South Korea cleaner marine fuels market to grow on new ECA

Singapore — Demand for cleaner bunker fuels, including marine gasoil, in South Korea is expected to increase further and fuel bills for shipowners are likely to rise, with plans to create an emission control area, industry sources told S&P Global Platts.

South Korea will establish its ECA and implement a 0.1% sulfur limit fuel rule in stages starting in September and implement it fully in January 2022, an official at South Korea's Ministry of Ocean and Fisheries told Platts on Wednesday.

Under the Special Act on Air Quality Improvement in Port & Other Areas enacted in 2019, all ships are already required to switch to 0.1% sulfur fuel when berthing at the country's five major ports: Busan, Ulsan, Incheon, Yeosu-Gwangyang and Pyeongtaek-Dangjin.

The new ECA will require 0.1% sulfur fuel when navigating or berthing at the five ports and within the country's territorial waters, the official said.

Under the law, any ship that violates the 0.1% mandate will be punished with up to one-year imprisonment or a Won 10 million ($8.650 million) fine, he said.

The Special Act already stipulates a series of measures, including setting stricter marine fuel standards, restricting vessel speed, prohibiting old gasoil vehicles from entering port areas, and encouraging port equipment and yard tractors to switch from gasoil to LNG.

Clean fuels demand on the rise

The formation of an ECA comes as South Korea's demand for cleaner fuels has already jumped due to the implementation of the International Maritime Organization's global sulfur limit rule January 1 and China's ECA launched last year.

"At the moment, there is already 0.1% MGO demand from vessels going to ECA regions in China and North America," a trader based in Seoul said. "With South Korea's ECA, demand will increase."

Another trader said the price gap between 0.1%S MGO and 0.5%S MGO will widen from the current gap of $10/mt.

The premium for South Korea delivered 0.1%S MGO over delivered 0.5%S MGO assessments averaged $2.90/mt from January 2-15, slightly lower than $3.21/mt in December, Platts data showed.

With the IMO 2020 rule starting this year, demand and prices for 0.5%S MGO have risen as it is sought as an alternative to 0.5%S LSFO amid tight supplies for the compliant fuel. Currently, only SK Energy and Hyundai Oilbank are supplying 0.5%S MGO, while all four refiners—SK Energy, Hyundai Oilbank, S-Oil and GS Caltex—are able to supply 0.1% LSMGO.

A South Korea-based supplier said shipowners "will be in a worse fix than before" having to pay more for compliant fuels.

Refiners' moves

South Korea is a mid-size player in the Asian bunker fuel market, with annual marine fuels sales of about 7 million-9 million mt. Its refiners are gearing up for new investments as environmental rules in shipping are becoming stricter.

South Korea's biggest refiner, SK Innovation, said subsidiary SK Energy will start operations at the new 43,000 b/d vacuum residue desulfurization unit at its 840,000 b/d Ulsan refinery in April to increase low-sulfur oil products output. The start of the unit will allow the refiner to produce up to 200,000 mt/month of LSFO.

S-Oil completed its new residue upgrading complex in November and has been supplying around 80,000 mt/month of blended LSFO in their term contracts.

Hyundai Oilbank has upgraded all of its secondary units and has been operating an 80,000 b/d solvent deasphalting process at its Daesan Plant since September 2018, which allows it to use heavy grades to produce cleaner, lighter fuels. The company is currently supplying around 100,000 mt/month of the low sulfur bunker fuel, a company source told Platts recently.

LSFO availability from the refiners seem adequate for now, market sources said, adding ample supply of the product and barge availability remains uncertain as stricter environmental rules in shipping loom.