[Carnot]

I am fortunate that in my job I get to speak at and attend many industry events. This year has been no exception. Perhaps the most enlightening was the Platts Oil Storage Conference in January in Amsterdam. No great surprises but it was clear that the new IMO sulphur limits for marine fuels is set to put the cat amongst the pigeons. To keep it short the limit in sulphur in marine fuels is to set to fall globally from 3.5% to 0.5% on 1 January 2020, excluding the SECA's which remain at 0.1% S. to achive this limit is not going to be easy and the clock has ticked away as nothing was done. Panic is starting to set in. The options are limited:

Switch to Marina Gas Oil - which is much more expensive and will prssure the gas oil supply a little
Install scrubber technology - not such an easy retrofit and shipyard space is limited
Switch to LNG - needs some mods but LNG is not currently widely available.

In short a mess. The refiners meanwhile have sat on their hands, and I can see why. Deep desulphurisation of HFO is incredibly expensive. The options are limited and some crude would be nearly un-treatable. Hydrodesulphurisation would be the best solution but not for heavy sour crudes. Coking is another option but would create a mountain of high sulphur pet-coke of near zero value. Blending with low S blendstock is also not going to solve the problem as there will be a surplus of high sulphur HFO that would need a home. The return of HFO to power generation is a possibility- as long as there is a scrubber. Maybe the Saudis will be interested instead of burning crude.

The other side is the rapidly tightening supply of crude which is now being reflected in the futures market. Last year when I flew over Rotterdam there was a vast fleet of VLCC 's at anchor, storing both crude and finished product. As the oil markets switched from contango to backwardation there has been a rapid sell off of this material. Last week - no VLCC's in sight.

Now the oil markets are reflecting a tighter supply, and coupled with growing demand - if you believe the IEA figures - next year looks set to be interesting. At this weeks Platts Oil Forum in London the tightening supply was mentioned along with the so-called OPEC spare capacity which I am not convinced about, as just about all of it exists in Saudi Arabia( and most people's minds). If Saudi Arabia has 2 million b/d of spare capacity - just how long can it run at 12 mb/d? I have my doubts. I am not convinced about US LTO baling out the OECD next time around. When will shale make any money? According to Platts the companies are listening and drilling for profits, not supply growth. That's all tight then. That did not show in 2017 - huge losses yet again hidden by reporting as EBITDAX.

An interesting fact is that now the Chinese and Koreans are buying up over half of the North Sea crude supply, reflecting the growing demand for crude in Asia, which is also being served by US exports.

What I am now more convinced of than six months ago is that the pieces are being positioned for another re-run of 2008. Growing demand of oil (and goods) , indebtedness of just about every economy, a rapidly tightening oil supply and a chronic lack of investment in oil production and infrastructure is leading to a near perfect storm. This week the Saudis made a statement ( a repeat of 2015) that the oil industry needs to invest $10 trillion dollars up until 2040.

I am in no position to qualify that figure. It might not be enough. The fear of EV's is overblown but this will no doubt have a bearing on any investment decision. Better get your prayer mat out.

Apologies for being out of circulation for a while. The technology side has been quiet for ages.

[Plantagenet]

A very interesting post indeed. Thank you.

1. The difficulties of refining low sulfur marine fuels aren't a topic anyone else has ever mentioned at this site. If it proves too much for the market to handle to the point that fuel shortages, wouldn't the stringent new rules limiting sulfur just be .....delayed? After all, if a crisis develops due to a shortage of low S fuel, the quickest way to resolve it is for the government authorities to just...temporarily.... waive the rules requiring low S fuel.

2. Your point about the capacity of KSA to ramp up their oil production again is very well taken. I also am skeptical. My skepticism is fueled by the upcoming IPO for Saudi oil. What better time for KSA to take part of their oil biz public.....then just when it is bumping up against oil depletion problems? Why would they unload part of their oil biz now unless it was very much to their advantage to unload part of their oil biz now...before problems become publicly known.

3. The tightening oil market and the various bubbles in housing prices and stock prices and bitcoin prices do seem reminiscent of the lead up to the 2008 crash. I agree with you again-----we may indeed be looking at a similar scenario.

CHEERS!

[EdwinSm]

I am far from an expert in oil, but I agree with Plant's first point.

So many times environmental legislation has been pushed back due to companies not being ready in time, that this could well be the path taken if a shortage of low sulphur fuel would threaten shipping of cheap goods to the consumers.

