Updated: Dec 17, 2019
IMO 2020 is poised to change shipping markets forever. Some participants are set to handle the new regulatory environment better than others
IMO 2020 will radically change shipping market supply/demand dynamics. The basis of IMO 2020 is simple – to reduce the amount of sulfur emissions by tightening the requirements around allowable fuels any given seagoing vessel can burn. In technical terms, this means cutting sulfur content to 0.5% down from 3.5% at present. Demand for HSFO will, in part, be forced to shift towards cleaner alternatives, namely that of Marine Gasoil and Low Sulfur Fuel Oil (LSFO). LNG is also an option, albeit uptake will be limited.
West African Production Enjoys Optimality
A barrel of crude oil is associated with a wide variety of classifications that can range from light-sweet (thin, low sulfur) to heavy-sour (dense, high sulfur) and everything in-between. The heavier (denser) a barrel of crude, the lower the attached API gravity. Most importantly, a heavier crude tends to yield higher amounts of distillate output per-barrel compared to that of a lighter crude. Consideration of sulfur is also key with “sweet” (<0.5% sulfur by volume) barrels enjoying an advantage against higher sulfur “sour” alternatives. By combining the need for high amounts of low-sulfur, distillate output, heavier-sweeter barrels will serve as the “optimal” IMO 2020 barrel.
Western Africa is poised to profit the most from an upswing in heavy-sweet demand with some 235 kbpd of this crude type departing from the region over the past year (60% of total heavy-sweet loadings). The likes of Doba blend (API 25, sulfur 0.09%, 100 kbpd), out of Chad and Dalia (API 24, sulfur 0.5%, 135 kbpd) sourced from Angola are debatably some of the best IMO optimized barrels and will thus enjoy sizable positive price spreads against alternative grades that are lighter or more sour.
Middle Eastern oil production sits on the opposite end of the IMO optimality spectrum. Output leaving the region holds an average API of just 33 despite sulfur content near 1.4%. Latin America is in a slightly better position. Despite equally high sulfur levels, produced barrels are overly heavy, holding an average API of 23, a positive for middle distillate yields.
The United States remains the biggest question mark. Volumes leaving the nation are overly light and sweet, which is great for gasoline production, less so for distillate output. Even so, any sweet barrel is preferred to one with more sulfur. With an average API of just 39 and sulfur content at 0.44%, U.S. departures are likely to share a middle ground against light-sweet WAF and medium/heavy-sour ME and LatAm grades.
Complexity is the Key
Oil production is only part of the IMO equation. Refinery infrastructure will also play an outsized role. So called “complex” refineries enjoy the ability to turn a higher percentage of a heavier-sourer barrels into valuable petroleum derivatives. “Intermediate” or “simple” refineries have less of an ability to transform the same barrel into equivalently valuable product yields. Such a process advantage is important given sour barrels are likely to sell at a growing discount to sweeter alternatives as the need to cut sulfurous product outputs grows.
The U.S. Gulf coast, debatably the most complex refining center on earth, is well placed to benefit from IMO 2020. With more than 9 mbpd in throughput capacity, the region is not only a large consumer of heavy-sour barrels, but well-equipped to re-export petroleum products. The average API/sulfur split of barrels imports into the region held at 24/2.39% resulting in high amounts of middle distillate and petcoke production, reflected in overall export totals. Departures of jet, gasoil and diesel alone held at 4,685 ktpm over the past year.
Saudi Arabia is also well placed to benefit from IMO 2020. The refinery cluster readily competes with the United States on complexity and export mix. Saudi throughput, all of which is sourced domestically, is slightly heavier than oil leaving the state (API 33, sulfur 1.97%). Behind only that of the United States, KSA petcoke departures managed an impressive 0.50 Mtpm with combined exports of diesel, gasoil and jet also managing an elevated total near 3,000 ktpm.
Jamnagar, the largest refinery in the world by throughput, is also poised to come out a winner with IMO changes. The facility, which is highly complex, has long showed an ability to import large volumes of medium – sour barrels given an API/sulfur split of 30/1.7%. Middle distillate departures have dominated, finishing at 1,871 ktpm over the past year.
A New Regulatory Environment
The approach of IMO 2020 is set to radically alter shipping markets over the next 12 – 18 months. A forced move away from HSFO will put distinct pressure on middle distillate supplies. Producers with readily available heavier and/or sweeter grades, namely those in Western Africa will enjoy a positive price spread to sourer alternatives. Complex refiners, namely those along the USGC, and within Saudi Arabia, among others, will also benefit given an inherent process advantage that allows a minimization of higher sulfur petroleum product yields.