We expect IMO to hold its course on the 2020 sulphur regulation date line of January 2020. In the financial market the fuel price spreads for 2020 and beyond have widened out thus sending pricing signals to both the shipping industry as well as the refinery industry to take action. And action is being taken. There is currently rapid adaption and uptake of scrubbers, especially among larger ships while refineries around the world are scrambling to prepare for the event. This gives good reason for the IMO to feel confident that their sulphur regulation is moving in the right direction.
Much will happen in the year to come. The 2020 non-scrubber compliant MFO 0.5% fuel will physically and financially emerge in the market in the first half of 2019. Spot prices for the fuel are likely going to be fairly modest at first given the very low consumption of the fuel in early 2019. Forward MFO 0.5% prices for 2020 and 2021 delivery are however likely to be much more expensive versus HFO 3.5% once forward prices for MFO 0.5% starts to emerge.
The real impact on HFO 3.5%, MFO 0.5% and Gasoil 0.1% prices will in our view really emerge and materialize in the second half of 2019 as shipping increasingly shifts away from HFO 3.5% and over to MFO 0.5%. That is also when we expect the forward product price spreads increasingly to widen out further.
On the basis of this report we expect that much of the concerns for the quality and instability of the upcoming MFO 0.5% product will gradually dissipate during 2019 as more and more users are able to test it and it becomes clear that MFO 0.5% is not at all necessarily a Gasoil based product but instead to a much larger degree a fuel oil based product. Comingling of MFO 0.5% between different suppliers is likely going to be a problem in the same magnitude as it already is a problem for HFO 3.5% fuel today.
The IMO 2020 sulphur event will play out very differently for different shipping segments. First and foremost it is the speed of scrubber installation within the different segments which will decide this. In segments with predominantly large and few ships the penetration is likely to be swift while in segments with many smaller ships the
penetration of scrubbers will likely take a long time. This will have a large impact with respect to whether a scrubber installation generates profits or just savings.
In the two graphs below we have depicted the development of two different shipping segments. The two graphs below are basically a combination of the two graphs on the left hand side. In the first we assume a segment with rather few and large ships where the penetration is rather rapid and where the competitive advantage disappears rather quickly. The disadvantage of not having a scrubber though also emerges rather quickly.
In the second graph we assume a large shipping segment with many smaller ships where scrubber penetration takes much longer time. Here the competitive advantage is more lasting but it also takes longer for the disadvantage for non-scrubber ships to emerge. I.e.
as long as you have a non-scrubber ship in a predominantly non-scrubber segment your competitive position is not so bad even though profits are lower than for scrubbers ships.
Rapid scrubber penetration. Few, large ships. 50 ton/day Slow scrubber penetration. Many smaller ships. 20 ton/day.
Source: SEB Source: SEB
SEB projection of the MFO 0.5%
premium over HFO 3.5% in USD/ton
Source: SEB
Assumed S-curve shaped dynamics of the competitive advantage of having a scrubber versus scrubber penetration as well as the disadvantage of not having a scrubber
Source: SEB
The two graphs below are basically a crossing of the two graphs above but with different assumptions about speed of scrubber penetration and fuel consumption per ship per day.
Abbreviations
Refinery cut: A barrel of crude is a huge soup of different molecules. A refinery splits the barrel into its constituent parts by “cutting the barrel” according to different chosen temperature intervals within which different segments of the molecules condense. This is typically done in the distillation tower.
Atmospheric Residue (AR): This is the part of the crude oil barrel which typically condenses into a liquid at 380 DC or higher temperatures. These molecules are long and also heavy literally speaking. Much of the sulphur contained in the crude oil ends up in this product.
ARS%: The sulphur concentration in the AR refinery cut
Vacuum Residue (VR): The Atmospheric Residue (AR) can be split further by reducing the pressure to vacuum before again heating up the AR. This will extract so called Vacuum Gasoil (VGO) from the AR. The AR is thus split so that AR = VR + VGO. The VGO is in general a semi-high value intermediate product used as a feedstock to FCC and Hydrocracker units in which the VGO is converted to a larger or lesser degree to middle distillates or gasoline. The Vacuum Residue molecules and “cut” have a typical condensing temperature of 560 DC or higher.
Vacuum Gasoil (VGO): A fairly valuable part of the AR cut used to produce middle distillates and gasoline
VRS%: The sulphur concentration in the Vacuum Residue cut
Straight Run Fuel Oil 0.5% (SRFO 0.5%): In general this is by definition understood to be unmodified Atmospheric Residue with a sulphur concentration of 0.5% or lower. This is in general considered to be a fairly valuable semi-finished product since it contains a lot of valuable low sulphur VGO.
HFO 3.5%: High sulphur Fuel Oil with maximum 3.5% sulphur content. This is the legal and dominant marine fuel in the global shipping market today. On average it actually only contains some 2.5% sulphur. This is a reflection of the average sulphur content in the refinery residue which is used to produce some 3.5 m bl/d of HFO 3.5% today.
HSFO 3.5%: Just another notation for HFO 3.5%
MFO 0.5%: Marine Fuel Oil with maximum 0.5% sulphur. This is the name increasingly in use for the IMO 2020 compliant marine fuel to be used instead of today’s HFO 3.5%. The naming indicates that the product is a “fuel oil” based fuel. I.e. that it is based on the heavier parts of the crude oil barrel distilled out as atmospheric residue or vacuum residue.
IFO 380: Intermediate Fuel Oil with maximum viscosity of 380 Centistokes (50 DC). This is typically the same as HFO 3.5%.
IFO 380 0.5%S: This is IFO 380 with only 0.5% sulphur concentration and can as such be viewed on parity as upcoming MFO 0.5% product.
Gasoil 0.1%: Typically used as a notation for Marine Gasoil 0.1% or MGO 0.1%. This is typically a middle distillate based oil product which is significantly lighter and a more diesel like oil product than the fuel oil based products used in global shipping today Fluid Catalytic Cracker (FCC): Refinery unit where VGO largely is converted to Gasoline Hydrocracker: Refinery unit where VGO largely is converted to diesel and jet fuel Cracks or “Refinery cracks”: Is an expression for the margin a refinery gets for converting a barrel of crude oil to products. It is the value of the resulting products minus the cost of the crude oil used as feedstock. Normally it is expressed as USD/bl crude but can also be expressed in USD/ton. It can also be specified for the individual products which the refinery churns out. For example the “Gasoil crack” or the “Fuel oil crack” etc.
ISO 8217: The international ISO standard for marine fuel also covering the quality specification to which the upcoming MFO 0.5% product must hold.
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