This week’s blog is by David St. Amand, President of Navigistics Consulting
As Turner, Mason & Company previously posted in the first two parts to this blog back in February and March, the International Maritime Organization (IMO – a body of the United Nations that facilitates global rule-making for the maritime industry) is poised to reduce the global 3.5% maximum sulfur content in marine fuels down to 0.5% on either January 1, 2020 or January 1, 2025, in order to reduce SOx emissions from ships. The 2020 or 2025 decision is expected at the 70th meeting of IMO’s Marine Environment Protection Committee (MEPC 70) taking place in London in less than a month (October 24-27, 2016). It should be a lively discussion as the official IMO study by CE Delft concluded that the global refining industry should have no problem producing the required fuel. A study submitted by IPIECA (the global oil and gas industry association for environmental and social issues – www.ipieca.org) and BIMCO (the world’s largest international shipping organization – www.bimco.org) took the opposite position (full disclosure, my business [Navigistics Consulting] developed the marine fuel demand analysis in the IPIECA/BIMCO submitted study).
In today’s blog, we will describe the marine fuels demand issues and other related background issues involved. The CE Delft study is typically referred to as the IMO’s Fuel Availability Study (MEPC 70/5/INF.6) and the EnSys/Navigistics study is referred to as the Supplemental Fuel Availability Study (MEPC 70/5/INF.9). The IMO Fuel Availability Study was required by regulation 14.8 of MARPOL Annex VI that was previously adopted by the member nations to the IMO (including the U.S.). MARPOL Annex VI deals with air emissions from ships.
Now to the heart of the matter, over three quarters of the fuel consumed on internationally trading ships is residual fuel oil (also referred to as HFO or Intermediate Fuel, e.g., IF-380). Marine bunkers represent about half the global market for residual fuels (the rest being used for land side power generation and industrial boilers, etc.).
When implemented, this section of MARPOL Annex VI will require ships to burn only 0.5% maximum fuel, or use an alternative compliance approach that reduces ship emissions of SOx to levels that would be at or below what would occur if the ship used maximum 0.5% sulfur fuel. The primary alternative compliance approach is to use an exhaust gas cleaning system (EGCS) also called a “scrubber.” Consider that if all ships installed scrubbers, there would be no change to the HFO market (well, maybe a slight increase in demand as scrubbers require energy to operate) and therefore, no debate over the ability of the refining industry to produce the required fuel.
So what is the volume of fuel that will need to be “switched” from the current maximum 3.5% sulfur fuel to a maximum of 0.5% sulfur fuel? A quick side note, there are several designated marine Emission Control Areas (ECAs) that from January 1, 2015 onward required ships to use a maximum 0.1% sulfur fuel. ECAs were described in Part 1 of this blog. The European Union has already passed a regulation requiring that only 0.5% maximum sulfur fuel be used from January 1, 2020 in all European waters outside of designated ECAs per Directive 2012/33/EC. China has also addressed SOx emissions with ships in many of its ports being limited to 0.5% sulfur fuel. Mexico is in the process of having its waters certified by the IMO as an ECA.
Up until the January 1, 2015, 0.1% sulfur requirement in ECAs, it was assumed that the global 0.5% sulfur requirement would be met by using low sulfur distillates such as Marine Diesel Oil (MDO – DMB) or Marine Gas Oil (MGO – DMA); however, several marine bunker suppliers introduced Low Sulfur HFO (LSHFO) for use in ECAs. Therefore, when we estimate “switch” volumes, the amount to be switched may end up being either LSHFO or MDO/MGO.
Total 2020 Marine Fuel Demand
In July 2014, the IMO issued a report on marine greenhouse gas emissions (GHG) referred to as the IMO’s 3rd GHG Study. The IMO’s 3rd GHG Study developed a “baseline” of 2012 “actual” marine fuel consumption through a “big data” approach to analyzing AIS ship tracking data. The IMO’s 3rd GHG Study concluded that total marine fuel demand in 2012 was 300 million tons per year (MTPA). Estimates of global marine fuel consumption in 2012 for EPA (by Navigistics under contract to RTI in late 2014) were within 10% of the IMO’s 3rd GHG Study (some differences in ship types account for most of the difference).
