imo 2020: a sea change is...
TRANSCRIPT
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
IMO 2020: A Sea Change is Coming
Ralph J. Grimmer
Stillwater Associates LLC
2019 West Coast Harbor Safety Committee Summit
Long Beach, CA
September 19, 2019
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Legal Disclaimer
Stillwater Associates LLC prepared this presentation for the sole
benefit of the 2019 West Coast Harbor Safety Committee Summit.
Stillwater Associates LLC conducted the analysis and prepared this
report using reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are
based on information available at the time of presentation. Changes
in factors upon which the report is based could affect the results.
Forecasts are inherently uncertain because of events that cannot be
foreseen, including the actions of governments, individuals, third parties and competitors. NO IMPLIED WARRANTY OF
MERCHANTABILITY SHALL APPLY.
2
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Agenda
1. IMO 2020 overview
2. Refiner perspective
3. Marine fuel supply
4. Enforcement
5. Impact on crude oil, diesel/gasoil, and fuel oil prices
3
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
IMO 2020: The Lead Up to This Big Change
4IMO 2020 was scheduled back in 2008.
IMO opted to not defer implementation to 2025 after its 2016 review.
1948United Nations
founds the International
Maritime Organization
(IMO)
1973IMO begins regulating
marine pollution via MARPOL 73
1997IMO adopts MARPOL Annex VI
regulations
2005MARPOL Annex VI
limits marine fuel to 4.5%
sulfur content
2008IMO defines timeline for
sulfur content
reduction
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
IMO 2020 is the last of the 2008 MARPOL Annex VI
sulfur content stepdowns
5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Sulf
ur
Co
nte
nt,
wt.
%
MARPOL Annex VI RuleReduced Maximum Sulfur Content for Marine Fuel
Within ECAs Outside ECAs
IMO 2020 reduces maximum marine fuel sulfur content by 85%
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Vessel Operator Marine Fuel Options
1. Low sulfur compliant fuel (0.5% sulfur max.)
• Marine Gasoil (MGO, similar to diesel)
• Very Low Sulfur Fuel Oil (VLSFO) blends
2. “Acceptable” high sulfur heavy fuel oil (HS HFO)
• If vessel equipped with onboard scrubber, or
• If vessel submits FONAR waiver request that is
approved by its Flag State
3. Compliant alternative fuel (e.g. LNG, methanol)
4. Deliberate use of non-compliant fuel (i.e. cheating)
• Ban against carriage of marine fuel above 0.5%S
takes effect March 1, 2020
• Port States will gain authority
6Compliant fuel will be the predominant marine fuel in 2020
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Key Issues on 2020 Marine Fuel Mix
1. How much “acceptable” HS HFO will be consumed?
• 3,000 - 4,000 vessels expected to have scrubbers by
January 1, 2020 (6-8% of global fleet)
• Represents 17-23% of current 3.4 MMBPD of HS HFO
demand
2. How prevalent will deliberate non-compliance be?
3. Will there be sufficient compliant fuel?
4. How significant will marine fuel quality
issues (e.g. compatibility & stability) be?
5. Some smaller ports may not offer HS HFO
in addition to 0.5%S VLSFO & MGO
and 0.1%S ECA fuel
72020 consumption of HS HFO could be 30-35% of 2019 volumes
due to combination of scrubbers, cheating & FONARs
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
IMO 2020 for refiners: threat or opportunity?
Threat
• Refineries that produce
significant yields of
HS HFO
• Asphalt refineries?
