Global bunker fuel cost could rise by up to US$60 billion annually from 2020, when the International Maritime Organisation's (IMO) 0.5 wt% sulphur cap regulation for bunker fuels kicks in.
Traditionally, fuel oil is used by the shipping industry as bunker fuel. In 2016, global demand for high sulphur fuel oil stood at almost 70% of overall bunker fuels.
With the implementation of the IMO regulation in 2020, the shipping industry will have to deliberate a switch to alternative fuels such as marine gas oil (MGO). This will enable the sector to meet the regulation's sulphur specifications. Alternatively, shippers could install scrubbers, a system that removes sulphur from exhaust gas emitted by bunker fuel.
A combination of higher crude prices and tight availability of MGO could take the price of MGO up to almost four times that of fuel oil in 2016, and eventually costing the entire industry US$60 billion annually.
Sushant Gupta, Research Director, Refining said, "Installing scrubbers may be an economically attractive option. Although there is an initial investment, shippers can expect a high rate of return of between 20 and 50% depending on investment cost, MGO-fuel oil spread and ships' fuel consumption. The shipping industry is traditionally slow to move, but in this case, early adopters may hugely benefit.
"Switching to MGO is a more costly solution. In a strict compliance scenario, we expect shippers to try and pass the cost to consumers and freight rates from Middle East to Singapore could increase by up to US$1.00/bbl."
Refiners, on the other hand, could see better profit margins as a result of higher MGO prices compared to fuel oil. But the benefit in margins will vary by refiners depending upon the configuration, access to advantaged feedstock and type of products produced. The Chinese (Sinopec and Petrochina) and Indian (Reliance and Essar) refiners stand to gain the most as they are deep conversion refiners with the capability to produce more MGO.
Not all refiners stand to gain
Simple refiners that are producing high yields of high sulphur fuel oil could potentially lose out as they are not able to meet the specifications or produce more MGO. These refiners should start thinking about options for placing their fuel oil. We expect a shift in bunkering locations based on compliant fuels availability.
Singapore could potentially lose some of its market share for bunker fuels to China as shippers look for alternative locations with a surplus of compliant fuels. It will need to repurpose some storage tanks and other infrastructure to prepare for a shift from fuel oil to gasoil bunkering. China, with ample MGO supply, is well positioned to attract shippers looking for MGO.
"The options for refiners and shippers will depend on the course of action decided by each of them. At the end of the day, the shipping industry and refineries need to communicate and find middle ground, and time, unfortunately, is running out," concluded Gupta.
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