D. DUNBAR, M. TALLETT and T.

WITMER, EnSys Energy;

and D. ST. AMAND, Navigistics Consulting

Business Trends

Anticipated market and pricing impacts

from new marine fuel regulations
At its MEPC70 meeting in October 2016, the International
Maritime Organization (IMO) announced that it will imple-
ment the 0.5% Global Sulfur Cap starting on January 1, 2020.
The new regulation is part of the MARPOL Annex VI regula-
tion (FIG. 1).
In an effort to better inform the industry of the IMO’s de-
cision, the authors delivered a rigorous analysis in mid-2016
on the likely implications of implementing the regulation in
2020.1 Decreasing the allowable percentage of sulfur in marine
fuels consumed in international (non-emissions control area, or
ECA) waters from 3.5% to 0.5% represents a profound change.
Some observers have likened the Global Sulfur Cap to the re-
cent change from 1% to 0.1% sulfur in ECAs, but the fact is that
the Global Sulfur Rule is likely to have a magnitude ten times
greater than that of the recent ECA rule, in terms of the volume
of marine fuel that must be “switched” to the new standard.
The driver behind the MARPOL Annex VI rule is to po-
tentially improve the health of millions of people, particularly
those living in coastal areas. At the IMO’s MEPC70 meeting, it
was clear that the group was keen to avoid the regulation being
pushed back until 2025. Nonetheless, this step change in global
marine sulfur limits will have major impacts on the maritime and
refining industries worldwide, as well as on the environment.
Regulatory uncertainty has limited progress toward
compliance. The MARPOL Annex VI Global Sulfur regu-
lation is unique in the uncertainties it embodies. A five-year
timing question—implement in January 2020 or delay until
2025—was settled at MEPC70.
However, compliance uncertainty remains, as shipowners
can respond by purchasing 0.5% sulfur-compliant fuel, by in-
stalling onboard scrubbers and by staying with high-sulfur fuel,
or they can switch to an alternative fuel, such as LNG. The tim-
ing and compliance uncertainties, along with a lack of incen-
tive for either shipowners or refiners to pre-invest before the
Global Sulfur Rule comes into effect, have deterred all parties
luctance is seen by companies to invest in LNG infrastructure
until a sound demand basis is set from shipowners.
The authors’ view is that LNG will continue to gain ground
as a fuel source for marine vessels over the long term, but will
have limited market penetration by 2020. Alternative fuels,
such as methanol, have also been discussed, but the potential is
small, especially in the short term.
As a result of this scenario, switching to 0.5%-sulfur fuel or
installing scrubbers are the primary options for compliance by
2020. Through a survey of Exhaust Gas Cleaning System As-
sociation (EGCSA) members, the authors found that only 346
vessels had scrubbers installed, or on order, through December
2015. Virtually all of the scrubbing systems were designated for
use in ECAs. This vessel count represents a miniscule 1.4% of
the 24,000 “candidate” ships worldwide that are economically
suitable for scrubbers; in other words, a very small degree of
progress has been made to date.
Via survey, modeling of scrubber technology takeup and al-
lowance for manufacturing and installation limits, the authors
estimate that scrubbers will be installed on, at most, 5,000 ves-
sels by 2020. These vessels will consume an estimated 48 MMt-
py (900 Mbpd) of high-sulfur heavy fuel oil (HS HFO). This
assessment is close to the 36 MMtpy projected for 2020 by one
IMO study,2 but well above the more conservative 11 MMtpy
projected by a marine analyst.3
Uncertainties surrounding the use of scrubbers on ships are
a factor affecting expected takeup. These include limited oper-
ating experience, management and disposal of acidic wash wa-
ter, and concern over whether scrubbers will be able to meet
5.0
4.5 Global cap
ECA zone cap
4.0
3.5
3.0
Sulfur, %