Opportunity
• Refineries with resid
upgrading (e.g. cokers)
o Especially for refineries
that process heavy sour
crudes
o Especially for refineries
with high distillate yield
8In aggregate, U.S. & Canadian refineries should find IMO 2020
to be an opportunity
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Global Refining Capacity by Continent
9
*********************************** Processing Capacity, MBPCD ************************************
Continent Totals Crude Flexicoking
Delayed Coking Visbreaking
Residual Hydrocracking
Resid Desulfurization
Hydrogen, MMCFD
Sulfur, Tons/day Asphalt
Africa 3,298 9 69 60 0 0 113 890 46
Asia 43,085 344 753 1,009 297 1,304 5,578 29,592 616
Europe 16,594 88 368 1,105 78 120 2,927 16,147 315
North America 22,920 367 2,580 74 155 247 4,595 59,506 829
Australia/New Zealand 555 0 0 0 0 0 97 191 10
South America 5,188 17 291 131 0 0 325 2,440 80
Total World91,640 825 4,061 2,379 530 1,670 13,635 108,766 1,895
Source: Oil and Gas Journal 2017 Worldwide Refining Survey
More than 90% of all resid processing capacity is in
North America, Asia, and Europe
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Capacity to upgrade high sulfur resid varies by region
10North America refining capability to handle surplus high sulfur resid is
substantially greater than both Europe & Asia
************************************* Percent of Crude Capacity *************************************
Continent Totals Flexicoking
Delayed Coking Visbreaking
Resid Hydrocracking
Resid Desulfurization
Hydrogen, MMCFD
Sulfur, Tons/day Asphalt
Africa 0.3 2.1 1.8 0.0 0.0 3.4 27 1.4
Asia 0.8 1.7 2.3 0.7 3.0 12.9 69 1.4
Europe 0.5 2.2 6.7 0.5 0.7 17.6 97 1.9
North America 1.6 11.3 0.3 0.7 1.1 20.0 260 3.6
Australia/New Zealand 0.0 0.0 0.0 0.0 0.0 17.5 34 1.9
South America 0.3 5.6 2.5 0.0 0.0 6.3 47 1.5
Total World0.9 4.4 2.6 0.6 1.8 14.9 119 2.1
Source: Oil and Gas Journal 2017 Worldwide Refining Survey
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Refineries will optimize amidst changing market prices
Key refining price differentials are likely to widen appreciably in
2020:
1. Light sweet crude vs. heavy sour crude
2. LSFO (and VLSFO) vs. HSFO
3. Diesel/gasoil vs. HSFO
4. Diesel/gasoil vs. gasoline?
11Refiners will optimize short-term & longer-term processing strategy
for their existing “kits” as market price direction solidifies
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Refiners and traders will be challenged to adjust to new
global requirements
Stillwater estimate,
MMBPD
• Continued HS HFO consumption 1.2
• HS HFO replaced with VLSFO or MGO 2.2
• HS HFO surplus to power plants & other 0.7
non-refinery consumption
• Net distillate demand increase 1.0
• Refinery crude runs increase 1.7
• Crude oil, products, and intermediates trade
flows will be altered
Note: Above figures assume 2020 and that 35% of 2019 HS HFO demand will be kept in 2020
12As vessel owners continue to add scrubbers in 2020 and beyond,
surplus HS HFO will be consumed and distillate demand will decrease
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Refiners face tough investment decisions
