IMO 2020: The Quest for Low Sulfur Fuel Threatens Margins
Fuel specification changes can significantly affect the oil value chain – and we have a big regulation coming down the pike that will affect the entire world of refined products and fuel consumers: IMO 2020. The International Maritime Organization’s (IMO) planned bunker fuel regulation will be one of those changes that makes big waves, exposing businesses to unprecedented supply and logistical challenges.
Breaking it down: The marine sector, which is responsible for half of global fuel oil demand, will have to reduce sulfur emissions by a whopping 80 percent by changing from high sulfur fuels to lower sulfur fuels in order to comply with the new regulation. While the industry consumes an average of 3.8 million barrels per day of high-sulfur fuel oil, it also consumes just over 1 million b/d of low-sulfur marine gas fuel. Even though this represents just 5 percent of the global demand for diesel and gas, when the sector fully complies with the new regulation by changing to low-sulfur fuel oil (or marine gas oil), the demand for diesel fuel and other distillates will increase; and the impact on refiners and consumers could be dramatic.
The Impact on Refiners
Oil refiners around the world are not equipped to produce enough low-sulfur fuel by 2020, so many ships may resort to diesel, causing consumer prices to go up. Other low-sulfur distillates, like heating oil and jet fuel, will also see a jump in prices, according to S&P Global Platts. Higher demand for light crude oil from shippers could also increase the price of gasoline.
Additionally, the strong surge in demand caused by the replacement of high-sulfur oil will require refineries to run at high utilization, increasing costs and compressing margins. From the refiners’ point of view, some of the refined bunker fuel will not reach the level of low-sulfur needed to meet regulatory standards, creating further challenges and lower yields when volumetric contract commitments must still be met.
With these changes comes volatility and constrained supplies. Commodity trading and risk management software with advanced analytics for decision support will be required for suppliers to have a better understanding of pricing implications for feedstock, plant, and capital investments.
The Impact on Consumers
Wood Mackenzie predicts that global shipping fuel costs are likely to rise by a quarter, or $24 billion, in 2020. Initially, consumers will pay more for bunker fuel because it will be a constrained commodity and sourcing will be a challenge. This can cause a logistical nightmare, as consumers may have to either potentially reroute vessels to different fueling locations when fuel is not available or carry more fuel between locations, which directly affect margins.
Alternatively, ships that install “scrubbers” can continue to burn cheaper high sulfur fuel oil, but the penetration rate for them would be limited by factors including limited access to finance, scrubber manufacturing capacity, and dry-dock space. In order to take this route, businesses must have real-time inventory and logistics management capabilities that provide decision support.
While consumers must be concerned with the same challenges suppliers will encounter, they will also have to take into account additional optionality. In order to do so, they must understand their bunker fuel optionality, which will be key to maintaining fuel costs in what will become a more competitive environment.
Despite assurances from IMO that there will be no delay to the start, one third of ship owners who responded to an IMO 2020 survey of Drewry, indicated they are still not convinced a global 0.5% sulfur cap on marine fuel will come into effect as planned as of Jan. 1, 2020, due to a lack of readiness. While market participants play the “waiting game” on who will invest capital into low-sulfur initiatives, businesses with enhanced portfolio visibility and the ability to scale at a moment’s notice will have a greater competitive advantage.
Steps to Becoming Proactive and Seeing Immediate Returns
Regardless of whether or not IMO will be in full swing by 2020 – one thing is certain: it will happen. Success prior to and after IMO 2020 taking full effect relies on proactive portfolio management, which starts today. This is where enterprise commodity trading and risk management software, coupled with advanced analytics, can help move the needle for your business and start showing significant ROI once implemented.
Whether you are a refiner or a consumer, rethinking your fuel management strategy is difficult and requires the analysis of a lot of data. Allegro’s CTRM software (also known as ETRM software) and advanced analytics can be a single source of truth for all your data and provide you with the ability to analyze the impact of strategic decisions. Once decisions are made, the software can provide information and insights on your inventory and help you protect your margins, no matter how volatile the market becomes.
Interested in learning how Allegro’s CTRM/ETRM software can help take your business from a proactive state to a reactive one in time to combat IMO 2020 and other market uncertainties? Click here to contact us today.