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Maritime rule change in 2020 stirs fears of diesel shortage

Maritime rule change in 2020 stirs fears of diesel shortage
JOHN KEMP October 26, 2018

LONDON (Reuters) – The International Maritime Organization (IMO) has so far resisted pressure to soften or postpone the implementation of new regulations requiring ships to use bunker fuels with a lower sulphur content from the start of 2020.

That has prompted warnings from some analysts that the regulations will squeeze the availability of low-sulphur diesel and jet kerosene required by trucks, trains, aircraft, farmers and industry, resulting in big price increases.

The regulations and any associated rise in fuel prices will occur in the run up to the next US presidential election so there is considerable political sensitivity around the timing and cost of the changes.

But most IMO members are confident there will be enough low-sulphur fuel available to meet the needs of both the shipping industry and other users of middle distillates without an unacceptable spike in prices.

From Jan. 1, 2020, ships will be required to use fuel oil containing no more than 0.5 percent sulphur, down from a maximum of 3.5 percent at present, and an actual average of around 2.5 percent.

Ships operating in emission control areas in the Baltic Sea, North Sea, most of the coast of Canada and the United States, and parts of the Caribbean are already subject to a lower limit of 0.1 percent, which will not change.

Reduced sulphur limits for the rest of the world were originally approved by IMO members in 2008 and the deadline was reconfirmed following a fuel availability assessment in 2016.

A detailed study of the fuel market commissioned by the IMO before it confirmed the deadline examined multiple scenarios for marine fuel consumption and production at the end of the decade.

The study concluded that “in all scenarios the refinery sector has the capability to supply sufficient quantities of marine fuels … to meet demand for these products while also meeting demand for non-marine fuels.”

Capacity increases in crude distillation as well as sulphur-removing hydrocracking and hydroprocessing would be enough to meet increased demand for low-sulphur distillates and fuel oil (“Assessment of fuel oil availability,” CE Delft, 2016).

Others in the industry have been less sanguine about the availability of sufficient low-sulphur fuel for both marine and inland users and warned about price increases.

Earlier this year, the International Energy Agency assessed the new regulations would divert around 200,000-250,000 barrels per day of low sulphur distillate from other uses to the shipping industry.

The agency warned diesel prices might have to rise by as much as 20-30 percent to achieve the necessary consumption reduction in other sectors (“Oil 2018: Analysis and forecasts to 2023,” IEA, March 2018).

This week, the agency presented a less worrying scenario to the IMO, suggesting diesel availability may be “less stretched” owing to slower global growth and a shift away from diesel in key economies.

Diesel demand is slowing in Europe and may be hitting a plateau in China while slower trade growth will also ease some pressure on diesel markets (“An analysis of the IMO 2020 sulphur limit,” IEA, Oct 2018).

Even so, airlines have started to warn the switch will put upward pressure on jet fuel prices next year (“Airlines face rising fuel costs, blame cruise ships,” Wall Street Journal, Oct. 22).
And some major shipping flag states, including the United States, worried about the impact on fuel costs, have been lobbying for “an experience-building phase” that would inform the implementation of the sulphur cap (“US seeks late change to sulphur-cap rules,” Financial Times, Oct. 23).