Back In The Saddle Again -- Arrived At Destination -- Tuesday, May 8, 2018

Active rigs:

$69.82↓	5/8/2018	05/08/2017	05/08/2016	05/08/2015	05/08/2014
Active Rigs	61	49	27	84	191

RBN Energy: trouble on the way as implementation of IMO's low-sulfur bunker rule looms.

Shipowners and refiners are struggling with how to prepare for January 1, 2020, when all vessels involved in international trade will be required to meet significantly stricter limits on emissions of sulfur oxides (SOx), either by using fuel with a sulfur content of less than 0.5% or by “scrubbing” the exhaust of ship engines when using the much higher-sulfur bunker fuel that most ships now rely on.

The International Maritime Organization’s (IMO) new sulfur rule isn’t a minor tweak.

It’s a game changer that already is causing widening spreads on the futures market between 3.5%-sulfur heavy fuel oil (HFO) — the traditional global bunker fuel — and rule-compliant low-sulfur distillates.

The rule also promises to be a boon to complex Gulf Coast and other refineries that can break down residual-based HFO into higher-value, lower-sulfur distillates. Today, we begin a new series on how shipowners, refiners and the markets for HFO and low-sulfur marine fuel are responding (or not) to the coming change in global bunker requirements.

Key points:

Much like necessity is the mother of invention, uncertainty is the mother of inaction. The fence-sitting that we’re seeing by shipowners and refiners is, in many ways, a direct result of the approach the IMO took in implementing its 0.5% sulfur rule. Rather than calling for shipping fleets to gradually lower their average sulfur emissions over time (say, 2.5% sulfur by 2018, 1.0% by 2020 and 0.5% by 2022 — and to do so entirely through the use of low-sulfur distillate — the IMO opted to establish only what the end would be (emissions equivalent to the use of 0.5% sulfur fuel) and a single date for the implementation, but not dictate the means by which the end would be achieved. That left shipowners and refiners staring each other down and saying, in effect, “You tell me first what you’re going to do to deal with this, then I’ll decide.” So far, neither side has really made a move.

It can take about 12 months to contract for and retrofit an existing ship with a scrubber (which requires a drydocking for hull penetrations to allow scrubber wash water to flow in and out), about 2 years to contract for and build a new, fully scrubbed ship from scratch and even longer (four or five years) to design and build a major refinery upgrade to boost distillate production.

Given those long lead times, it’s fair to say that, with the January 2020 compliance date closing in and only between 158 and 600 ships fitted with scrubbers (more on this in a moment), the vast majority of the ships affected by the IMO’s 0.5% sulfur rule will comply by switching from high-sulfur HFO to either rule-compliant 0.5% sulfur marine distillate or blends of higher-sulfur HFO and ultra-low sulfur distillate.

[As for the number of vessels with scrubbers, analysis of IMO’s Global Integrated Shipping Information System (GISIS) by Navigistics shows that there are currently 158 ships equipped with scrubbers, while the Exhaust Gas Cleaning Systems Association (EGCSA) claims there are now ~600 ships so equipped.

And then this little nugget:

The differential between ultra-low sulfur diesel and high-sulfur HFO is widening in the futures market, with the differential for January 2020 delivery at about $171/bbl versus its current (forward month – June 2018) $156/bbl.

The spread widens dramatically starting in mid-2019, about the time ship operators will need to begin planning for the switch-over of their vessel fuel systems for IMO-rule compliance. The differential continues to grow as the rule-implementation date approaches.

It’s important to point out that from June 2018 to January 2020, the futures price for West Texas Intermediate (WTI) drops from about $70/bbl to $60/bbl (14%) and the price for high-sulfur HFO falls from about $62/bbl to $43/bbl (32%), but the price for ultra-low sulfur diesel stays close to flat, inching down only 2%, from about $218/bbl to $213/bbl.

Note to diesel truck drivers: The shift to low-sulfur fuels for shipping won’t only be affecting shipowners and charterers.

Doing the math: $215/42 = $5.12. And I assume that's wholesale.