By 2020, most oil refiners will cut their production of high-sulphur fuel oil, or HSFO, to comply with new rules under introduced by the International Maritime Organization to curb air pollution.
Currently, the global shipping fleet uses 3.3 million b/d of HSFO
Most oil refiners worldwide are planning to reduce the amount of high-sulphur fuel oil, or HFSO, they produce to comply with new rules set out by the International Maritime Organization to cut air pollution from ships.
The global shipping fleet currently, including oil and chemical tankers as well as container ships, uses up to 3.3 million barrels per day (b/d) of high sulphur fuel oil.
Dubbed “the bottom of the barrel”, HSFO is the remaining product from crude oil that has been processed through crude distillation units as a refinery. To produce gasoline and diesel, the fuel oil is further processed at secondary refining units, or residue fluid catalytic crackers, hydrocrackers and cokers.
Post 2o20, HSFO will be produced by about 60 per cent of the 33 refineries participating in a Reuters survey, despite new rules calling for a reduction in maximum sulphur content from 3.5 per cent currently to 0.5 per cent in 2020.
Seventy per cent of the refiners surveyed said they will cut the supply of high-sulphur fuel oil.
According to Reuters, once the regulations come into effect, refiners will have little incentive to produce HSFO, but because some ships will be outfitted with smokestack scrubbers to remove sulphur from the exhaust fumes and power plants will continue to use HSFO, demand for the fuel will continue.
“Although HSFO demand for ships is expected to decline substantially in 2020, the oil’s demand for power generation and general users will remain,” Japan’s second-largest refiner Idemitsu Kosan told Reuters in the survey.“
In future, demand for scrubber-equipped ships is projected to recover, so we expect HSFO output to continue.”
Just over half of the refiners told Reuters that they will cut HSFO production by upgrading their plants to further process the fuel oil and will produce higher value products including gasoline and diesel.
When asked how much the expect to spend on their plants to produce more ultra-low and low-sulphur fuel oil, two thirds of the 16 refiners that responded to the question say they expect to spend under $100 million. Five said they will invest between $500 million and over $1 billion on the projects.
The secondary units are expensive and take years to build and possible expansion projects face tough environmental regulations.
“We will need (the Environment Protection Agency’s) approval if we want to expand the coker and that is tough in Taiwan now,” Formosa Petrochemical Corp (6505.TW) spokesman KY Lin told Reuters.
Lin added that Formosa has recently adjusted its coker unit to run at 95 per cent utilization from 90 per cent to cut its HSFO output.
Along with environmental concerns, refiners are also looking ahead to 2020 when HSFO in Singapore will be priced at a $16.70/barrel discount to Dubai crude. In October 2018, the discount is $5/barrel
“Forward prices are scary,” Lin said.
Some refiners say they can switch from high-sulphur fuel oil to meet demand in other markets.
“If fuel oil demand falls, we will switch our configuration to produce bitumen which is in high demand in India due to its road-building program,” an official from Indian Oil Corp told Reuters.
Meanwhile, some refiners say they will keep an eye on the market and prefer to stay flexible by being able to switch production from low- and high-sulphur fuel oil.
Bharat Petroleum in India says it can produce either fuel oil or switch to other products, depending on demand.
“We will not reduce fuel oil output to zero completely as we need our refineries to be flexible,” a BPCL official told Reuters.
Italy’s Eni says it “will produce the minimum amount of HSFO just to satisfy the market demand of the ships that will have installed the scrubbers.”
A representative of Hindustan Petroleum Corp Ltd of India told Reuters the company will produce some fuel oil but the output will be “very, very low beyond 2022”.
One-third of respondents said they are already not producing any HFSO, or they will stop producing it in 2020.
PKN Orlen, a Polish refiner, says it will produce fuel oil with 1 per cent sulphur content from 2020. A spokeswoman for Italian refiner SARAS said “We are already ready to face IMO-2020 and we already produce basically no HSFO”.
Mel Duvall of Husky energy says the Canadian oil company expects to benefit from the ruling because it will likely boost the demand for diesel.
“It is expected that there will be an increase in global demand for diesel fuel as ship operators switch from high-sulphur fuel oil,” he told Reuters.