Outlook for fossil fuels is tough to comprehend, but as long as they can be made cleaner, it seems they are here to stay.
Recently, the government banned the use of petcoke as a fuel. Petcoke is a more polluting fuel than coal, and India is one of its largest importer and consumer. However, the Directorate General of Foreign Trade has allowed its import, only for use in cement, lime kiln, calcium carbide and gasification industries, when used as the feedstock or in the manufacturing process. This import ban was long pending after the Supreme Court prohibited the use of petcoke in and around New Delhi last November, over the region’s air quality concerns.
The government imposed an additional tax on coal in 2010. Since then, petcoke has become attractive, given the higher calorific value and the absence of any additional taxation. Domestic petcoke production stood at 13.94 million tonnes in FY17, growing at a CAGR of around 20% over the last seven years. The domestic consumption of petcoke also grew at a CAGR of around 20% over the same period. Petcoke consumption accounted for 12.3% of consumption of petroleum products, second only to high-speed diesel.
India plans to introduce BS-VI norms by 2020—aimed at making our vehicles less polluting. This will bring Indian vehicle standards at par with European standards. The sulphur content in BS-VI fuel is substantially lower than that of BS-IV fuel. Currently, the sulphur content in the fuel is at 50 parts per million (PPM), while BS-VI fuel has a sulphur content of 10 ppm. Such emission standards are already prevalent across many countries. These new norms will have a bearing for vehicle manufacturers, refiners and the final consumer as well, in terms of cost.
The issue of low sulphur fuel is also closely related to another imminent event—the International Maritime Organisation (IMO) regulations that come into force on January 1, 2020. As per the new IMO rules, ships will be allowed to use only 0.5% sulphur bunker fuel oil, as opposed to 3.5% currently. Various estimates suggest the current average sulphur content in fuel oil used by ships to be 2.45-2.75%. Ships use around 4-5 million barrels per day of bunker fuel.
Majority of the global crude oil production is in grades, which have at least 0.5% sulphur. Traditionally, refineries have been able to push this sulphur into petcoke and bunker fuel (lower distillates), and produce other cleaner distillates like petrol and diesel. This high sulphur petcoke was being shipped to countries like India, which looked for cheaper substitutes for coal. The IMO 2020 regulations pose a challenge for refiners. At the same time, the growing global aversion to petcoke narrows down the options for refiners, as to how they can dispose off the excess sulphur.
In the light of the new IMO regulations, the options for refiners as well as shipowners seem pretty straightforward, but both the sides seem to be in a wait-and-watch mode. Ships can be retrofitted with scrubbers—devices that enable removal of sulphur from emissions—and continue to use high sulphur bunker fuel. However, scrubbers are expensive, lead to a downtime for a ship, and also reduce the weight-carrying capacity of a ship. Reports suggest that there isn’t enough bandwidth to retrofit the existing fleet with scrubbers before the regulations kick in. Also, scrubbers of open loop merely transfer sulphur emissions from the air to the oceans. Our oceans are, by no means, less polluted. Another option would be to use a blend of high sulphur bunker fuel and low sulphur distillates like marine gas oil—leading to increase in fuel costs. In either case, shipowners will have to incur a cost and this will imply an increase in freight charges.
Refiners whose refineries have been built to process sour crude will be at the losing end unless they undertake investments either to reduce sulphur from the distillates or process a wider crude slate and move to sweeter crude. The economics of any such investment will also depend on the future differentials of high sulphur and low sulphur oils. In itself, the sulphur market is in oversupply—thereby reducing the incentive to undertake investments to remove the excess sulphur.
Apart from bunker fuel, petrol and diesel, coal too is being subjected to a similar treatment. Estimates suggest around 50% of global sulphur dioxide emissions come from burning coal. South Korea has already adopted rules forcing utilities to buy coal with a maximum average sulphur content of 0.4%. Such developments put existing major coal producing and exporting nations at risk. Other countries are too moving in the similar direction. Amidst all these developments, cleaner fuels like gas and renewables stand to gain.
As the world focuses more on climate change and emissions, the traditional fossil fuels market is due for an overhaul. This will have implications for the entire value chain, right from the producer of the fuel till the end-consumer. While this makes the outlook for fossil fuels difficult to comprehend, it necessitates businesses to be agile and be ahead of the curve. As long as fossil fuels can be made cleaner, it seems they are here to stay, for a while.
The author is a corporate economist. Views are personal