2.5
from investing.
2.0

Limited LNG or scrubber penetration seen by 2020. 1.5

LNG has virtually no sulfur and very low particulate and nitrous 1.0
oxide (NOx ) emissions. As such, it represents a potentially at- 0.5
tractive fuel under MARPOL Annex VI; however, it suffers from 0.0
the “chicken-or-the-egg” syndrome. Shipowners cannot justify
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

investing in vessels capable of running LNG until the promise

FIG. 1. IMO MARPOL Annex VI sulfur limits.
of LNG supply infrastructure is well established. Similarly, a re-
Hydrocarbon Processing | FEBRUARY 2017 9
 Business Trends
more stringent emissions regulations in the future, should they
be implemented. Prior to MEPC70, shipowners commonly
expressed unwillingness to invest $3 MM–$8 MM to install a
scrubber. Retrofitting is achievable, but is unlikely to be consid-
ered economic by the owner where the remaining vessel life is
short or where vessel sale is anticipated.
In addition, the shipping industry is experiencing severe fi-
nancial difficulties, based on vessel oversupply and trade uncer-
tainties, and will need to deal with a new IMO Ballast Water
Convention coming into effect in September. The net effect is
that the bulk of the burden, from what is fundamentally a ship-
ping-sector regulation, will fall on the refining sector—at least
at the immediate onset of the rule in 2020. This situation also
raises the question of whether the refining industry will be able
to meet the demands placed on it by the Global Sulfur Rule.
The switch constitutes a major market impact. If the
authors’ outlook holds true, the 2020 requirement will be to
switch roughly 200 MMtpy (3.8 MMbpd) of HS HFO to 0.5%
fuel, with a range of uncertainty of approximately +/– 10%. A
forecast for all marine fuel types in 2020 is shown in TABLE 1.
The magnitude of a 3.8-MMbpd switch volume, and the
corresponding market impacts, should not be underestimated.
While economic incentives exist to produce heavier marine
fuels to the 0.5% sulfur standard, the expectation is that these
will initially play only a small role, partly because of the need to
establish acceptability for onboard-ship operation. Testing new
fuels can be done safely (shippers generally perform onboard
fuel compatibility tests before committing to fuel use), but fuel
compatibility is a concern for shipowners. Asphaltene-like sedi-
ment can form in fuel storage tanks and clog the ship fuel deliv-
400
≤ 0.5% fuel (mostly distillate)
350 HS HFO
300
250
MMtpy
200
150
100
50
0 using two scenarios: one without the Global Sulfur Rule in
Without regulation With 0.5% sulfur regulation
FIG. 2. Global marine fuel consumption in 2020 (excluding LNG).
TABLE 1. Marine fuel consumed globally in 20201
Global fuel Global 0.5% ECA/
HS HFO with fuel switched other
scrubbers from HS HFO distillate2 LNG Total
MMtpy 48 195 88
MMbpd 0.9 3.8 1.7
Global 2020, % 12.5 55.4 25.6
1
Source: EnSys-Navigistics Supplemental Marine Fuel Availability Study.
2
ECA fuel already at 0.1%, other marine distillate either already at 0.5% (EU EEZ,
China DECAs) or will need to be reduced to 0.5%; entails only limited further
desulfurization from present levels.
10 FEBRUARY 2017 | HydrocarbonProcessing.com
ery system. According to Steve Bee, Global Business Director
at Intertek ShipCare Services, the blending of two bunker fuels
that are each perfectly within ISO 8217 specifications can lead
to incompatibility and an unusable product. The risk, however
small, of engine issues cannot be passed along in the same man-
ner as fuel costs for vessels on term charter.
Consequently, the authors see the bulk of the 0.5%-sulfur
fuel as being marine distillate, especially in early 2020 (FIG. 2).
The industry is facing a demand to convert nearly 4 MMbpd of
HS HFO supply to much lower-sulfur fuel (mainly distillate)
over a short period of time. This trend equates to a shock to the
supply system. To put this into context, it equals:
• 8 yr–9 yr of past growth in (inland) gasoil/diesel
• Five years of growth (2015–2020) in total main light
products (gasoline, jet fuel, kerosine, gasoil and diesel)
• A 45% reduction in total residual fuel demand.
Refining industry to the rescue? Hydrogen and sulfur
plant limits foreseen. Will the refining sector be able to fully
respond and meet the switch requirements on January 1, 2020?
Evidence indicates that this is unlikely.
Through a compilation of data from Hydrocarbon Processing’s
Construction Boxscore Database and other sources, the authors
believe crude distillation capacity and secondary (upgrading)
capacity to be adequate to fully respond to the Global Sulfur
Cap in 2020. The authors also project that available desulfur-
ization and hydrocracking capacity will be adequate to handle
increased feed sulfur loads, albeit with potential strain and im-
plications for catalyst life. The notable exceptions are sulfur re-
covery plant and, to a lesser degree, hydrogen (H2) plant capac-
ity; both are vital for desulfurizing refinery streams.
The authors estimate that further additions, equating to
60%–75% over and above planned 2016–2019 projects, will be
needed to meet the industry’s sulfur recovery needs; likewise,
H2 plant additions of 20%–35% of firm projects will be needed.
The authors estimate that SRU base capacity in 2016 was just
over 128,000 short tons per calendar day (st/cd). Even with
the additional 13,366 st/cd of SRU capacity that is likely to be
added between 2016 and 2019, the authors believe that an ad-
ditional 8,000 st/cd–10,000 st/cd of SRU capacity, above that
which has already been announced, will be needed to meet the
Global Sulfur Rule.
These findings are based on rigorous, integrated modeling
2020, and one with it included, at different levels of switch vol-
ume and light/heavy marine fuel mix. Full compliance with the
Global Sulfur Rule will require the removal of approximately
15,000 st/cd of additional sulfur from marine fuel products
(TABLE 2). The authors’ modeling does not place this burden
solely on additional SRU capacity. It allows for increases in
coker throughput, with rejection of sulfur into petroleum coke,
limited increases in FCC sulfur oxide (SOx ) emissions, limited
11 342 increases in throughputs on base 2020 SRU capacity (including
firm projects), and close to 10,000 st/cd of needed additional
0.4 6.8
SRU capacity.
6.5 100 In short, even allowing for flexibility within the projected
2020 refining system, the authors see a shortfall in SRU—and
also H2—capacity needed to achieve full adaptation to the
Global Sulfur Rule.
 Business Trends

