SAN ANTONIO, 20 March 2017 — "In light of new marine fuel regulations in 2020, North America has the opportunity to take a much bigger role in the future global bunker market given its capabilities to be a major supplier of ultralow sulfur fuel oil (ULSFO) components and gas oil," according to Alan Gelder, Vice President, Refining, Chemicals & Oil Markets, EMEARC Research for Wood Mackenzie, speaking today at the American Fuel & Petrochemical Manufacturers (AFPM) annual meeting in San Antonio, TX.
Gelder explained that the global total demand for fuel oil and gasoil bunkers has changed little since 2010. However, Asia Pacific’s market share of the global bunker market has continued to grow, now representing almost half of all bunker volumes sold. North America is a distant third in terms of market share behind Asia Pacific and Greater Europe. North America is hence underweight in terms of bunker supply, as it has a greater share of global trade.
Gelder noted: "North America currently has a lower share of the global bunker market than its share of global trade." This is a reflection of the current global bunker fuel market being dominated by high sulphur fuel oil (HSFO), which is more costly in the United States than in Europe, as the US Gulf Coast (USGC) has more sophisticated deep conversion refining capacity that can process heavy residue feedstocks. However, Gelder emphasized that North America has a high global share of the global gasoil bunker market, due to it being an Emissions Control Area and a low cost source of middle distillates.
"Any switch in bunker fuel towards distillate could hence increase North America’s bunker market, as it is one of the lowest cost providers of such fuel. The forthcoming International Maritime Organisation’s (IMO) legislation on ship emissions under MARPOL Annex VI could provide such an opportunity," Gelder said.
In October 2016, The IMO Marine Environmental Protection Committee agreed to implement the 0.5% sulphur limit for marine fuels in 2020, rather than defer enforcement to 2025. According to a separate study by Wood Mackenzie, 'IMO's bunker sulphur changes: smooth sailing or rough seas?', ULSFO could emerge as the lowest cost compliance option, but sufficient volumes of ULSFO are not expected to be available at current fuel oil price levels, with volumes limited to less than 1.0 million b/d in 2020. Nevertheless, there is considerable uncertainty regarding availability and this is likely to evolve during the initial years of implementation.
Gelder's technical paper affirms there are various options for compliance, with the lowest cost option of continued use of HSFO requiring ship owners to invest in on-board scrubbing, as Wood Mackenzie does not expect sufficient volumes of ULSFO to be available at current fuel oil price levels.
"Considering these factors, the market outlook is uncertain, but there will be a shift away from HSFO to gasoil by the shipping sector," noted Gelder. This will have implications on the global refining system such as:
- Fuel oil demand falls, resulting in lower prices, as it needs to be converted to more valuable fuels by existing spare residue upgrading capacity
- Gasoil demand rises, resulting in higher prices as refining margins need to rise to increase supply whilst fuel oil prices fall
Aside from the improvements associated with the shifting market dynamics, North American refiners have the opportunity to take a larger share of the global bunker market through their advantaged supply of ULSFO components and gas oil, reiterated Gelder. "This will require development of the necessary port and bunkering infrastructure, with the expectation that North America can punch above its weight in global bunker supplies post 2019 if it focuses on capturing the forthcoming opportunity."
In conclusion, Gelder stated "There is hence a risk that this fuel specification change could be disruptive, but the anticipated market reaction could benefit USGC refiners that have deep conversion/distillate oriented configurations."