IMO Regulations 2020 and Tightening Oil supply
Posted: Thu 22 Feb 2018, 08:53:31
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.
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.