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IMO's sulfur cap seen providing medium-term support to refineries

Cannes, France —

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The International Maritime Organization's more stringent bunker fuel requirements from 2020 will provide support for refineries, at least in the medium term, delegates at the World Refining Association conference in Cannes said Wednesday.

The IMO will impose a global 0.5% cap on marine fuel sulfur emissions from 2020, from the current 3.5% global limit.

"Refinery margins for upgraded refineries are likely to be supported in 2020," said Richard de Caux, head of refining analysis at BP.

The impact on refiners will depend upon the use of scrubbers, compliance with the MARPOL regulations and how much low sulfur fuel they can produce, de Caux said. However, scrubbers "will only make a small part of the solution in the early years" and the majority of demand will be for 0.5% sulfur fuel, he said.

This could be seen in gasoil cracks, which on the futures market are at a premium in 2020 over current levels, while HSFO cracks are discounted.

Adapting to the new requirements is "not so difficult," particularly for plants with high levels of conversion, and most of Total's refineries are ready to adapt, a company official said.

For average refineries producing twice as much diesel as fuel oil, "not much will change," according to an official from Poland's Lotos.

But as one delegate noted, "if you haven't made your decision two to three years ago, you need to live with what you've got."

In the past few years European refiners have been adding new conversion capacity, such as SDA, hydrocrackers and cokers.

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But others have made "moderate incremental investments" such as increasing the FCC capacity in order to run heavier feedstock, according to Brian Glover, Honeywell UOP vice president and general manager-process technology and equipment.

"They try to manage, not eliminate the problem," Glover told S&P Global Platts, adding that investment decisions are also facing the uncertainty of what "2025 and 2030 will bring."

Further uncertainty is coming from the pace at which scrubbers are being installed. Until now the rate of installations "has been relatively low but it's not clear to what extent they will accelerate," Glover said.

Hence some refiners that haven't made investment decisions yet can still "develop additional plans after 2020," Glover said.

According to data presented by Concawe, installation of scrubbers is picking up and "all order books are getting full, said Damien Valdenaire.

About 2,500 ships are expected to install scrubbers between now and 2020. While this can account for the use of around 3 million-4 million mt of fuel oil per year, the question remains open for European refiners how to switch the remaining 27 million mt of 2.9% fuel oil to 0.5% sulfur.

FURTHER CHALLENGES AHEAD

But while MARPOL regulations are expected to provide a temporary "boost" to refiners, future challenges will come from new capacity additions, said BP's de Caux.

The addition of new capacity had slowed in recent years, but "that is expected to change," de Caux said, with new capacity due to come onstream, "mostly in the Middle East and Asia."

BP forecasts slowing demand growth due to vehicle efficiency and penetration of electric vehicles, resulting in "closures in mature markets" such as Europe, OECD Asia and parts of the US.

Those regions have already seen "a lot of capacity" closures in the last 20 years, said Christophe Vuillez, Total vice president-strategy development and research.

While there has been no talk of imminent closures, refineries "need to address every day those incredibly volatile margins," Vuillez said.

But at present refineries benefit from the "extraordinary oil demand growth" between 2015 and 2017 following the heavy decline in crude prices in 2014, while this year is likely to be another year of strong growth, de Caux said.

A further boost has also come from poor refinery utilization in Latin America and Africa, which has helped to push utilization rates outside of these regions to almost 87%, a level "not seen since the peak" of the refinery golden age, de Caux said.

According to European refiners, US crudes can provide opportunities, but they also pose significant challenges, as quality is not as consistent as North Sea and Urals.

"It is not a uniform quality," said another delegate, adding that quality changes as the crude comes from different fields.

A lack of consistency of the API and metal content was seen as another downside, yet as a third delegate said, "European refiners have to take some time to get used to it."

--Elza Turner, elza.turner@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com