Industry Insight: Overcoming the Cost and Supply Challenges for Low Sulphur Fuel Oil in 2020

By Bruce Abbott, President and COO, Genoil Inc
Friday May 20, 2016

In recent years, the marine fuel landscape has changed dramatically. In January 2015, the 0.1% sulphur limit was introduced in Emission Control Areas (ECAs), and the introduction of a global 0.5% sulphur cap in 2020 (or 2025, although the former date is more likely) will be confirmed at the forthcoming Marine Environmental Protection Committee meeting (MEPC 70) in October later this year.  With Heavy Fuel Oil (HFO) comprising the majority of fuel supply, it is hard to overestimate the impact this cap will have on the industry and the future make-up of the marine fuel supply chain.

A big question is what strategy ship owners and operators will adopt to ensure compliance. The reality is that there are three choices: Liquefied Natural Gas (LNG), although there still needs to be significant investment and development of infrastructure and bunkering standards, making it a more medium to long-term solution; scrubbers, however uptake has been slow due to the significant upfront capital investment required; and lastly distillates, which will prove to be the most popular and widespread compliance solution of choice. 

The challenge is that there are serious concerns over whether there will be enough distillate product to meet demand; by most estimates the industry has to replace almost 250 million metric tonnes of high sulphur bunker fuel (HFO) with something that meets the 0.5% maximum sulphur specification. According to the 'Bunker and Fuel Oil Study' 2014, by Marine and Energy Consulting and EMC – Energy Market Consultants, demand for distillates will rise to almost 400m tonnes by 2020. Despite this, the refiners are not prepared to invest the significant capital required to upgrade refineries to produce more middle distillates. Furthermore, they have not found a cost effective way to remove sulfur from fuel oil or refinery residue and there is little incentive to do so when high distillate prices will increase their profit margins.

On top of this, there is also uncertainty over the future price of distillate fuels.  There is a level of apathy within the market at the moment, as distillates cost less than heavy fuel oil did two years ago, when the talk of the 0.1% ECA went hand-in-hand with concerns over ship owners going out of business as their fuel bills rose to unsustainable amounts. The dramatic drop in crude prices put paid to this. However, what may happen over the next four years (if the global 0.5% ECA is implemented in 2020) is far from certain.

Cost of Oil

Even right now the price of oil is confusing analysts. At the time of writing, the much-anticipated Doha meeting failed to resolve output issues, yet crude still hovers around the $45 per barrel mark.  Indeed there is every indication that the global oversupply of crude is diminishing, paving the way for higher prices by the end of the year.  The US Energy Information Administration reported that output reduced by 90,000 barrels per day (b/d) in March 2016, with total output for the year anticipated to slip to 8.6 million b/d from a peak of 9.7 b/d.  With the global glut slowing, and with China's growth revised up to 6.5% (albeit fuelled by credit), there is a chance that crude prices could strengthen.

The net impact of this is that there is every chance that the price of crude, and therefore distillates, could be proportionally higher in 2020 than it is today.  With the lack of product to meet demand, which will put prices up further, what we can be certain of is that the differential between HFO and clean fuels will also be far greater, as refineries look to continue to offload their by-product into the only viable market for it.  While this will most likely increase the demand for scrubbers, there is also a significant opportunity for a low sulphur-based product that meets compliance requirements, and which can be produced at considerably less cost.

Hydroconversion Upgrader

This is why Genoil, as a leading publically traded clean technology engineering company, has introduced its technology – the Hydroconversion Upgrader (GHU) – to the marine market. The GHU converts heavy crude oils and refinery bottoms into clean burning fuels for transportation industries, including shipping.

Genoil's innovation builds on existing and proven Fixed Bed Reactor technology, which accounts for approximately 80% of the world's reactors. However, the GHU takes it to new heights by super-saturating the carbon molecules with hydrogen, significantly increasing the desulphurisation, dematalisation and denitrogenisation conversion rates, and increasing operating efficiencies by 75%. In the context of the shipping industry's global sulphur cap, the GHU technology can take refinery residue and turn it into low sulphur fuel oil to meet the 2020 legislation.

Critically, the GHU enables Genoil to produce compliant fuel at a much lower cost than oil refiners, as well as alleviating the industry pressure on the industry's distillate supply challenges. This has benefits for all stakeholders within the marine fuel supply chain. For ship owners it negates the requirement to invest capital in abatement technology or switching to LNG. For fuel payers it facilitates access to cheaper, compliant products, reducing fuel bills and increasing profitability. For fuel suppliers it ensures a continual supply of compliant fuel oil, which they can provide to customers at a reduced cost, but at a higher margin than traditional distillate or low sulphur products. 

The benefits also spread to ports. In a highly competitive market, port authorities can increase their attractiveness by ensuring the continuous supply of ECA-compliant, cost-effective fuel products, delivered through a state-of-the-art bunkering infrastructure. Genoil's GHU unit can be easily placed in locations including receiving terminals, pipelines and ports.

While the fixed bed reactor as the foundation of the GHU technology is not new, the shipping industry is still traditionally skeptical when it comes to innovation. The lack of the widespread uptake in clean technologies that increase operational efficiencies is evidence of this. That is why Genoil has invested significantly over the years in research and development from its 147-acre site in Alberta, Canada, delivering an abundance of test data, which verifies the viability of the product.  The company has also filed over 20 patents in relation to its GHU technology, including the process for treating crude using hydrogen in a special reactor unit.

Most significantly, credibility is often measured by the company that you keep. That is why in 2015 Genoil signed a $700 million joint venture with the Chinese government refining operator, Hebej Zhongjie Petrochemical Group (HYT), marking the formal commercialisation of the company and its technology within a large-scale refinery. And more recently in April 2016, Genoil announced, in conjunction with consortium partner Beijing Petrochemical Engineering Co Ltd (BPEC), the receipt of a $5 billion Letter of Intent (LOI) for the funding of a 500,000 barrel per day (bpd) desulfurization and upgrading project located in the Middle East. Beijing Petrochemical is a division of Yanchang Petroleum, sitting at position 380 on the Fortune 500 list. This is a project that will see, following the implementation of the GHU technology, a production capacity of 500,000 barrels per day of low sulfur crude oil.

There's no doubt the global sulphur cap will present the shipping industry with challenges, and has already begun to add significant complexity to the marine fuel supply chain. If crude and distillate prices do rise, we will see a speedy reversal in the current state of apathy, and no doubt, a pre-regulatory panic, like the one which swept the industry in the build up to the 2015 ECA.  The good news is that there are solutions out there that are developed, well-established and proven.  Critically, plans and strategies for compliance still need to be developed in the short-term.  Companies within the supply chain that achieve this will seize significant competitive advantage, and reap the rewards for years to come.