphur fuel oil (which is equivalent to distillates); and finally, to switch to liquid natural gas (LNG) propulsion systems. However, despite being well flagged, the shippers have been relatively slow moving in adapting to the new rules. The bunker fuel market currently accounts for around 5.5 million barrels per day (mb/day) of global consumption, with 4mb/day accounted for by ferries, cruise or container ships, LNG/LPG, dry bulk transport and oil tankers, amounting to around 70,000 ships. These ships consume over 50% of the total global fuel oil demand, Schroders, a global investment management company, said in a recent report.
Fuel oil has traditionally been the bottom of the barrel, high-sulphur by-product formed along with gasoline and distillate (diesel) by refiners. To give a sense of how important the regulation is, on an annual basis, one large container ship emits more sulphur dioxide than 50 million diesel cars over a year. There are over 65,000 ships in operation globally.