Impact of IMO 2020 sulphur regulation on refining and related industries

Impact of IMO 2020 sulphur regulation on refining and related industries
Published: 6 November 2019 - 8 a.m.
By: Indrajit Sen
Since we are just few steps away from 2020, which means the new long-awaited International Maritime Organization (IMO) regulations shall come into full force, let us have a quick look into the industry status. As motor fuel demand is expected to slow down in the following years, refineries that went by fuel scenario in their configuration shall re-evaluate opportunities that bunker fuel production along with other alternative routes may bring in.

In only two-year-time, a drastic change in plans of many companies has been made. Of course the most vulnerable territory is shipping/logistics industry, which will directly face the challenge to find LSFO (low-sulphur fuel oil) and comply will all regulations. Following the announcements done by transportation giants, we learned that scrubbers will not essentially solve the issue of cleaning – at least not in long term.

Opportunities in the horizon
A number of residue upgrading projects have been announced and started recently, especially in the Middle East and Asia, but even though now large-scale projects can be done in less time than before, still not all planned capacity will start-up on time to cover strong demand for new bunker fuel. This might mean that shortage of compliant fuel will eventually force IMO to extend transitional period if all the parties confirm that they are not ready to supply the required amount of LSFO (above the level that was provided to shippers operating in Emission Control Areas before).

Globally, the era of HSFO (high-sulphur fuel oil) is coming to a dramatic end. Wood Mackenzie predicts that global bunker fuel costs will rise up to $60bn per annum from 2020. There are still some opportunities for internal and market use for such products but not enough to absorb all the amount when the market will be flooded with non-compliant residue fuel: Internal – refinery fuel (need critical examination of equipment and efficiency analysis); blending, a good option for use of both non-compliant FO (fuel oil) and excess light products like diesel fractions in areas that plan; recycle in FCC (fluid catalytic cracking) units. External – needle coke production (the market size is limited and primary feedstock quality is critical for the process); carbon black production (market is growing but not all refiners have an opportunity to get slurry oil with required characteristic to feed into the process).

Shell evaluated that the best quick-win opportunity is to change the feedstock crude blend to include a proportion of opportunity crude. For a typical 200,000bpd refinery, the inclusion of 10% of an opportunity crude with a relative discount of $1 per barrel could increase the gross refinery margin by $7mn a year.

The role of catalyst providers
Nevertheless, IMO 2020 is not a threat for all market players: these upcoming changes will positively affect not only licensing companies, which provide technologies and equipment to treat and minimise sulphur, but also catalyst providers.

We observe several drivers for global refining catalyst demand growth: (i) a wave of new downstream capacities addition, which in line is generated by demand for fuels and petrochemicals (automotive park growth, higher quality of life, urbanisation, etc.); (ii) an urge to enhance resource efficiency of downstream processes – conversion level, target products yield to address market changes, energy optimisation reliability and better utilisation of all sources; and (iii) stricter environment and safety regulations worldwide – both for fuel specifications and composition and for environmental impact.

One of the most well-known refinery technology that has been developing for decades to be able to process different feedstock blends, sustain optimal working parameters and stability of gasoline quality and yield is the FCC process. The FCC unit boom has slightly passed, but still there are quite a few projects under development, or planned – an RFCC (residue fluid catalytic cracking) process being a new trend, especially in those abovementioned promising regions – some forecasts say FCC catalyst market will value over $3bn by 2025, now the share is close to 50% of all refining catalysts. The IMO regulations might also surge the market for FCC catalysts as refineries aim to produce maximum middle distillates.

The OPEX/CAPEX scenario
Generally, refineries use either hydrogen addition, or carbon rejection technologies for converting residues into high-value products. The residue hydrotreaters require high pressure and frequent changes of catalyst, making them both capital intensive and high in OPEX. According to HTE’s analysis, possible margin increase via optimised catalyst system is significant, i.e., in hydrocracking: 1-2% volume gain (basis 50,000bpd); margin uplift $10-$15 per barrel; as a result, up to $5.25mn margin increase.

One of world’s global hubs – Singapore – depended heavily on RFO (residual fuel oil) supplied by, or through Russia (about 30% in 2018 – more than Malaysia, UAE and others), and after regulations are activated, the demand for it will drop, which means a serious issue for FO utilisation. Some experts suggest smaller-scale Chinese refineries have renewed interest in it so that there might be still market for the product in Asia.

A surplus of HSFO in 2020 should be somehow monetised. A few Russian refineries located in central part of the country announced that they officially started production of low-sulphur bunker fuel at their modernised units. Others have either insufficient capacity to cover transportation costs and still secure margin from bunker fuel export, or completed ‘no fuel oil production’ programme that was initiated by the government and tax maneuver, which means a shift towards light and motor fuels, or integration with petrochemical production.

The main concern is crude being heavier and containing primarily more sulphur and other elements than, for instance, crude used by the Middle Eastern refineries. Thus, it needs more steps of treatment to get the result, which means more CAPEX needed and margin cuts. Demand for West African LSFO will go up subsequently – we discussed in previous articles that western companies are still looking closely into opportunities for building plants there to produce bunker (and other) fuels from sweeter crude available in the region.

The emerging scenario
In the Middle East, a new generation of highly complex plants, combined with upgrades and expansions at existing plants, is radically altering the product mix. New unit configurations include hydrocracking, catalytic cracking and hydrotreating capacities designed to minimise fuel oil output and maximise low-sulphur middle distillate, diesel and gasoline production. Saudi Arabia and Kuwait are leading the charge in new clean fuel projects in the region. To comply with mandatory sulphur specifications for gasoline and diesel, Saudi Arabia is spending billions of dollars to construct multiple clean fuel projects. Kuwait is investing over $30bn on ambitious plans to overhaul its refining sector and become the region’s clean fuel leader by 2019.

As Argus Media has evaluated, the US Gulf Coast LSFO stream might soon secure relative stability in amount. About 200mn tonnes of HSFO will be taken out from the market next year, which will definitely cause imbalances. We discussed with different companies – shippers, traders and producers – their views on use of marine gasoil, or methanol/LNG as bunker fuel. Some of them see certain market for these products and in long term, methanol might become more popular in regions where FO is expensive, or hard to reach but everyone agrees alternative bunker fuels will not dominate the market in the nearest future – even in the case of LSFO insufficiency.

Will shortage of LSFO disrupt marine transportation market? To what extent changes in regulations will affect final product customers? Will large refineries producing quality bunker fuel win and restructure their operation model towards this product? Answers to these and many more questions remain uncertain as today’s markets are so much interconnected and sometimes non-resilient to sudden changes that predictions are more like looking into a crystal ball, even if complex math models are used to calculate trends.

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