IMO 2020 solutions

July 30, 2018
To one of its biggest problems in decades, the refining industry might find solutions in its scrapyard. Strategically restarting idle capacity can help keep ships at sea as standards tighten for sulfur in bunker fuel.

To one of its biggest problems in decades, the refining industry might find solutions in its scrapyard. Strategically restarting idle capacity can help keep ships at sea as standards tighten for sulfur in bunker fuel.

Beginning in 2020, the International Maritime Organization (IMO) will require that marine bunkers contain no more than 0.5 wt % sulfur. The current maximum is 3.5 wt % outside “emission control areas,” where the sulfur limit since 2015 has been 0.1 wt %.

Costly and complex

In a recent article for Oil & Gas Journal, Muse, Stancil & Co. authors Ken Cowell, Tim Bennett, and Ramin Lakani put the challenge in jarring perspective. In the past, they noted, regulatory changes to oil products related to health and the environment, such as cutting sulfur in diesel and gasoline, applied regionally. IMO 2020, the bunker change, applies globally. “The investment options for refiners to convert-destroy [high-sulfur fuel oil] are effectively an order of magnitude more expensive and complex than those implemented to produce low-sulfur gasoline and distillate fuels,” they wrote (OGJ, July 2, 2018, p. 52).

Confounding plans is uncertainty about post-2020 demand for low-sulfur fuel oil and distillate marine fuel. Facing higher prices for diminished-sulfur bunker fuel, shipowners can install scrubbers or exhaust-gas cleaning systems and continue burning high-sulfur product. They also might use vessels fueled by LNG. For now, therefore, the market for low-sulfur fuel oil and marine distillate is hard to predict. This helps explain why refiners have been slow to commit to the large investments many will have to make to meet the new standards.

More complication comes from disparities sure to emerge between values of low-sulfur and high-sulfur products and therefore between those of sweet and sour crude. And the emergence of no-sulfur LNG as a growth fuel for marine transportation further complicates price relationships, which—like market size—are crucial to decisions about refinery investment.

But the International Energy Agency sees a supply buffer that at least might ease the transition. “The IMO may literally bring back from the dead refining assets previously shut down due to poor performance,” it says in its July Oil Market Report. The agency doesn’t believe the industry can bring online by 2020 the capacity upgrades needed to shift as much as 2-3 million b/d of bunker fuel demand from HSFO to very low-sulfur fuel oil or marine distillate. As desulfurization drops from 75-80% of the average crude barrel to meet existing standards to more than 92% for IMO 2020 compliance, IEA says, a HSFO surplus of 1.1 million might develop with a corresponding shortage of low-sulfur marine fuel.

That shortfall makes tantalizing about 4.5 million b/d of global refining capacity removed from service during the past 5 years. Well-positioned owners might restart some of the idle units to profit from proximity to markets and access to price-advantaged feedstock.

An example, IEA says, is the plan by ArcLight Capital Partners to partly restart the 500,000-b/d Hovensa refinery in the US Virgin Islands. A $1.4-billion investment targets a crude still and associated secondary units, including a coker, a reformer, and desulfurization units. Feedstock might be light, sweet crude from US shale plays, IEA says.

Wilhelmshaven under study

The agency also says Hestya Energy, Rotterdam, is considering restart of the vacuum distillation unit at the mothballed Wilhelmshaven refinery in Germany. Hestya acquired the idle 260,000-b/d refinery from ConocoPhillips in 2011 to add the terminal to its extensive European system. IEA says the VDU might process heavy feedstock into lighter and lower-sulfur bunker blendstocks to capture value from the price differential. The practice was common in Europe during the middle 2000s, when refiners could profit from price spreads between high-sulfur Russian gas oil and ultralow-sulfur diesel.

In the oil and gas business, mobile capital and human ingenuity have a way of softening problems that at first seem hardened by physical limits.

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