An official IMO study also projected substantial SRU and
H2 plant shortages.2 These two sets of modeling analyses beg
the question of whether the refining industry is willing and able
to “fill the gap,” now that the timing is set for the Global Sulfur
Rule implementation. It would need to build significant addi-
tional SRU and H2 capacity before 2020. The authors, as well as
other industry analysts, are not optimistic that the refining in-
dustry will make the required investments to the scale needed,
for three main reasons:
1. Insufficient time. Historical refining project
completion times and discussions with experts in
this area indicate a build time of at least 2 yr–3 yr for
newbuild SRUs. The authors perceive a low likelihood
of new major SRU projects (i.e., those not already in the
advanced planning to engineering stage) entering into
service by 2020. Significant time is needed to complete
a project, from idea inception to startup, even with the
ability to deliver skid-mounted and modular units.
2. Unclear long-term economics. Economic justification
for refining projects is always a key factor. The authors
estimate that the necessary incremental SRU and
H2 capacity additions needed to fully comply with
the Global Sulfur Rule will entail an investment of
approximately $5 B. With uncertainty on how the
regulation will be met post 2020, it remains to be
seen whether sufficient new refining projects will be
announced and materialize.
2.0
1.8
1.6
1.4 Deferrals
1.2
Mbpd
Refiners have indicated concern over these projects
because of uncertain long-term justification for them.
The scenario that puts refiners in a quandary is that
a surge in distillate costs in 2020 will lead to a rush
by shipowners to install scrubbers. This will, in turn,
lead to a partial reversion to high-sulfur marine fuel
after a few years. Economic justification for a project
must usually extend significantly beyond a 2 yr–5 yr
payback window. Therefore, however profitable
2020–2024 may be for building a new SRU, the
investment may not make sense.
3. Marine fuels not strategically necessary for many
refiners. Marine fuels comprise a relatively small
percentage of total global liquids demand (an estimated
6% in 2020), and are not a significant driver of
refiner planning and investment. While maintaining
compliance with regulations for gasoline, onroad
diesel and jet fuel is a strategic necessity for nearly
all refiners; participation in the marine fuels market
is more of an option. Several oil majors are leading
suppliers of marine fuels, but other refiners do not
participate directly—hence the large and active bunker
fuels blending and supply sector.
Moreover, while major bunkering centers are
located in places such as Houston, Rotterdam, Fujairah
and Singapore, volumes sold can be more fluid than
those of fuels for inland consumption. Ships can and
do alter where they bunker, based on supply and
80
pricing. Therefore, there is not the same onus on many
70 individual refiners to be involved in the marine fuels
60 market as there is for other transportation fuels.
50
Bunching of refinery projects in 2019 represents a
$ B, 2015