[kublikhan]

Thanks for the info Carnot. As I understand it the law as it is currently written contains something of a loophole: It is not illegal to store the high sulfur fuel in your fuel tanks, it is only illegal to burn it. This may tempt some unscrupulous ship owners to flout the law and continue to burn the high sulfur stuff once they get on the high seas away from prying eyes. There is a proposed amendment to the rules to close this loophole.

IMO’s Sub-Committee on Pollution Prevention and Response, which met on 5-9 February in London, agreed on draft amendments to the MARPOL Convention on the prevention of pollution from ships to prohibit the carriage of non-compliant fuel oil. The amendments have been forwarded to the Marine Environment Protection Committee meeting in April 2018, for urgent consideration. Once approved by MEPC 72, they could be adopted at MEPC 73 (October 2018) and could enter into force on March 1, 2020.

“This is an important development that closes a serious loophole in the original agreement. Banning the carriage of non-compliant fuel will make it considerably more difficult for unscrupulous ship operators to ignore the rule, burn cheaper non-compliant fuel, and escape serious sanction. This decision, which must be confirmed by the IMO in April, will mean a cleaner environment and fewer premature deaths from ship air pollution. The ban on burning high-sulfur fuel that was agreed in 2016 had the right objective, but requires robust enforcement as the additional cost of compliance brings a significant incentive to cheat. By following through with a ban on carrying non-compliant high sulfur fuel, governments would better ensure no one can simply switch to the cheaper, dirty fuel once they leave port and are out of sight of the authorities.”

IMO Presses On with Enforcement of 2020 Sulfur Cap

Some were indeed looking to delay the implementation but the mood seems to be poor for a delay. Others are looking for exceptions from prosecution under the logic of "I tried looking for the low sulfur stuff but they didn't have any":

“Factually speaking, there is no way that the oil refineries will be capable of producing the required amount of low-sulphur fuel by 2020. It could take five to seven years to develop the supplies and that could produce distortions in the market. There will [initially in 2020] be very short supply and that will mean high prices.”

The possibility that LSFO prices could soar as a result of the switch also concerns some developing countries. As a result, a number of delegations asked for a transition period from 1 January 2020, rather than the hard implementation of the regulation.

Other delegates were scathing about this move. "The shipping industry has been here before. We learnt a lot from 2015 [when the emission control areas were implemented] and there is little chance of a delay to the implementation of the regulation,” said one delegate from a non-governmental organisation.

Another delegate pointed out that the IMO and MEPC had looked at the supply side and concluded that the initial supply of LSFO could be “patchy”, but added “that’s what tankers are for". He said the IMO had studied the issues and believes that enough LSFO will be available globally, but there may be some areas where supply is short. If there is a limited supply in a region, then LSFO can be shipped in from an area where supply is adequate for local needs.

Delegates also discussed the need to develop a standard system that would allow owners to show they had made attempts to source LSFO but, where unable to do so would render them immune from prosecution under the new regulations.

All delegates that spoke to Fairplay agreed that the ban on the carriage of high-sulphur fuel after January 2020 was very likely to be approved at MEPC following the deliberations at PPR5 and after the working groups report their findings.

IMO delegates keen to maintain sulphur cap momentum

[Carnot]

My view from the Platts conference was that the bunker fuel suppliers and the shipowners were pessimistic about a delay in implementation of the 0.5% Sulphur regulation. Large shippers were expected to be compliant in order to maintain insurance cover. The main issue is that the fuel suppliers might have to deal with multiple grades. An outright shortage is not likely as most of the existing ships will not be fitted with scrubbers and will have to use more expensive marina gas oil. Something like 2.5-30 million bbls of this low sulphur fuel oil will be required, which will put a manageable strain on existing supplies. HS HFO will probably fall in price as the market initially shrinks.

[Subjectivist]

My view from the Platts conference was that the bunker fuel suppliers and the shipowners were pessimistic about a delay in implementation of the 0.5% Sulphur regulation. Large shippers were expected to be compliant in order to maintain insurance cover. The main issue is that the fuel suppliers might have to deal with multiple grades. An outright shortage is not likely as most of the existing ships will not be fitted with scrubbers and will have to use more expensive marina gas oil. Something like 2.5-30 million bbls of this low sulphur fuel oil will be required, which will put a manageable strain on existing supplies. HS HFO will probably fall in price as the market initially shrinks.

When the ultra low sulfur road diesel regulations went into effect the suppliers solved the isuue by switching all their fuel output to ultra low instead of messing with multiple grades for different end users.