Publication: Tanker Operator
Date: November/December 2011


The following are highlights of OW Bunker’s latest analysis into the impact of impending low sulphur regulation on the supply and demand for bunker fuels outlined at the recent Bunker Asia Singapore conference.OW Bunker looks into its crystal ball

The following are highlights of OW Bunker’s latest analysis into the impact of impending low sulphur regulation on the supply and demand for bunker fuels outlined at the recent Bunker Asia Singapore conference.

Starting with ECA zones, OW Bunker believes that, despite attempts by various lobby groups, the 0.1% ECA regulation will go ahead as planned in Europe, US and Tokyo Bay in 2015. The current lack of take up of scrubbers and the embryonic nature of LNG, means that distillates will be the main source of compliancy mitigation.

“While we can sympathise with the position of shipowners/operators, the industry is under such environmental scrutiny from legislators, environmental interest groups and consumers, that any regulatory amendment would be seen as an unacceptable u-turn on behalf of an industry that is perceived by external forces to be unwilling to change or adapt. When this position is supported by the likes of the Danish Shipowners’ Association, the European Commission and many other environmental lobby groups, it is hard to see how the 2015 deadline can be avoided,” said Søren Christian Meyer, OW Bunker global sales director speaking at the Bunker Asia 2011 conference in Singapore.

The bunker supplier and trader noted that there were also changes occurring in refinery trends. Local, often state controlled, or owned oil companies are investing in refineries while the global oil majors are divesting, with new specialist refiners continuing to rise. For example: 

• Shell is divesting its activities downstream, selling off refineries, stores, tank stations in order to focus on its core upstream business.
• Statoil is divesting its bunkering business to focus on core businesses.
• ConocoPhillips (world’s fifth largest refiner) splits refinery from downstream business into two separate public trade companies.

It is unlikely that low sulphur MGO will become a standard product at many refineries, due to the logistical challenges of middle distillates and the fact that land- based diesel products will always be seen as more commercially attractive over marine- based ones:

• Introducing low sulphur MGO on a wider basis would require refineries to configure their set up to produce this middle distillate and also ensure that there are the appropriate storage facilities to accomplish this.
• A key issue for the refiners is that they cannot just sell ‘normal’ diesel to the marine industry. They need to validate that the diesel complies with the standards for marine fuel, which has a different flash point (60 deg C versus 55 deg C) from land-based middle distillates.

The future refinery capacity is mainly increasing in the Middle East and Asia/Pacific. OW Bunker’s analysis of total demand compared to the future capacity forecast shows that there will be enough middle distillates refinery capacity globally, but there will potentially be shortages in Europe and APAC:

• During the next 10 years (2011 – 2020) over 150 refineries have been identified as investing in building capacity. Over 50% of these are in the Middle East and APAC
• The fuel desulphurisation process involves high capital and operating costs for both the installation and the price of catalysts respectively. This will naturally have an impact on price levels as refiners look to maintain margins.
• The demand for distillates is also unpredictable and unclear, which is making it hard for refiners to justify the conversion expenditure.

“Refiners are currently unwilling to invest in highly costly desulphurisation processes to produce more distillates, due to the uncertain demand structure. And where they are upgrading refineries they are not doing it in bunker supply ports for ECAs. This means that products will need to be shipped to Northern Europe to meet the demand, which will significantly impact on prices,” Meyer said.
 

Supply and demand

OW Bunker believes that there will be enough supply for low sulphur middle distillates, which will be available on ECA zone strategic fuel ports. However, they would need to be shipped into these strategic supply locations, which would add to the overall increase in price for the product:

• World bunker fuel production is expected to increase from circa 340 mill tonnes to 410 mill tonnes between 2011 and 2020. The Middle East and Asia/Pacific regions will predominantly drive the increase. 
• Middle distillate capacity will be sufficient for the 2015 regulation, however the demand/capacity gap will reduce to a minimum by 2020.
• Due to the limited number of ECA zones, residual fuels will form the bulk of demand during this period. 
• Forecasted future sales also suggests that there will be a significant demand for heavy fuel oil post 2020, which suggests that the industry is widely anticipating a ‘grace period’ on the global 2020, 0.5% sulphur regulation, or a significant uptake in scrubbers.

Short sea shipping is driving demand for distillates, whereas the impact from deepsea is marginal.

“Based on our analysis of historical prices, the future demand for distillates and the cost of producing them, we expect the future price differential from 3.5% HFO to 0.1% MGO to be in the region of $300 to $400 per tonne,” Meyer said.

OW Bunker also said that it believed that the reduction of the global sulphur limit to 0.5% from 2020 will have a significant impact on the nature of deep sea fuel demand. Low sulphur fuel, which has a negligible demand currently, would constitute about 90% of total bunker demand among the deepsea fleet by 2020, ie 270 mill tonnes distillate/30 mill tonnes residual.


Catch 22 situation

There is a general belief in the shipping industry, that the IMO’s implementation of 0.5% sulphur limit on exhaust will be delayed to 2025. This is mainly because of limited refinery investments in increasing middle distillate production capacity by 2020, which would be insufficient to meet growing bunker middle distillate demand. As a consequence, residual fuel is assumed to remain the major constituent of the bunker fuel supply until 2020.