1.0 40
danger. A critical determinant for the refining industry is
0.8 30 whether scheduled capacity additions between 2016 and 2019
0.6
20 will materialize in time. The drop in crude oil prices has im-
0.4
10 pacted the timing of refining investments. It has led to the defer-
0.2
0.0 0 ral of planned refinery additions, such that now a peak of ap-
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 proximately 1.7 MMbpd of new capacity is projected for 2019
(FIG. 3). This capacity includes projects that have not started
FIG. 3. Annual distillation capacity additions and total projects
investments, 2012–2021.
construction, adding a concern that any further slippage will ex-
acerbate 2020 marine fuel supply issues.

TABLE 2. Sulfur reduction/recovery mechanisms from authors’ Potential for widespread economic strain on markets,
modeling analysis1 with winners and losers. In a situation that calls for full
Amount, st/cd % of total compliance in 2020, the authors’ outlook is for severe strain on
Sulfur into petcoke (increased petroleum product markets. This outlook is based on sharp in-
4,500 30%
coking unit throughputs) creases in marine gasoil-intermediate fuel oil (MGO-IFO) price
Sulfur into increased FCC stack gas SOx 250 < 2% differentials, which translate into higher prices for inland diesel/
Sulfur recovered via increased
gasoil, jet fuel, kerosine and gasoline throughout the world be-
throughputs on existing 2020 SRUs cause of the coproduct nature of refining. Prices for HS HFO are
5,400 36% expected to drop significantly. Initial “spike” differentials could
(close to 4% utilization increase,
worldwide average) hit or exceed $500/t, $60/bbl for diesel vs. HS HFO.
Sulfur recovered from needed 2020 This points to winners and losers among refiners. Deep-con-
SRU capacity additions beyond
4,850 32%
version, high-complexity refineries (those able to process high
projects (nameplate capacity volumes of heavy, sour crude) are clear winners, especially where
approximately + 9,500 st/cd) the orientation is toward distillate yield. Conversely, less com-
Total incremental sulfur 15,000 100% plex refineries producing high HS HFO yields look to be losers,
1
Source: EnSys’ World Oil Refining Logistics and Demand (WORLD) Model with implications for possible additional refinery closures.
12 FEBRUARY 2017 | HydrocarbonProcessing.com
 Business Trends
Market will ‘clear’—but when and how are uncertain.
These predictions of tight/inadequate capacity and severe eco-
nomic strain raise the question of what will actually happen in
2020. For a start, 100% compliance with the Global Sulfur Rule
seems unlikely because of supply tightness and limitations on
what the shipping sector can afford to pay for fuel. Also, MAR-
POL Annex VI allows for waivers in the event of non-availabil-
ity of compliant fuel.
Equally, enforcement is a prospective issue, opening up the
potential for illegal non-compliance. Strained economics could
also lead the market to enter into additional adaptations and
clearing mechanisms, driven by price elasticity effects:
• Depressed prices for HS HFO could open up more
outlets, thereby boosting demand to a limited extent:
o Industrial boiler/power sector (although widespread
restrictions on sulfur apply)
o Seasonal demand for asphalt
• Increased prices for diesel/gasoil, jet fuel/kerosine and
gasoline could curb demand, but with the associated risk
of adverse economic impacts
• A strong market contango on HS HFO could instigate a
move to build HFO stocks—effectively following in the
footsteps of the crude oil inventory build of recent years
• Over the medium term, increased premiums for light
sweet crudes and higher discounts for heavy sour grades
could affect supply in regions where production is
economically sensitive; think increased production of