High sulfur resid displaced from HS HFO pool
1. Potentially a bigger 2020 problem than compliant fuel supply
2. Displaced volume very likely to exceed global refineries’
ability to process in 2020
3. Net surplus HS HFO primarily to power plants?
Lead time to engineer, permit, and construct new processing
facilities typically 5 years
Pace of non-refinery changes will influence refinery investment
decisions
1. Scrubber installations
2. Fleet conversion to alternate fuels
3. IMO marine greenhouse gas (GHG) regulations
13Since the IMO decision (Oct. 2016), there has not been a marked
increase in announced global resid processing projects
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Marine fuel quality concerns are a significant issue
Two primary quality concerns for IMO 2020-compliant Very Low
Sulfur Fuel Oil (VLSFO) marine fuel blends
1. Compatibility
2. Stability
2018 HS HFO quality issue in Houston, Panama, & Singapore
Fuel specifications for new IMO 2020-compliant VLSFO
1. New ISO 8217 standard unavailable until ~ 2022
2. Publicly Available Specification (PAS) available as an
interim solution
Vessel operators will want to:
1. Revisit fueling patterns and fuel sources
2. Draw on existing relationships with bunker suppliers
14Protection of ships’ engines is a paramount concern for vessel owners
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
IMO 2020 Enforcement Authority
Current enforcement authority is weak
1. IMO itself has no enforcement authority
2. Only Flag States have authority to enforce open oceans
compliance and set non-compliance fine amounts
New enforcement mechanisms
1. At its MEPC 73 meeting in October 2018, IMO provided
enforcement authority to Port States effective March 1, 2020
• Carriage of marine fuel in bunker tanks with more
than 0.5% sulfur content prohibited
2. Possible loss of insurance coverage
3. Public pressure through large corporations
15The MEPC 73 changes approved at MEPC 74 in May 2019 are the
strongest IMO actions to date driving enforcement
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Deliberate Non-Compliance
Industry estimates of deliberate non-compliance pre- and post-
MEPC 73
• Pre-MEPC 73 (only Flag States have As high as 35%
enforcement authority)
• Post-MEPC 73 (Port States gain authority) ~ 10%
o Port States do not gain authority until
March 2020
Deliberate non-compliance will look more attractive to unscrupulous
vessel operators if:
1. Enforcement is weak
2. Fines are small
16IMO recognizes the need for effective enforcement if the intended IMO
2020 benefits are to be realized
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
U.S. West Coast Aspects of IMO 2020
U.S. Enforcement of IMO 2020
• In the United States, enforcement of IMO 2020 will be managed
by the U.S. Coast Guard, in alliance with the U.S. EPA
• Per IMO’s MEPC 74 Meeting, Port States will gain enforcement
authority March 1, 2020
California’s Ocean-Going Vessels Fuel Rule
• Per California’s Ocean-Going Vessel (OGV) Fuel Rule, vessels
operators are prohibited from utilizing onboard scrubbers or
residual-based ECA-compliant marine fuel within 24 nautical
miles of California’s coastline unless an “expedited research
exemption” has been granted (uncommon)
• Intent of the OGV rule is to reduce particulate matter and oxides
of nitrogen emissions versus what is allowed by IMO
17
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Where Will Future Prices Land?
Forward view of prices
1. ICE and CME futures thinly traded beyond March 2020
2. Many experts believe futures prices understate key price
differentials after IMO 2020 rollout in January
3. IMO 2020-compliant VLSFO futures contracts not yet
actively traded
4. Spot market price reporting bases are only now shifting to
actual deals
5. Keeping abreast of futures
prices will be crucial to
building and adapting
strategy & tactics
18Key price differentials widen from Oct. 2019 to Jan. 2020, but not by as
much as some experts expect. Differentials decline in 2020 & 2021.
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Current View of Futures Prices – U.S.
19
Data source: CME Group. Prices are as of 8-19-19.
ULSD & WTI diffs. to HSFO both widen 7% by Jan. 2020
and then narrow considerably throughout 2020 & 2021
Commodity UnitsOct
2019Dec
2019Jan
2020June 2020
Dec2020
Dec2021
WTI - Cushing $/bbl 56.14 55.21 54.71 53.11 52.02 51.00
NH HarborULSD
$/bbl 77.27 77.45 77.48 75.52 75.95 75.28
USGC3.5% HSFO
$/bbl 40.20 38.13 37.73 38.60 40.68 44.10
ULSD - HSFO Diff.
$/bbl 37.07 39.32 39.75 36.92 35.27 31.18
WTI - HSFO Diff.
$/bbl 15.94 17.08 16.98 14.51 11.34 6.90
ULSD - WTIDiff.
$/bbl 21.13 22.24 22.77 22.41 23.93 24.28
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Current View of Futures Prices – Northwest Europe
20
Data source: CME Group. Prices are as of 8-19-19.