Most refiners are currently apprehensive about outlaying large investments for middle distillate capacity addition. This is attributed to minimal knowledge on bunker distillate demand in the future, which is provoked by uncertainty in the levels of popularity/ acceptance that LNG propulsion and scrubber technology would achieve by 2020 and the anticipated delay on the 2020 regulation.

However, if we assume that the current IMO deadlines stand, there will be a significant increase in middle distillate demand and a subsequent shortage in supply. Low sulphur fuel usage is anticipated to remain the most preferred compliance option. LNG propulsion and scrubber technology will witness limited (but increased) acceptance by 2020. As a consequence, the shipping fleet will look to ensure compatibility of machinery to different fuel grades and frequent fuel switching.

Demand for distillate bunker fuels is expected to outpace supply by 2015. The addition of multiple new ECA zones in the period 2015-20 will add to this increased demand. As low sulphur fuels are anticipated to be the most preferred compliance option in the future, demand is expected to outgrow supply of certain grades in certain regions (based on the current supply perspective and the simulated demand).

Ultra fine fuels will become particularly critical, as the sulphur emission limit drops. By 2020, the market will be extremely pressured if the forecast proves valid, which could potentially mean a shortage in supply and rising prices.
“The lack of regulatory clarity is creating significant issues and uncertainty throughout the whole supply chain. Refiners are unwilling to invest in the costly process of upgrading their operations to produce distillates, and shipowners are ambiguous over investing in ‘unproven’ scrubbing technology and an embryonic clean fuels market.

“It is important that shipowners and operators have a complete understanding of the regulations, their potential impact and the full range of solutions that could be implemented to ensure compliancy at the minimum financial and operational cost. Fuel suppliers have a 360 deg view of this situation and the knowledge to impart. It is vital that the bunker industry steps up to the mark and provides the necessary advice and insight that will help the right decisions to be made,” Meyer concluded.


Singapore position

Turning to Singapore, OW Bunker warned that the Lion City must continue to focus on driving up bunkering standards, as a means of maintaining its position as the world’s largest bunkering port. With the ensuing threat and competition from China, Singapore must position itself as a champion for professionalism to keep ahead.

Meyer said: “As well as striving to be as competitive as possible on price, Singapore must focus on building a reputation for being the world’s bunkering capital of excellence, a region known for quality and value-added services.”
Speaking on the trends, threats and opportunities of supply and demand in Singapore, Meyer continued: “While bunker prices in China are currently higher, this could well change. There is real expansion in the development of storage facilities and terminals, as well as bunker barges. And the main bunkering players have so much financial resource that they can simply drop their prices to become competitive.”

Meyer believed that the seismic transformation of the shipping industry and the impending changes to fuel supply on the back of environmental regulations, compounded by the global economic crisis, is serving to change the mindset of many within the shipping industry.

“Shipowners and operators are facing such significant issues and challenges, that they are looking for more from their fuel suppliers than just a cheap deal. While price is obviously important, they need counsel just as much as quality products. Suppliers have an opportunity to differentiate themselves, and build close relationships with their customers, working with them to implement fuel procurement strategies that increase operational performance, environmental efficiency and profitability,” Meyer said.

Meyer also stressed that Singapore must continue the strides it is making in improving standards and infrastructure to become the symbol for progression within the bunkering industry. This will help to alleviate the threat to supply and demand from China.

“The MPA has made significant investments in improving standards beyond regulation, not just in bunkering, but also in innovation and development schemes that will tackle the challenges that the shipping industry faces. Continued commitment to such initiatives and setting new benchmarks for excellence by which we should all be measured will create the foundation that will enable Singapore to retain its number one status within the global shipping industry,” he said.

A good example is the development of mass flow metering, which has been an area of focus for SPRING Singapore, and a concept that has been pioneered by OW Bunker:

“Ensuring product quantity is one of the biggest issues for shipowners and operators. OW Bunker championed the installation of mass flow meters over five years ago and we now have over a third of the vessels in our global fleet now using them, the latest being in our new physical locations in Panama, Montevideo and Gothenburg.

“Not only do they guarantee quantity, mass flow meters significantly increase efficiencies into the bunkering process, which must ultimately be one of the key drivers and incentives for improving standards,” he said.

Meyer also said that while there are more suppliers entering the Singapore market, this will lead to further consolidation among the smaller operators, who will struggle to survive in a cash-starved supply chain or to effectively compete in selling a value proposition to ship owners and operators.

“There is real pressure on cash within the supply chain, which is increasing the need to manage risk and control, in particular counter party risk. It is vital to have a sustainable and robust business model with long-term financing, which many smaller operators do not have.

“They also do not have the financial muscle to invest in infrastructure development to ensure product quality and quantity, which is so vital for customers. And finally they cannot offer an all-encompassing proposition that goes beyond product to provide strategic counsel, technical analysis, risk management, advice of managing energy efficiency and so forth.

“I fear that as the global economic pressures continue, we will enter a period of corporate Darwinism, where there will be continued consolidation among suppliers that do not have the resources, infrastructure and scale to compete and survive,” he concluded.