The IMO’s 3rd GHG Study also projected 2020 global marine fuel consumption to be between 324 MTPA (Low) and 340 MTPA (High) with a “base case” of 330 MTPA (average of the 16 scenarios developed). The IMO’s 3rd GHG Study assumed a 2020 0.5% sulfur rule implementation date and high scrubber penetration (due to favorable scrubber economics).
The IMO’s 3rd GHG Study was completed before crude oil prices collapsed in 2014-2015.
Projections of global marine fuel consumption are shown in Table 1 for each of the following:
- IMO’s 3rd GHG Study (assumes 2020 0.5% sulfur rule and high scrubber penetration), completed in 2014;
- CE Delft’s IMO Fuel Avails Study (basis shown has 2020 0.5% sulfur rule); and
- EnSys/Navigistics Supplementary Fuel Avails Study (shows both with and without 2020 0.5% sulfur rule).
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It should probably be noted that the two lead “authors” of the IMO’s 3rd GHG Study are also on the CE Delft Fuel Avails Study team. CE Delft did not provide a “no 2020 0.5% sulfur scenario” in their report.
The EnSys/Navigistics study was done on an “energy balanced” basis. Therefore, the “No 0.5%” and the “With 0.5%” cases use the same amount of energy for ship power (plus scrubber energy requirements).
The primary differences between the CE Delft and EnSys/Navigistics demand values are as follows:
- CE Delft assumed increasing vessel operating and fuel efficiencies from the 2012 3rd GHG Study baseline (done in 2014); and
- EnSys/Navigistics started with the 3rd GHG Study. Because of the significant decline in marine fuel prices, calculated optimal speed of ships increased (based on actual early 2016 ship speeds). This is because a ship’s optimal speed is a tradeoff between fuel costs (in $/ton) and charter rates (in $/day).
The most interesting take away from Table 1 is the overlap of the ranges between the CE Delft and EnSys/Navigistics 2020 global marine fuel demand levels (with 0.5% sulfur in 2020). This is important because any differences in conclusions regarding the ability of the global refining industry to manufacture 0.5% sulfur marine fuel is not a function of “demand” differences between the two studies.
Another critical issue by January 1, 2020 is the “scrubber penetration.” The three studies’ scrubber penetration rates are shown in Table 2 as the amount of HSHFO still being consumed on ships in 2020.
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The 3rd GHG Study assumed “full” scrubber penetration (approximately 60% limit) based on economic attractiveness. The CE Delft and EnSys/Navigistics studies took a more critical examination of the scrubber installation decision and implementation. The results again show reasonable consistency between the CE Delft and EnSys/Navigistics results.
The EnSys/Navigistcs Base Case “Switch” volume (HSFO that needs to meet 0.5% sulfur limit) in 2020 is 3.8 million barrels per day (MMBPD). The range of EnSys/Navigistics “switch volumes” is 3.4 MMBPD in the low demand scenario to 4.4 MMBPD in the high demand scenario (EnSys/Navigistics did not vary the absolute level of scrubber penetration between the low and high demand scenarios).
This brings us to the issue of fuel availability. According to the EnSys/Navigistics switch volumes analysis (not shown by CE Delft, but should be consistent based on the information provided in Tables 1 and 2), ~3.8 MMBPD of HSHFO will need to meet the 0.5% maximum sulfur content rule on January 1, 2020. This can be done through either:
- Increased distillate production (of less than 0.5% sulfur); or
- Increase manufacturing of LSHFO.
I’m a ship guy. I can tell you that EnSys and CE Delft came to the exact opposite conclusions on the ability of the global refining industry to meet this requirement by 1/1/2020.
With 3.8 MMBPD of switch volumes (2020) out of an approximately 7.4 MMBPD global HFO market (2016), one has to wonder how this will happen especially given the off/on nature of the implementation of the 0.5% global marine fuel sulfur limit.
Turner, Mason & Company collaborates with industry experts across various industries to analyze the impacts that various regulations may have on global refiners. A special thanks to David St. Amand, who remains a frequent collaborator on topics of shipping and logistics and was kind enough to contribute this week’s blog. The knowledge of the IMO regulations and associated studies has been applied to our predictions and projections, applied to both in our Crude and Refined Products Outlook as well as other industry and client studies we have performed. For more information on the products we have or services we provide, send us an email, or give us a call.
David St. Amand is President and Founder of Navigistics Consulting. He is a degreed naval architect/marine engineer (Webb Institute) and like most management consultants has an MBA (Dartmouth’s Tuck School). www.navigistics.com