Andy Roberts outlines how refiners can work towards compliance with the IMO’s new bunker fuel sulphur limits
The business of making, delivering and consuming fuel oil is set for big change.
Sulphur limits in marine fuel are set to be cut by the IMO (International Maritime Organization), and shipping firms have less than two and half years to reduce sulphur emissions by 85% from 3.5wt per cent sulphur equivalent to 0.5wt%.
The new regulations will be enforced from January 1st 2020. This is great news for people and for the environment because sulphur emissions are responsible for early deaths, due to lung irritation, and cause acid rain.
But delve a little deeper, and you’ll find it is having serious financial repercussions for the shipping, marine fuel bunkering and refining industries.
Those repercussions will hit consumers in their pockets at the pump unless the industry takes corrective action to minimise this now.
Refiners are burdened with delivering the fuel required for compliance – but 85% are not prepared.
Shippers essentially have two options: switch to a compliant fuel such as low sulphur marine fuel or LNG (liquefied natural gas) or invest in exhaust gas cleaning systems, known as 'scrubbers'.
However, both of these options are costly. The implications of additional capital expenditure and the effect on current ship engine performance, lubrication, consistency of fuels from port to port, along with record keeping and crew training, increase costs of compliance.
There are other pressures too: looming CO2 emissions control; ballast water management; sludge handling; ECA (Emission Control Area) fuel switching; and new European MRV (Monitoring Recording and Verifying) regulations.
All of these changes manifest themselves in increased transportation costs. As an industry that already survives on very slim margins, most shippers are sitting back and avoiding any investment.
They will pass on any extra costs to consumers in the form of increased prices of imported goods and produce, and expect refiners to deliver compliant fuel.
However, according to a recent survey by KBC[i], 85 per cent of refiners don’t yet have a plan to respond.
For the bunker providers, the 'middlemen' between the refineries and the shippers, the IMO 2020 regulation presents its own challenges.
They are soon to face an array of blendstock quality and compatibility issues to deliver compliant, safe and stable fuels. Their world is about to become very complex and costly.
As they look to address the challenge of managing sulphur components, margin, competition and port readiness, consolidation is taking place to reduce overheads. Some, however, are looking to make the most of the opportunities.
For the refiner, the market outlet for high sulphur marine fuel will be in over-supply creating price and margin implications which will require refiners to react or risk going out of business.
Ultimately shippers and bunker providers will rely upon the refining industry to supply the required marine fuel and components to the market.
The IMO’s decision is pushing the refining industry to make difficult investment and logistics decisions within a very short timeframe. Is it financially viable to exit the high sulphur fuel oil market? Or is this an opportunity for the refinery that encourages long term strategic investment for the next 20 years?
What should refiners do with all the excess high sulphur fuel?
Refiners are not only facing marine fuel production challenges, but with global de-carbonisation, outlets for bottom of the barrel, heavy, high sulphur liquid fuels are diminishing.
A cursory review of the utility companies, their fuel mix and strategies, shows they will not be the refiners’ saviours. Their demand for liquid hydrocarbon fuels to generate power is dwindling as they opt for renewables and cleaner abundant liquefied natural gas.
The question for refiners is how to survive when the current by-product of the refining process - high sulphur fuel oil - is in oversupply, and the bottom of the barrel is now an on-purpose, on-specification product?
It is not just one component of the product pool they need to consider, it is the shift in demand and price of all production streams.
The key considerations are: (i) Location of the refinery; (ii) Crude oil grades used as feedstock (looking beyond the historical crude diet and considering forward possibilities); (iii) Availability and future prices of crudes; (iv) Complexity of the refinery and availability of residue destruction, residue upgrading and sulphur removal capacity; (v) Availability of compatible and economic blending components; and (vi) Access to new bunkering locations.
There will be winners as well as losers; take the right actions now to assure prosperity.
It really doesn’t have to be all doom and gloom for the refineries that will feel the squeeze under the new IMO 2020 regulations.
Viewing the challenges from a ‘molecular management’ perspective, analysing the current state of the refinery industry and what changes can be made appropriately and optimally for each individual refinery prior to the enforcement deadline will provide opportunity for many refiners to prosper.
Refiners can take advantage of market uncertainties by enhancing operating flexibility.
The options are numerous and the problem is complex. The risk is high given the complexity of the issues and the urgency.
Completing feasibility analysis with simple linear LP-type technology will inevitably lead to bad decisions.
Rigorous simulation and optimisation is the only path to accurate analysis and therefore to reliable and robust decisions for the refiner.
The need to understand the highly inter-twined (and non-linear) implications on crude, hydrogen demand, energy adjustments, and sulphur recovery capacity will allow refiners to make decisions about the right blend of assets and operating strategies that remain robust to evolving market conditions and make the most sense for that location.
In addition, real-time data integration and advanced controls as well as newly emerging cloud-based capabilities will systematise margin capture, driving realised operations closer to the optimum, sustainably.
However, with less than two and a half years to go, refiners must act now.
Refiners must access the remaining choices available and make the best decisions to mitigate the regulation’s impact. This requires deep, expert analysis to develop a strategic path forward.
Refiners suffering today from overcapacity and over-production may fortuitously be able to future-proof themselves by implementing new margin-boosting technology to produce the cleaner fuels that the shipping industry will require.
Continuous modelling and optimisation of the refinery’s strategies can assure continued compliance without sacrificing margin capture.
The winners will not only be refiners who adopt this smart approach, but consumers will also benefit. If refineries fail to adopt optimal strategies, that cost will be passed to consumers at the pump; if refineries follow a course based on rigorous analysis and implementation they will remain efficient and competitive, and the consumer will be saved from having to suffer the full impact.
Andy Roberts is Global Practice Executive, Production Optimisation at KBC.