As the International Maritime Organization 2020 – otherwise known as IMO 2020 – draws near, most analysts expect oil prices to become more volatile.
Now, IMO 2020 will require that shipping vessels reduce sulfur emissions significantly by switching to lower sulfur fuels. Specifically, as of January 1, ships will have to stop using fuel that has more than 0.5% sulfur.
This is a huge change from the current limit of 3.5%.
The impact will initially be felt in the bunker market, the one tracking the fueling of ocean-going vessels.
But the genuine effect will be far more pervasive.
A competition at the refining level is beginning for reduced sulfur product at specific cuts in the distilling process.
The focus here is in the production of low-sulfur content distillates. This puts diesel (and the most direct route to bunker fuel) against heating fuel in competition for the same volume coming out of the same portion of refinery volume.
That means IMO 2020 is having an impact well beyond the shipping sector.
Asia’s Growing Energy Dominance
The refineries that have the largest capacity to produce the most fuel volume from the low-sulfur diesel and heating fuel cut will have the greatest flexibility in the new world of end users resulting from IMO 2020.
But there is growing concern that the new standards will usher in an intensifying competition for available space in the refining process worldwide, one that determines where the processing capacity is directed based on the higher competitive market price for the end product.
This is also centering in Asia, where the effect of IMO 2020 will be most pronounced.
As I have observed here in Oil & Energy Investor on several occasions, global energy demand in general, and the utilization of refined oil products in particular, is moving quickly to Asia. That continent will progressively dictate energy demand worldwide at least for the next two decades (and probably beyond).
But Asian cities like Singapore are also central locations for both the bunkering industry and the tradeoffs required with where refinery output is directed.
Well, there is something quite interesting afoot here.
What This Company Has to Say on this Matter
In a sign of what is to come, Linde (LIN) – a global leader in industrial gases – had a groundbreaking ceremony yesterday on Singapore’s Jurong Island. I had the opportunity to visit the site during a trip to Singapore late last year.
And what the company has in mind here will revolutionize the Asian approach to both IMO 2020 and the way lower grade crude oil is refined.
Jurong Island facility, Singapore
Source: Linde Plc
The massive $1.4 billion Linde addition to this complex will usher in a rise in hydrogen gas demand as oil refineries throughout Asia race to produce low-sulfur fuel to meet both IMO 2020 regulations and broader demand for low-sulfur refinery end products.
As Linde CEO Steve Angel put it during the ceremony yesterday: “The demand of hydrogen has grown steadily over the years at a much faster rate than GDP [Gross Domestic Product] growth. The company plans to ride hydrogen to satisfy a new crucial market need dictated by environmental concerns. And it has joined forces with ExxonMobil (XOC) to pull off that may well be a remarkable marker changer.
Linde’s facility, expected to be online in 2023, will turn Exxon’s heavy residual fuel (i.e., what we used to call residuum – that remains after all refinery cuts are completed) into hydrogen and other gases. In turn, Exxon will then use the hydrogen to take sulfur out of oil products processed at its local refinery.
The impact goes to the core of oil availability.
Sweet and Sour
Much of the lower grades available are sour crudes, so named because of the high content of sulfur. For it to be usable, the sulfur must be extracted, which is both messy and expensive.
You will always know when and where sour crude is being processed. A strong odor of what smells like rotten eggs permeates everywhere, and your eyes quickly start burning.
But back to what Angel said yesterday.
“There are going to be some projects, many of which in southeast Asia, whereby refiners will be looking to take bottom of the barrel, residue products, and put them through a gasification process to produce hydrogen which can then be used to desulfurize particulates. That’s how they are going to address IMO 2020.”
However, this will also allow refineries a way to utilize greater quantities of lower grade, sour crude available a substantial discount to market price. This allows increased profits from what is called in the trade “feedstock cost differential.” An expanding value added product line will emerge from the kind of crude available at very low prices.
The use of sour crude will demand hydrogen, and companies like Linde are already well on the way to providing it.
IMO 2020 was initially regarded as a major new cause of accelerating marine shipping costs. But it now seems that the new regulations are going to provide an improving bottom line for refineries through the use of what had been considered the least desirable crude oil out there.
This is yet another example of how a need in one component of the energy sector provides the opportunity for a rosy return prospect in another.
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