Refiners' Inaction Over 2020 Will Create an Opportunity for Big Traders: KBC

Stephen George, Chief Economist at energy consultancy KBC. Image Credit: KBC

Many refiners have not, and will not, make a meaningful response to the global 0.50% sulfur cap on marine fuel coming into force in 2020, and their inaction will create opportunities for big traders, Stephen George, Chief Economist at energy consultancy KBC has told Ship & Bunker.

"I think the 2020 date was a surprise for many refiners and shipowners who thought the new rules would come into force in 2025," said George.

"The reality now is if you make HSFO today you probably have an issue."

The scale of the problem was highlighted in a recent poll taken by KBC during one of its webinars; only 15 percent of respondents had a plan of how to cope with the impact of the 2020 sulfur cap.

"This was a European-focused rather than global survey, and the people who were on the call likely had a reason to be there," he cautioned, "but in general the more people we talk to, the more we find refiners that thought they had a viable plan and now realise they don't."

As previously discussed on Ship & Bunker, one dilemma caused by the new sulfur cap is that ship owner / operators can comply by either switching to a compliant fuel, which will most likely be a distillate product, or install a scrubber and continue burning the same higher sulfur HSFO they do today.

"We're all aware of the small order book for scrubbers and it surprises me how many seem to be leaning towards switching fuel. But when you see newbuilds like OOCL Hong Kong, the biggest container ship in the world, without a scrubber it's probably a comment on what the market's view is right now," said George.

"It's not too late to install scrubbers in time for 2020 of course, and we don't know what will happen with them after 2020 either, but a refiner is not going to risk $2 billion of long term investment with this kind of uncertainty."

Further complicating the picture for refiners are challenges and pressures coming from beyond marine.

"Refiners in the US and Asia are probably safe at the moment, but in Europe there are real concerns about the durability of demand for product from land-based sectors. There are those that can destroy HFO already but those that haven't already started won't be doing it in 2020. Why make long-term investments to produce products no-one may want?

"Marine's expected shift away from HFO won't completely kill demand of course, there will still be customers buying fuel oil for power and other industrial uses, but demand could drop by half. This will leave many of the less complex refineries at risk of being severely economically disadvantaged unless they study, agree, and implement a robust strategy for the future."

The reality, then, is the shipping industry expects there to be enough compliant fuel come 2020, but refiners seem either unwilling or unable to make that happen.

This disconnect could be the perfect opportunity for a large trader, says George.

"There will not be an additional 4 million barrels per day of MGO available to meet demand in 2020, but there doesn't need to be," he says.

"If it's not in the refiners' interest to produce it, then there's a real an opportunity here for big traders who have the blending capacity to create large volumes of consistent quality, 2020 compliant bunkers."

KBC recently issued a White Paper "The IMO's 2020 marine fuel sulphur cap and challenges for the global refining industry – time for action is now!" that further explores the issue.

On July 27 the company is also holding a refining-focused Webinar "Identifying your best option to respond to IMO 2020." For more details on the event visit: http://www.kbcat.com/calendar?task=view_event&event_id=182