The October 2016 decision by the International Maritime Organization to implement strict sulphur emissions from 2020 will transform the shipping industry and bunker fuel markets in the longer term, though it signals uncertainty and some big swings in price relationships for crude oil and refined products as we near 2020. In this paper, we look at the forthcoming transition and some implications for refiners.
For more than a decade now, the Marine Environment Protection Committee (MEPC) of the International Maritime Organization (IMO), a United Nations entity, has been planning an orderly reduction in the global level of sulphur and nitrogen emissions from marine sources. Early mandates saw emissions sharply lowered in some environmentally sensitive regions, known as Emissions Control Areas (ECAs). However, the majority of global waters have continued operating with a level of stack emissions equivalent to burning 3.5 percent sulphur residue bunker fuel (HSFO) with no emissions abatement.
MEPC policy implemented in 2008 defined a pathway to lower global sulphur emissions to a level of 0.5 percent sulphur equivalence, but the implementation date was not determined at that time. Rather, a decision was to be taken in 2018 as to whether it should take place in 2020 or 2025. Given the long time-line for capital investment, the IMO brought forward this decision to 2016 and in late October, it determined that the market was technically able to achieve the 0.5 percent standard from 2020.
The MEPC decision was based on a technical study commissioned in 2015 that determined it was feasible to supply the market with enough low sulphur material for the industry to make this transition by 2020. The terms of reference of this study did not consider the cost of making this transition – only the technical feasibility of supply. Given that we are now only three years away from this major transformation of bunker fuel markets, time is short to make any major strategic changes. Refiners now need to be balancing their near-term operational needs in the run-up to 2020 with medium term capital planning based on the market response in the 2020 – 2025 period.