This week’s blog is by Dr. Rudy Kassinger
The International Maritime Organization (IMO), at the 70th session of the Marine Environmental Protection Committee (MEPC) approved 2020 as the effective date for the implementation of a 0.5% cap on marine fuel sulfur content. While this move was widely expected there were voices favoring a delay to 2025. This change is the culmination (for now) of a long and steady reduction in the max. % S in the widely used maritime international fuel specification, IMO 8217. The first IMO marine fuel spec, IMO 8217:1987 established a 5.0% S max. Subsequent revisions reduced the max. % S to 4.5% and to today’s current limit of 3.5%. Unchanged is the latest 0.1% S limit in so called Emission Control Areas. In the US this limit extends to 200 miles from the shores of the US and Canada.
This forthcoming change is the equivalent of opening Pandora’s Box. The earlier reductions from 5.0%S to 4.5%S and then to 3.5%S elicited little more than a shrug from the world’s refiners. Virtually all residual fuels were for a long time generally <3.5% S, so these earlier reductions were little more than a cosmetic change. This will not be the case in the reduction from 3.5% S to 0.5% S. Ship operators they will be faced with two choices, either (1) switch to fuels ≤0.5% S and abandon the use of high sulfur residual fuel, which was widely available and among the cheapest sources of energy (BTU’s/MJ/Kg). This has been the primary fuel source for global diesel-powered shipping since the early 1950’s or alternatively (2) install scrubbers to remove SOx from the exhaust gases produced by continued use of high sulfur residual fuel. While the choice that ship operators opt for will remain unclear for a while what is clear is that either option will be expensive, i.e., much higher priced low sulfur fuel or investment in an on-board scrubber. The advantage of the scrubber is that ships can keep using the “same old fuel” they have been using for decades while the advantage for the low sulfur option is that it requires no change in hardware and some other advantages associated with burning a cleaner fuel. Although all these fuels will have in common a low % S, I suspect other properties may be significantly different, e.g., density, viscosity, composition and the requirement for different on-board handling.
If ship operators forego the use of residual fuel it will have an enormous impact on the world’s refineries that currently produce these fuels. With the loss of an outlet for residual fuel these refiners will be forced to convert surplus residue to clean products or cut crude runs. Refiners have been searching for decades for ways to convert residues into more valuable products (in annual reports this is often referred to as “up-grade the product mix”, refiner speak for converting reside into clean products). Resid destruction has followed one of two routes, carbon rejection (coking) or hydrogen addition (hydrocracking). Both routes require enormous refinery investment, take years to implement, and require the services of major contractors. The end products are the more valuable distillate fuels not low sulfur residual fuel.
Regardless of which option marine operators choose, I believe the delta between MGO (distillate) and residual fuel (e.g., IF 380) is destined to increase.
Below is a chart that presents the price of MGO and IF 380 in Rotterdam as a % of the Brent crude price. IFO 380 (residual fuel) has sold at a discount to crude cost for as long as I can remember, whereas MGO sells at a premium to crude oil.
Image may be NSFW.
Clik here to view.
Currently IF 380 is about 70% of crude cost, while MGO is about 115% of crude cost. The delta between MGO/IF 380 has recently been ~ 45% of crude cost. If my Economics 101 is accurate, I anticipate as demand for MGO (distillate) amps up, and IFO 380 (resid) decreases the price differential between the two will increase. There was a short period at the end of 2015 when the IF 380 discount was ~50%. MGO premiums of 120% are not uncommon.
So where does this leave us?
What we can say for certain:
“There are no easy solutions”
“All solutions will be expensive”
But is this the end of the line? After all, the max. %S has gone from 50,000 ppm to 45,000 ppm to 35,000 ppm and will soon go to 5,000 ppm. On the other hand a large fraction of the alternative low sulfur fuels are <15ppm S. I suspect there will soon be demands for further reduction in ISO 8217 %S. For the refiner, low sulfur crude is helpful but not the answer. Consider the sulfur content of the low sulfur crude (<0.5% S) pool in the Strategic Petroleum Reserve which contains approximately 400 million barrels of such crudes in four caverns in which the average % S of the atmospheric residue, is >10,000 ppm. The S in crude oils is not uniformly distributed throughout its boiling range. The light distillates are in the hundreds or less ppm range, while the residues are >10,000 ppm. An examination of a wide range of crudes indicates that ~85% + of the sulfur is in the residue. A further complicating factor is that the sulfur in the light end of the barrel is present in simpler sulfur compounds than in the residue. The sulfur in the residue is significantly more difficult to remove. The bottom line is that the only way by-product residual fuel can continue to be used as a marine fuel is if ship operators install scrubbers. If scrubbers are mandated for the continued use of residual fuels, fuel sulfur would not need to be capped at 5,000 ppm. An ideal fuel, in my opinion, would be a 500 cSt (@ 50oC) 4.5% S max. fuel.
Such a fuel has been the fastest growing grade in the world’s largest market, Singapore. This grade now accounts for almost 20% of Singapore’s >45 million tons of marine bunker fuel. The fact that it is the cheapest fuel available at least partly explains its attractiveness.
No matter which route is followed, the end result will be beneficial to the environment. All routes will lead to a reduction in emissions of SOx and particulates. This will be the result of either producing cleaner burning fuels through refining or through cleaning of the exhaust gases emanating from the combustion of unrefined petroleum residues. The refinery route sounds very seductive, but sulfur removal from residue is an energy intensive process that incurs a substantial refinery GHG emission increase which has been identified and quantified in a number of IPIECA presentations. This needs to be considered in the IMO’s continuing discussions on the contribution of global marine fuels to GHG emissions, likely to be the next big emanation from Pandora’s Box.
The recent IMO decision on low sulfur bunker fuel will be one of the dominant issues facing the global refinery industry in the next ten years. We have invited Dr. Kassinger to write on this topic because of his expertise on the subject. Turner, Mason & Company expects to expand its coverage of this topic in the next edition of its Worldwide Refinery Construction Outlook which will be released in early 2017. We will monitor and report global construction projects through public and corporate announcements and potentially through industry surveys. For more information on the products we have or services we provide, send us an email, or give us a call.
Dr. Kassinger has a PhD in organic chemistry from Purdue University and worked for Esso/Exxon for over 27 years. Following his retirement from Exxon, he served as a Technical Consultant for the DNVPS fuel testing service for over 25 years. Dr. Kassinger is currently President of Kassinger Consulting LLC.