LS Gasoil & Brent diffs. to HSFO widen 4% & 9% by Jan 2020
and then both diffs. narrow considerably throughout 2020 & 2021
Commodity UnitsOct
2019Dec
2019Jan
2020June 2020
Dec2020
Dec2021
Brent Crude $/bbl 59.74 58.70 58.32 57.53 56.72 56.22
ARA Low Sulphur Gasoil
$/mt 561.9 556.6 554.3 547.0 545.3 541.7
Rotterdam1% LSFO
$/mt 351.0 351.9 350.1 347.3 345.2 347.5
Rotterdam3.5% HSFO
$/mt 256.7 240.9 237.0 241.9 254.8 276.3
LSFO - HSFO Diff.
$/mt 94.3 111.0 113.1 105.4 91.4 71.2
LS Gasoil -HSFO Diff.
$/mt 305.2 315.7 317.3 305.1 290.5 265.4
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Current View of Futures Prices – Singapore
21
Data source: CME Group. Prices are as of 8-19-19.
Gasoil & Brent diffs. to HSFO widen 10% & 16% by Jan 2020
and then both diffs. narrow considerably throughout 2020 & 2021
Commodity UnitsOct
2019Dec
2019Jan
2020June2020
Dec2020
Dec2021
Brent Crude $/bbl 59.74 58.70 58.32 57.53 56.72 56.22
Singapore Gasoil 0.05%
$/bbl 74.10 73.51 73.23 72.48 72.05 71.48
Singapore380 cSt HSFO
$/mt 288.0 269.0 263.7 262.2 273.9 292.9
Brent – HSFO Diff.
$/bbl 14.69 16.61 17.06 16.50 13.87 10.39
Gasoil - HSFO Diff.
$/bbl 29.05 31.42 31.97 31.46 29.20 25.65
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
In summary, IMO 2020 will have a significant impact
1. Most impactful sudden specification change for shipowners and
refiners … ever (because it’s global)
2. Q4 2019 - Q3 2020: Significant market turbulence
3. Markets will restabilize over time. How long with that take?
4. HSFO and heavy sour crude prices will be driven lower relative
to light sweet crudes, compliant marine fuel, and clean refined
products in 2020
5. Refiners in general have been slow to invest thus far
6. Compliant fuel forward prices not yet readily transparent
7. Shipowner and refiner investments post- 1-1-2020 will cause
widened price differentials to narrow
8. Higher diesel, jet fuel, and gasoline prices will be felt by
businesses and consumers
22
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
“A Sea Change Is Coming”Presenter: Ralph Grimmer
Senior Associate, Stillwater Associates
888-643-0197
For more information, please contact us:
Stillwater Associates website www.stillwaterassociates.com
IMO 2020 articles https://stillwaterassociates.com/tag/imo-2020
23
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Appendix
24
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Largest Flag States
25
Source: Harley Marine
Top 8 Flag States by vessel count
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Largest Bunker Fuel Supply Ports
26The above 5 ports supply almost 30% of the 300+ MM mT/yr
global bunker fuel demand
Source: 20/20 Marine Energy
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Shipowner Decision Factors on Scrubber Installation
1. Shipowner financial condition
2. Other IMO regulations (e.g.
ballast water; future GHG)
3. Capital costs and operating
expenses
4. Ability to recoup capital
investment
• Owner/operator - fuel and
other operating costs
• Charter out - charter rate
differential
27Vessel scrubbers are expected to cost $3-5 million plus port time
™
Stillwater Associates LLC
IMO 2020: A Sea Change is Coming
Shipowner Decision Factors on Scrubber Installation
5. Existing vessel or new build?
a. Existing vessel
• Vessel age
• Shipyard time
• Structural compatibility
b. New build
• Compliant fuel vs.
HSFO vs. LNG
6. Fuel availability
a. Tramper vs. liner vessels
28Scrubber installations and conversions to alternate fuels appear
more likely to occur for new builds and liner vessels