Brussels — Tighter shipping pollution requirements from 2020 are expected to increase demand for diesel and low sulfur fuel oil, giving ongoing support to already healthy refining margins in Europe, according to speakers at an industry event Thursday.
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The International Maritime Organization's global marine fuels sulfur limit is set to drop from 3.5% to 0.5% at the start of 2020, forcing shipowners either to switch from burning high sulfur fuel oil to cleaner, more expensive alternatives like distillate-based fuels, or to install scrubber equipment on each vessel to clean emissions on board. A sharp change in refined product price spreads can be expected with an almost overnight shift in the bulk of marine demand from HSFO to lower-sulfur alternatives.
Delegates at the S&P Global Platts European Refining Summit in Brussels Thursday accentuated the positive aspects of the change for their industry, with higher diesel and low sulfur fuel oil demand and some HSFO finding new homes in power generation and bitumen production.
Additional demand for diesel and LSFO is estimated to be around 1.6 million b/d, according to Christof Ruhl, global head of research at the Abu Dhabi Investment Authority.
The rising demand would "have a very positive effect on margins," Ruhl said.
With the significant improvement in margins in the past few years, "the trend of shutdown of refineries in Europe has stopped," said Jean-Baptiste Renard, CEO of 2PR Consulting.
Margins are expected to remain strong in the short term, especially for complex refineries, and those with units such as delayed cokers that can process HSFO into lighter products.
According to Marco Schiavetti, CEO of Saras Trading, in the short term he sees "very good margins for complex refineries."
The IMO regulation "will help refining margins in Europe to be high and sustainable until the end of 2020-21," according to Tamas Pletser, chief oil and gas equity analyst at Erste.
After that he expects more refinery consolidation and potential closures in Europe, a view shared by several other delegates.
Refiners that had invested in units that destroy residue "will experience another golden age," said Stephen George, chief economist of KBC Process Technology. George expects coker units to operate at capacity.
Meanwhile, according to Saras' Schiavetti, the IMO sulfur cap would be a threat to simple refineries, though it also depends upon "the difference between light and heavy crude." He also sees increased challenges as new capacity in Middle East will put pressure on small and unsophisticated refineries in Europe.
"Complexity is roughly half of the new refining systems built in the Middle East, it will put a lot of pressure in Europe and in particular in the Mediterranean," Saras' Schiavetti said.
CRUDE OIL DEMAND, HEAVY VERSUS SWEET
The IMO regulation will initially have positive effect on crude oil demand, according to Jan Edelmann, commodity analyst at HSH Nordbank, but as use of scrubbers picks up, that will weigh on global crude demand.
But the most important impact would be on the crude slates, as sweet crude is expected to become more popular and gain in value.
The sweet-sour differential can be two-three times wider than before, said David Wech, managing director of JBC Energy.
But according to Pletser it will actually be the sulfur content that will determine the value of crude.
"Sulfur will be more important factor than the heaviness of crude," said Tamas Pletser.
Heavy sweet crude, like crude from Angola and Brazil, "will come at a very high premium," said KBC' Stephen George. "The heavy sweets are likely to benefit most from the IMO," said George.
The expected lower price of heavy crude would benefit complex refineries who "will take full benefit," said Schiavetti. But at the moment, this is not the case as limited supply of heavy crude pushes up its price versus light crude, he added. "At the moment we're seeing the opposite trend - heavy material is getting more expensive than light."
Still there are "some opportunities in the short term but many challenges in the medium and long-term," he said.
But on the contrary, while the short-term would benefit those producing distillates, the pressure on HSFO cracks would remain. "There is too much demand for middle distillates coming up and too much supply of HS fuel oil," said Ruhl. One of the reasons is that "the industry was very slow in adjusting," said Ruhl.
An estimated 215 million mt/year of HSFO will need to be displaced after 2020, according to Cem Sakal, Group CEO of Cockett Group.
But there is some silver lining for HSFO as it can be used for power generation, said Tamas Pletzer, chief oil and gas equity analyst at Erste. He sees as much as 500,000-1 million b/d of HSFO demand being preserved by power generation buyers taking advantage of the lower prices after 2020. In addition refineries can turn to HSFO as feedstock.
Increased bitumen capacity would provide another outlet for the cheaper fuel oil. "Lots of asphalt units are built," said David Wech "and this is one way to eliminate high sulfur fuel oil."
Refiners, such as Turkey's Tupras have taken advantage due to good demand for construction "and produce lots of asphalt and can sell it at a very good price," said Erste's Pletser. But the production of bitumen also depends upon good local demand as it is difficult to transport far.
But according to KBC's George there is limited market for bitumen which is "driven by demand" and might be a road to disposal of fuel oil but not one "to margin enhancement."
But with HSFO prices likely to fall "we believe there is a strong call for scrubbing," said George. According to JBC Energy 2,760 scrubbers are expected to be installed by the end of 2020. Thus up to one third of the displaced HSFO can be back in operation by the end of 2020, according to George.
The expected increase in freight is unlikely to have an impact due to the low freight rates but also as it will be offset by trade increase.
"The change in spreads will be so much bigger than the change in freight," said JBC's Wech.
Furthermore "the freight component is not relevant compared to cracks," according to Saras' Schiavetti who added that the "freight costs are negligible compared to the trade flows."
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