Speaking at the Platts European Refining Summit in Brussels Thursday, European refiners were cautiously optimistic on their ability to provide compliant 0.5% sulfur marine fuels from 2020 onwards to meet International Maritime Organisation regulations.
However more co-operation was needed with the shipping sector in advance in order to build trust around new fuel blends, they said.
A combination of approaches would be needed to cope with IMO 2020, according to speakers, varying at each refinery. Some would simply run lower sulfur crudes, while others had already completed major capital investment.
"A switch to sweeter crudes is feasible," said Mark Anderson, a consultant at KBC. "There are a significant number of crudes with less than 0.5% sulfur in the residue column." These tended to be crudes with high acid numbers, he said, which required other technical solutions from refineries.
Eni's vice president for proprietary technology, Massimo Trani, singled out African crudes such as Djeno Melange, Sarir, Western Desert, Asian sweet crudes and North Sea crudes as likely contenders.
Operational tweaks in refinery operations could be useful, said panellists, and blending would be a major part of the solution.
However "Blending 3.5% [fuel oil] down to 0.5% will be most unlikely to work as a standalone strategy," said KBC's Anderson.
Savvas Manousos, global head of trading, Maersk Oil Trading, said 1% sulfur fuel oil blended with distillate would be one of a number of ways of getting to 0.5%.
In terms of capital investment, some European refineries had already gone down the route of coker installations, such as ExxonMobil Antwerp, Grupa Lotos Gdansk, Gazpromneft and INA Rijeka, said KBC's Anderson.
However challenges and questions certainly remained, he said, including around the value of visbreaking units when bunker fuel is no longer viscosity-constrained.
Once sulfur is reduced to 0.5% in a bunker fuel blend, the viscosity typically will be far below the 380 CST level required in RMG marine fuel.
As well as the challenge of making compliant bunker fuel, European refiners will also face a drastic fall in demand for HSFO in 2020, according to speakers at the conference.
As a result of the IMO bunker regulation reducing demand, HSFO prices will "crash," said Eni's Trani. This could lead to high margins for highly complex refineries, he added, noting that Eni's EST technology puts the company at a competitive advantage.
However, Saras' General Manager Dario Scaffardi countered that previous predictions that fuel oil would "go out of business" had not materialized. The market "has a tendency to do things differently," he said, adding that should fuel oil prices collapse that could prompt shipowners to install scrubbers.
"For all the years I've been in this business, the projection has been that fuel oil prices go down. Demand has gone down, but in fact prices have gone in the opposite direction."
He added that the range of predictions for fuel oil cracks in 2020 was huge, between minus $50/b and minus $20/b.
With increased demand for low sulfur crudes, and sour crude yields expected to fall due to lower fuel oil cracks, wider sulfur spreads would be seen in both crude and products in 2020, according to speakers at the conference.
However Saras' Scaffardi again said the market could act differently than projections.
"In my time in the industry, Diesel has gone from 10,000 ppm sulfur to 10 ppm. The difference in price between the fuels is now $10/mt, which doesn't even cover the cost of desulfurizing it. Re-balancing always happens. Now you're better off waiting for 2020 and seeing if more marine demand for higher sulfur MGO emerges."
In an audience poll, most conference participants thought that shipowners would largely choose to buy low sulfur fuels, rather than installing scrubbers or choosing to not comply with the global sulfur cap.
However panelists struggled to quantify the likely extent of non-compliance, as a share of the roughly 200 million mt/year market for high sulfur bunker fuel.
Maersk's Manousos said he was confident in strong enforcement measures from governments in 2020, and therefore expected high compliance, especially in the container shipping sector, currently a larger consumer of HSFO than either the dry bulk or tanker segments.
"We (Maersk) are accountable for 5% of fuel oil demand, and the top 10 container shipping companies are responsible for 40% of fuel oil demand," he said. "At the other end of the spectrum of around 90,000 merchant vessels worldwide, quite possibly a few of the smaller companies won’t comply."
Maersk has already stated publicly that it won't install scrubbers on its container ships, and instead is going down the low sulfur fuels route. "The uncertainty of the regulatory framework in the medium term is a good reason for shipowners to be wary of installing scrubbers," said Manousos. If CO2 regulations come into force in 2025, scrubbers would be stranded assets after only five years."
While many individual European refiners are working on their own 0.5% sulfur fuel oil blends, speakers at the Brussels event said that much work needed to be done on researching which blends were compatible with each other, and explaining this to shipowners clearly.
"If a market for 0.5% [sulfur] fuel develops, it will have a problem making sure different types are compatible with each other," said Saras' Scaffardi. "If I were a shipowner, I'd be wary of using VGO-based fuels: low sulfur VGO trades at a premium to Brent, close to the price of diesel. So some shipowners might prefer to just burn MGO for ease of use instead. No shipowner can afford to risk blending issues and compatibility of fuels which could lead to engine failure."
Mark Anderson, a consultant at KBC, said more collaboration on this point was needed. "We've always proposed collaboration across the supply chain, from refiner to shipowner. There has been silo thinking in the main. But now time is getting tighter and tighter [ahead of 2020]. People are opening their eyes to the need for co-operation to solve some of these issues of compatibility."
Eni's Trani said it was possible refiners could co-operate to put the required quantity of compliant bunker fuel on the market, but it depended on their market strategy and cost.
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