By 2020, new IMO fuel rules will require the shipping industry to use fuels with a much smaller sulphur content.  Shipping companies say that because a derivatives market for the new fuel has not been developed, they cannot take a bet on the value of the fuel, making it difficult to invest strategically.  ExxonMobil photo.

Oil sands producers think IMO 2020 will cost $5/b until market rebalances

Shipping industry executives say the lack of price clarity for fuels that comply with the upcoming changes to the International Maritime Organization’s regulations makes it difficult for companies to make strategic investments.

To reduce pollution from shipping, the IMO fuel rules will change in 2020.  The sulphur cap for marine fuels globally will fall from 3.5 per cent to 0.5 per cent.

“The complication we have at the moment is ascribing a value in, let’s say June 2020, to 0.5 per cent [sulphur] product,” Vitol Group chief executive Russell Hardy said while speaking at the Reuters Global Commodities Summit.

“We know the upper boundary is gasoil, we know where that price is today and we know where the high sulphur fuel oil price is, and the low sulphur fuel oil … but we don’t know in that range, where the [0.5 per cent] product is going to sit.”

The Canadian Energy Research Institute released a study in Sept. that predicted the Western Canadian Select (the Canadian heavy crude oil benchmark) discount to West Texas Intermediate will increase for at least a few years.

“Canadian crude is discounted for two reasons right now: one is quality differential and two is a transportation differential because we’re remote from the WTI price point,” CERI CEO Allan Fogwill told Energi News in a recent interview.

“And what we’re talking about here is that quality differential is going to increase becuase the lower quality crudes, the heavy sour that’s produced, will be less in demand in particular in refineries that can’t process the residual crude beyond a certain point.”

Canada and its competitors from the Americas will bear the brunt of the transition to the new standards.

“We are talking Canada, Venezuela and Mexico becuase 82% of the high sulphur heavy crudes are coming from the Americas. There’s some that’s produced in Saudi Arabia, but it’s mostly in the Americas that it’s going to be an impact,” said Fogwill. 

Hardy says that a derivatives market is missing for the new fuel.  This means that traders cannot take a bet on the value of the new fuel and are hampered when it comes to making strategic investments.

He added that oil majors are expected to prepare their refineries for the production of the cleaner fuels, but not the allocation of their inventories.

Hardy says in the second half of 2019, the new low-sulphur fuel will need to be moved from where it is currently available, including the United States, Brazil and Europe, to Asian markets where the demand will be higher.

“It’s doable but we would like a bit of transparency,” Hardy told Reuters.

IMO fuel rules allow for ship owners to continue using high sulphur fuels if they install sulphur cleaning kits, called scrubbers.  Shippers say this is another investment that needs hedging and price clarity.

“Our latest internal scrubber count is between 3,000-4,000 that will probably be fitted in or about time [2020],” said Hardy.

According to Hardy, Vitol has opted to install scrubbers on their bigger long-haul ships rather than smaller vessels that can carry up to 50,000 tonnes.

Fogwill says there is a lot of uncertainty associated with what will happen after the Jan. 1, 2020 implementation date.

“The shipping indsutry can make many types of adjustments including scrubbers on the ships, fuel blending, replacements with LNG [liquified natural gas] or methanol. You can also see that they could, in some circumstances, not comply with the new regulations becuase those are the responsibility of the host countries and not of the International Maritime Organization,” he said.