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A conference on IMO 2020 impact shows how many questions remain as new rule approaches

In a room full of people who will be more deeply affected by the upcoming IMO 2020 rule than just about anybody else in the global economy, the speakers and audience at a Miami conference had few definitive answers on how markets will play out when the new rule goes into effect January 1.

The Argus Fuel Oil conference, produced by commodity data and news publisher Argus Media, theoretically focused on all uses of fuel oil. But there’s only one issue for this crowd – the IMO 2020 rule that will require that marine fuels  meet a new sulfur specification globally of 0.5% after being limited to the 3.5% sulfur level found in high sulfur fuel oil (HSFO). 

This was not a crowd that cared that much about how IMO 2020 will work its way down to the over-the-road diesel market after its implementation. But several of the comments from the speakers certainly suggested what the impact could be on the lifeblood of trucking. 

Carl Ellett, the chief economist at independent U.S. refiner PBF, was probably closer to the diesel market than any other speaker; his company’s refineries make a lot of it. And he told the audience that they might need to come to the Argus fuel oil conference in 2021 to find out how things work out with the implementation.

“Not really knowing what the other side of the fence is doing is a big problem,” Ellett said in the conference’s opening remarks. “So the outlook is that we’re going to miss the mark and adjust to it. We’ll know more when we get together next year.”

And as a further suggestion that the transition has barely begun and has a long way to go, Ellett expressed confidence that “macroscopically, we’re going to be able to meet demand.” But the road there won’t be easy; additionally, his comments were about meeting the demands of the shipping industry, not what might happen to over-the-road diesel. 

“The challenge is going to be what areas are those sources coming from,” he said, citing “new crudes, new blendstocks and new challenges.”

Ellet said, “The rebalancing needs time to happen.” Reports of storage building in Singapore, the world’s largest market for marine fuels, is a positive sign, he said. And if enforcement on IMO 2020’s launch data on January 1 is somewhat soft, “that provides a little bit of hope that the transition won’t be quite as onerous as maybe fundamentals might suggest.”

Despite the fuel oil focus, diesel was never far from the conversation. The oil industry is creating a new product called very low sulfur fuel oil (VLSFO), made primarily by blending a diesel intermediate product called vacuum gasoil (VGO). Previously, before the advent of VLSFO provided another outlet, VGO would be fed into a refining unit called a hydrotreater to make diesel or a unit known as a cat cracker or FCC unit to make gasoline. 

Beyond VLSFO, an alternative to using HSFO in ships is an existing product compliant with IMO 2020, marine gasoil (MGO). Shifting VGO into the production of VLSFO or MGO and away from the ultra low sulfur diesel (ULSD) now being used by trucks is the scenario that concerns the trucking industry.

One thing that became clear in Ellett’s address is that some refiners are still waiting to make possibly necessary investments to produce the additional diesel products likely to be needed for  IMO 2020. He suggested a “wait-and-see” approach is being pursued by some companies that will look to see if higher margins for making VLSFO justify more investment into making VGO and other diesel products. 

“Capital resources are stretched,” Ellett said. “Is the investment affordable? Wall Street doesn’t reward companies with big capital investments.” (He noted that his company, PBF, is strongly positioned to produce compliant fuels for IMO 2020.)

The types of changes Ellett suggested are being undertaken are those that the industry has talked about for the better part of a year – running more crudes that are sweet (low sulfur) and light but not too light (which produce less fuel oil and more of the middle distillates that diesel comes from). But those steps don’t add “hardware” capacity to produce diesel blendstocks.

How to utilize the assets that are in place and whether to make over the road diesel or marine fuels, Ellett said, all comes down to price. Specifically, it’s a decision whether to move VGO away from making gasoline and road diesel and move it instead to VLSFO or MGO production. “The price of diesel as an alternative will drive the decision whether to starve the FCC,” he said. 

Additionally, Ellett said, the hydrotreaters in the U.S. refining sector that convert VGO to diesel are already running at a strong level. Most of them are “already running full,” he said, or they are constrained by a lack of hydrogen, which is a required input into a hydrotreater. (Hydrogen does not exist alone in nature and needs to be produced separately, usually through a process known as reforming.) The message was clear – there isn’t a great deal of spare hydrotreating capacity to add new flows of VGO conversion for marine fuels and over-the-road diesel. 

In reviewing how the marine industry will replace the roughly two million barrels per day of HSFO that needs to be replaced, Ellett lumped together what he called low sulfur gasoil, like VGO, and other distillates. “They are expensive but may be necessary in the absence of location options,” where new fuels like VLSFO aren’t available. 

Peter Sand, the chief shipping analyst at BIMCO, a key shipping association, noted at the time of the conference launch on October 21 that there were only 71 days left until IMO 2020 became the global standard. “The whole marine fuel market is looking at tapping into a pool that is not there now,” Sand said. “But on January 1, will there be a pool available? Is that really possible? I’m not sure.”

Sand echoed Ellett in noting that new blends of compliant fuel like VLSFO might be available in sufficient quantities generally but that doesn’t mean they will be in all of the thousands of ports that ships call on. “There may be enough but if it’s not in the right places, it will be tricky,” he said.

Discussion on that issue – whether compliant fuel will be available everywhere – in general has led to the conclusion that an existing compliant fuel like MGO will be used instead at places where VLSFO hasn’t made its way into the supply chain. That would be another development putting higher demand into the diesel market because MGO contains more diesel molecules than VLSFO.

Fred Finger, vice president and head of operations for American Roll On Roll Off Carrier, said his company has started to transition ships to compliant fuel. “Availability is not a problem,” he said. 

However, he also said the company’s activities are heavily weighted toward the port of Antwerp, Belgium. That’s a key port and it’s the sort of location where, based on the comments of the other speakers, supply would not be expected to be a problem.

The other major pathway to compliance is scrubber installation, which allows ships to continue burning 3.5% sulfur fuel oil, with the sulfur “scrubbed” from the emissions. Sand noted that the spread between HSFO and VLSFO needs to be about $200/metric ton for shipowners to consider scrubber installation with a reasonable payback period for the investment. The spread is at that level at present. 

(Editor’s note: the story has been corrected to reflect that Carl Ellett said that “macroscopically, we’re going to be able to meet demand.” Initial reporting was that he had said “microscopically.”)

John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.