IMO 2020 to Alter Global Fuel Economics: Will Refiners Gain?

IMO 2020 to Alter Global Fuel Economics: Will Refiners Gain?
27/08/2018 https://www.hellenicshippingnews.com/imo-2020-to-alter-global-fuel-econo...

As the whole world is striving to achieve a cleaner energy environment, taking measures to curb pollution has become an important objective for authorities. In this regard, International Maritime Organization (IMO) intends to lower the sulfur content in marine fuels to reduce pollution from marine vessels, which has increased lately, especially due to a rise in the number of shipping vessels on water. In 2016, the IMO announced its decision to curb sulfur amount in marine fuels to 0.5% from the current cap of 3.5% by 2020. IMO believes this move to significantly reduce greenhouse gas emissions.

Significant Effect on the Demand Side

Notably, 5% of the world oil demand comes from the shipping industry, which is around 5 million barrels a day. Most cargo ships and tankers currently use oil with a high sulfur content, which is considered a dirty fuel. Once the rule is implemented, the shipping industry will have three options to choose from:

Switching to fuels with lower-sulfur content (low sulfur fuel oil or LSFO), which are costlier than dirty fuels
Using liquefied natural gas (LNG) as an alternative for dirty fuels after costly infrastructural changes
Installing costly scrubbers in the ship to cleanse sulfur from dirty fuels
The last two options require an immediate lumpsum cost to be incurred by the shippers, while the first option provides more time to adapt. Per the Wall Street Journal, the new rule will cost the maritime industry around $40 billion.

In a survey of ship owners conducted by Drewry, it was observed that 66% of the ship owners planned to use LSFO, 13% were likely to opt for scrubbers and 8% will use LNG. The survey result confirms that the shipping industry is going to witness strong demand for LSFO.

Supply-Side View

IMO 2020 is expected to have a direct effect on the global refining sector, something which investors are wary of. The new rule is expected to bring in a sea change at refineries in terms of their operations and configurations. While simple refineries are expected to suffer initially from the change, complex and larger refineries can reap profits from the decision.

Simple refineries with less sophisticated technologies process crude into different parts, of which dirty residual fuel oil is used on vessels. Following IMO 2020, demand for their product will decline. The simple refineries will require change in technology and production process to adapt to the new rule and it will cost both money and time. It’s to be noted that these refineries have roughly 16 months to change their operations and configurations.

Large complex refineries that have already started the process of changing configurations, around the globe, will witness significantly high demand for their fuels following IMO 2020. Notably, there are clusters of refineries in the U.S. Gulf Coast, Europe as well as in parts of Asia, who possess the characteristics required to make profit from the new ruling.

Companies With Large Complex Refineries

Some energy companies like BP plc BP are already producing low-sulfur products. High sulfur fuel oil only comprises 3% of BP’s total fuel production. The company has a Zacks Rank #3 (Hold). Energy behemoths like Exxon Mobil Corporation XOM , TOTAL SA TOT , Royal Dutch Shell plc RDS.A and others are already either producing low-sulfur fuel or on track to upgrade their refineries. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .

Needless to say, IMO 2020 is going to be the next big thing in the energy industry. Not only will it reduce pollution, it will also change the fuel demand pattern of the shipping industry. Inevitably, the change in supply pattern is expected to be demand driven. All the ill-equipped refineries are likely to witness plunging demand for their high-sulfur fuels, while the complex refineries are poised to witness high demand for their low-sulfur fuel products. The low-sulfur products will also have a higher price level. With more shippers expected to opt for LSFO, it looks like a huge opportunity for complex refineries to rake in profits.
Source: Zacks