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Port Report: Shipowners to rely on oil majors more than ever to meet IMO 2020 goals

( Photo: Informa )

More refiners make pledges to supply market for IMO-compliant fuel, but if those efforts fall short, diesel may be next best option.

ExxonMobil’s (NYSE: XOM) latest plan to boost output of low-sulfur ship fuel is one of the many that are being made  to allay concerns about fuel supply once the International Maritime Organization’s global sulfur cap begins next year.

But it’s still unclear whether those pledges will be enough to keep the shipping industry from tapping global diesel market. Moreover, market experts say the IMO 2020 switchover will present an array of logistical headaches well beyond the refinery.

ExxonMobil said it’s investing in additional capacity at its Singapore refinery to produce up to 48,000 barrels per day of low-sulfur fuel aimed at meeting IMO 2020’s mandate that ship emissions contain no more than 0.5 percent sulfur.

The Singapore project, which will not be ready until 2023, joins ExxonMobil’s other major project aimed at meeting the IMO 2020 mandate, an upgrade to its Antwerp, Belgium refinery that currently produces up to 50,000 barrels per day of low-sulfur fuel.

Still, those two projects amount to only about 3 percent of the total low-sulfur fuel expected to be needed in the market after 2020.

Many other refiners have pledged to increase production of low-sulfur fuel, and the shipping industry will need to lean more heavily on refiners than ever before due to the IMO 2020 mandate, said Adrian Tolson, senior partner at 20-20 Marine Energy.

Speaking at a panel discussion during the annual Connecticut Maritime Association shipping conference, Tolson estimates that up to 165 million metric tons of 0.5 percent sulfur marine fuel will need to be produced to meet the market demand due to the sulfur cap.

Another 75 million tons will likely come from marine gasoil, the even more expensive 0.1 percent sulfur fuel currently used in the waters off of North America, Europe and parts of China. The remaining 60 million tons of fuel will come from the currently existing 3.5 percent sulfur fuel that will be used on ships with sulfur scrubbers.

Oil majors will have to supply most of that 0.5 percent fuel as other marine fuel suppliers – small, independent refiners and fuel blenders – lack the resources to make low-sulfur fuels. But it’s still unclear whether the current slate of refinery upgrades and projects will be able to supply enough 0.5 percent fuel to keep ship tanks full.

“We see a lot of promotional activity from refineries all focused on their (low-sulfur fuel oil) production,” Tolson said. “Can they produce or replace 150 million metric tons of the global bunker market? There’s some concern there.”

“We don’t know what those refiners’ price expectations are,” he added. “We don’t know what price level they might stop producing if they don’t see the numbers they want.”

Should low-sulfur fuel production fall short of the needed demand, ship owners will have to tap marine gasoil more heavily. That could have the knock-on effect for the diesel market as that product most closely resembles marine gasoil in quality.

“If that supply falls short of demand, what that backfills with is diesel,” Tolson said. “If that backfills with diesel, that will massively spike the price on diesel.”

Along with the supply, the logistical hurdles of 2020 are also coming into clearer view. Rasmus Jacobsen, who heads the Americas unit of bunker supplier Monjasa, cited his experience in the Panama Canal market, one of the top 10 bunkering ports in the world.   

Oil storage there is already tight with only 12 percent unused capacity. While some of the storage currently used by high-sulfur fuel will be switched over, there is still the process of cleaning out tanks to prevent contamination. Likewise, the fact that there will still be demand for high-sulfur fuel oil along with marine gasoil means “adding a third fuel grade will be tough.”

Similarly, the barges and tankers that bring fuel to ships may only be able to handle one type of fuel, and not all the grades that are in the market. But Panama is only allowing a fixed number of barges to operate in the region, limiting the options when it comes time to fueling ships.

Jacobsen said those rules are likely to change if there are widespread problems in getting fuel to vessels, but he said “2020 is going to be a difficult year” as logistical issues are sorted out.

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Michael Angell, Bulk and Intermodal Editor

Michael Angell covers maritime, intermodal and related topics for FreightWaves. His interest in transportation stretches back several generations. One great-grandfather was a dray horseman along the New York waterfront and another was a railway engineer in Texas. More recently, Michael has written about the shipping industry for TradeWinds, energy markets for Oil Price Information Service, and general business topics for FactSet Mergerstat and Investor's Business Daily. When he is not stuck in the office, he enjoys tours of ports, terminals, and railyards.

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