Concerns Over Distillate Shortage to Meet Global 0.50% Sulfur Cap Could be Misguided: Tolson

Adrian Tolson, Senior Partner, 20|20 Marine Energy

Adrian Tolson, Senior Partner, 20|20 Marine Energy, today said concerns over a shortage of distillates to meet compliance requirements for the upcoming 0.50 percent global sulphur cap in 2020 or 2025, could be misguided. 

"Fuels largely based on distillates, including 100% distillates as well high percentage distillate-based blends will be the compliance solution of choice to meet the 0.5% global sulphur cap. However, the widespread concerns about there being enough distillate product to meet demand may be misguided," he said.

"There is evidence to suggest to the contrary, based on the refinery upgrades taking place in the Middle East and India, as well as an anticipated increase in the uptake of scrubbers as the price differential between distillates and Heavy Fuel Oil becomes even greater."

Citing data from the Hydrocarbon Processing Market Data Report 2016, Tolson points to the Middle East adding approximately 1.5 MMbpd of new refining capacity by 2020 in order to meet the growing demand for distillates.

In March 2016, India's largest state-owned refiner Indian Oil Corp (IOC) said it had earmarked $26 billion for a five to seven year investment programme to expand and upgrade its existing refineries.

At the same time, Tolson says the price of distillates will go up following the implementation of the global sulphur cap, as a direct result of rising crude costs and increased demand.

HFO, which Tolson calls a by-product from refining that can only realistically be used within shipping, will decline in price making investment in scrubbing technology an even more viable compliance solution with short payback periods.

However 20|20 Marine Energy also believes that diesel use within the automotive and land-based industries may also decline, freeing up surplus product that could be directed to shipping.

"The world is starting to end its love affair with diesel. The United States and Asia are more committed to the gasoline/hybrid model, as well as the electric route, and even Europe is showing less of an appetite," says Tolson.

"There have also been signs that diesel is no longer as popular with the power generation industry, primarily due to CO2 emissions, and at the same time, alternative land power sources, such as solar energy and liquefied natural gas (LNG) are gathering momentum. 

"However, refineries have been planning for diesel usage to continue at a predictable rate, and given this anticipated decline in certain markets, there will be surplus product that can be diverted to vessels within the shipping industry."

The International Maritime Organization's (IMO) is looking to make a decision over the 2020 or 2025 start date for the 0.50 percent global sulphur cap at MEPC 70 in October, following the outcome of a fuel availability study.