U.S. refining executives expect their firms to see a windfall from tougher marine fuel sulfur standards that will hit the global oil and petroleum product markets at the start of 2020.
Known as IMO 2020, the regulations put forth by the International Maritime Organization, or IMO, will lower the sulfur cap in marine fuels from 3.5% to 0.5%, potentially altering the global trade of crude oil and refined products.
As the rule's deadline has approached, the industry's understanding of the variables affecting the timing, duration and magnitude of those shifts has become more clear and U.S. refining executives have become bolder in their statements about how the regulations will affect their business.
"We have been somewhat reluctant to throw out what the absolute number advantage is for us under an IMO 2020 environment, but it is very, very significant," Valero Energy Corp. CEO Joe Gorder said Sept. 5 at the Barclays CEO Energy-Power Conference. "I mean, it will be billions of dollars in incremental EBITDA."
"A reduction in the sulfur content is going to increase the demand for distillate and it's thereby going to increase the cracks for distillate. It's going to strengthen the gasoline cracks. It's going to increase the discounts on all of the sour crudes that we're currently processing," Gorder said, referring to the price spread between the price of petroleum products and crude oil.
In remarks to conference attendees, Marathon Petroleum Corp. Chairman and CEO Gary Heminger said global distillate inventories were at the low end of the five-year range heading into a "very large" fall turnaround, or scheduled maintenance, season.
"Many analysts have predicted that you will start to see an effect on the distillate crack spreads probably in mid-2019," Heminger said. "I would submit that we are expecting that you'll start to see [this] in the late third quarter or fourth quarter. … We see this as a long-term sustainable increase in the distillate crack. I don't think the party has even begun. With this IMO, with the differentials in crude oil and with the robust economy, I believe the U.S. refining system is very, very well-positioned for long-term sustainable growth."
Heminger said he expects U.S. refiners to benefit from the regulations the most on a net cash basis because of their competitive advantage relative to global players in processing heavy sour crude into distillates.
Outside of the U.S., some refiners are weighing the upgrades necessary to meet the tougher marine fuel standards, but some of those projects have been placed on hold, while others have not yet undergone feasibility studies.
U.S. executives said the competitive landscape will not change much ahead of 2020.
"Today, a 50,000-barrel-per-day coker costs north of $1 billion, $1.5 billion," Valero COO Lane Riggs said, adding that a refinery owner would also have to invest in processes downstream of the coker, such as hydrotreating and hydrocracking, to produce products for blending into transportation fuels. "You're talking about a lot of money for someone to do a grassroots thing. ... The economics in the space have been fairly compelling for a while. … If you're trying to do something really big, it's expensive to try to solve this problem."
"If you already haven't invested and you're not buttoning up the big capital projects, you're late to the game. … The [upgrading capacity] that is in place is what's going to be in place," Heminger said.