Insight from Total: Impacts of IMO global sulfur cap on in-land HFO users
The International Maritime Organisation (IMO) has driven a rapid transformation of the shipping industry with the enforcement of a 0.5 per cent cap to the sulfur content of fuel oil, a significant cut from prior 3.5 per cent.
Effective from January this year, the regulation serves as a measure to reduce sulfur oxides (SOx) and particulate matter (PM) emissions from ships.
Ship owners have three options to comply. The first is to switch to Marine Gas Oil (MGO) or Very Low Sulfur Fuel Oil (VLSFO) with sulfur content of less than 0.5 per cent.
The second requires investing in a scrubber – more formally known as an exhaust gas cleaning system (EGCS).
Vessels fitted with a scrubber may still continue to use High Sulfur Fuel Oil (HSFO) provided exhaust gas emissions do not exceed the equivalent of burning a 0.5 per cent sulfur fuel.
The third option is to use Liquefied Natural Gas (LNG), a fuel that is sulfur-free and therefore doesn’t emit sulfur oxides.
This regulation may seem to impact only the shipping industry, but looking deeper, there is a secondary impact on in-land activities, especially on Pacific Islands where HSFO is still widely used by electricity producers, in remote mining companies that have their own power generation plants or in industries that employ burners or boilers for heat production required in various manufacturing processes.
As the inland users are not limited by the sulfur cap, one may think that such companies may continue their operations as per normal using HSFO.
However, inland users should also stay alert, and here are four reasons:
Firstly, this regulation has led to a drastic change for the requirement of Heavy Fuel Oil (HFO) globally because more than 50 per cent of the global production of HFO is used as bunker fuel.
Refineries now need to adapt depending on their existing design: the low sulfur cuts from crude oil will be utilised for the production of this new 0.5 per cent VLSFO.
The former high sulfur cuts used in the manufacturing of the HSFO needs to be further refined to meet this new specification, or sent through cokers or Fluid Catalytic Cracking Units (FCCU) to produce light fractions and increase the production of diesel and gasoline.
However, many refineries are limited by their design, the demand and supply balance has been suddenly shifted.
As suppliers try to deal with a glut of high sulphur hydrocarbon cuts, prices of 3.5 per cent S HFO decline.
At the same time, the new 0.5 per cent S VLSFO has a pricing closer to diesel than HSFO.
In summary, the major pricing parameter for HFO is indexed to the sulfur content of the fuel and the mark-up on each percentage point decrease in sulfur is now higher than in the past.
Secondly, shipping freight costs are impacted. Bunkering cost for 0.5 per cent VLSFO is higher, ship owners are also investing in scrubbers or other new fuel strategies which further increases costs.
This cost impact is compounded for inland users that receive their parcels of fuel by shipments.
Thirdly is the impact on quality of the HSFO itself. Currently, the market average sulfur content for HSFO is around 2.6 per cent S which is well within the 3.5 per cent S specification (max).
This average will increase as refineries segregate cuts of fuel and remove the low sulfur fuel cuts from the high sulfur fuel cuts.
As such maintenance of large engines utilising the HSFO will be affected and may also need an engine oil assessment (higher TBN engine oils) to counter the sulfuric acid formation during combustion of HSFO.
Lastly, in relation to country in-land regulations, the global trend in passenger car and transport industry has been to drastically reduce the sulfur content of fuels.
This same trend has now been adopted by the IMO for the shipping industry. Country regulation are therefore also expected to become more stringent regarding the in-land usage of HFO.
In all, there is a rapidly changing landscape towards environmental responsibility. The stringent sulfur content limits on marine fuel may be a catalyst causing industries to move towards a greener world, and there is a push for inland users to be prepared.
The future is bright for 0.5 per cent VLSFO and cleaner alternative fuels.
For further information, please contact your nearest Total affiliate or visit http://www.miningsolutions.total.com/.
To learn more about Total’s strategy for IMO 2020, download our white paper here.