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light sweet oil (notably North American LTO) and
lower production of heavy sour crudes (such as
Canadian oil sands).
Takeaway. The next scheduled step in the IMO Annex VI pro-
cess was for an implementation plan to be developed at a meet-
ing of the subcommittee on Pollution, Prevention, and Response
(PPR) in late January, with submission to MEPC 71 in July 2017
for approval. This timeline is only part of what is sure to be a
long and complex process with far-reaching consequences.
Recognizing the amount of time needed for the shipping
and refining industries to adapt—and that the outcome is un-
certain, with a lot of “moving parts”—it will be essential for all
stakeholders to stay on top of developments. This will entail
tracking and evaluating the outlook from the present to 2020
and beyond, with a keen focus on progress in necessary refinery
investments, scrubber installations, fuel demand mix, formula-
tions and compatibility, market supply/demand, compliance
and price impacts worldwide.
LITERATURE CITED
1
EnSys Energy and Navigistics Consulting, “Supplemental marine fuel availability
study,” July 2016, sponsored by IPIECA, BIMCO, CONCAWE/Fuels Europe,
Canadian Fuels Association and Petroleum Association of Japan.
2
Faber, J., “Assessment of fuel oil availability—final report,” July 2016.
3
Field Upgrading, “Ship and bunker update: IMO decides on 2020 for 0.5% global
bunker sulfur cap,” October 2016.
MARTIN TALLETT is founder and President of EnSys Energy,
a consulting practice specializing in quantitative assessment
of the global downstream petroleum industry, covering refining,
logistics, trade, regulations, investment and related strategic
issues. He co-leads, with David St. Amand, the EnSys-Navigistics
Marine Fuels 2020 service. His early background was in a variety
of refining and planning positions with Exxon and Amoco.
Since 2007, he has been involved in marine fuels assessments for a range of
government, refining and shipping industry clients. He holds a BSc degree
in chemical engineering from the University of Nottingham in the UK.
DAVID ST. AMAND is President of Navigistics Consulting, a
management consultancy dedicated to the maritime and energy
fields. He has extensive expertise on marine fuel consumption,
marine fuels (including LNG and hybrid fuels) and marine fuel
markets. He has conducted global and regional studies of
marine air emissions, marine fuel efficiency, marine bunker fuel
markets and technical issues for a wide variety of public and
private clients. Mr. St. Amand began his career with a major oil company and was
technical lead on its tanker energy conservation efforts before moving into crude
oil supply. He holds a BS degree in naval architecture and marine engineering from
Webb Institute in Glen Cove, New York, and an MBA from Dartmouth’s Tuck School
of Business in Hanover, New Hampshire.
THOMAS WITMER is a consultant for EnSys Energy, where he
supports technical and business strategy throughout the
upstream and downstream. His most recent assignments
include analysis of marine fuels issues and the US Strategic
Petroleum Reserve. He holds BS degrees in industrial
engineering and finance from Lehigh University, and is an active
member of the Society of Petroleum Engineers.
DANIEL DUNBAR has been associated with EnSys since 1984.
He has more than 30 years of experience in the petroleum and
related industries, with particular expertise in petroleum
technology and economics, oil and gas production, electric
utilities and computer-based simulation. Prior to his association
with EnSys, he held supervisory and executive positions with
Getty, Chemico and Commonwealth Oil, Nuclear Power Services
Co., Gordian and ICF. Mr. Dunbar received a BS degree in chemical engineering
from Columbia University in New York, New York.
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