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Macro & FICC Research
IMO2020 Report
March 2018
New 2020 sulphur regulations for global shipping
Crude and product markets to be shaken by the new maritime sulphur
regulations in 2020
IMO’s 2020 sulphur deadline a done deal
It is now impossible for the IMO to push the 2020 global 0.5% sulphur limit to a later date
without breaking its own rules. From January 2020 it will be illegal to run a ship using fuel
containing more than 0.5% sulphur without operating an exhaust cleaning gas system.
Fewer than 2000 ships will have a scrubber in 2020
Currently, some 18,000 bulk carriers, crude oil carriers and container ships account for 76% of
the world’s DWT capacity. Together, they likely consume close to 4 m bl/d HSFO. By 2020, we
expect less than 2000 ships to possess a scrubber. We therefore expect that present HSFO Bjarne Schieldrop
demand will fall sharply from 4 m bl/d to as little as 0.3 – 0.4 m bl/d. Demand will instead switch Chief analyst commodities
to higher quality oil products such as ultra-low sulphur fuel oil (ULSFO 0.5%) or Gasoil. (47) 9248 9230
Bjarne.schieldrop@seb.no
Gasoil to HSFO spread likely to widen to over $450/ton
As demand for HSFO almost evaporates in 2020 and instead shifts to ULSFO 0.5% or Gasoil, we
forecast global refinery upgrading capacity utilization will be stretched to its maximum. We
therefore expect the Gasoil to HSFO 2020 price spread to widen to more than $450/bl.
Historical Gasoil 0.1% to HSFO 3.5% product price spread - USD/ton
Source: SEB, BloombergMacro research : IMO2020 Report Wednesday 21 March 2018 2
Contents
New 2020 sulphur regulations for global shipping ............................... 1
Executive summary ................................................................................... 3
The IMO 2020 Sulphur deadline is a done deal. ............................................... 3
Likely less than 2000 ships with scrubbers in 2020. ..................................... 3
2020 HSFO to Gasoil spread to rise above $450/ton .................................... 3
Paper scrubber, competitive hedge or plain bet .............................................. 3
Foreword ..................................................................................................... 4
Meeting with clients in Europe, Singapore and Hong Kong ........................... 4
Background ................................................................................................. 5
The graveyard of dirty oil........................................................................................ 5
IMO ending high sulphur emissions from global freight ................................. 5
Scrubbers? No thank you! We want fuel compliance! .......................... 6
Competitive concerns - What do others do? ........................................... 6
Risk-reward deemed far from good enough ..................................................... 6
IMO – will they or won’t they? .................................................................. 7
The IMO’s sulphur regulation is very different from the BWT regulation . 7
Focus shifts from IF to HOW ................................................................................... 7
IMO wants change, not havoc and disruption ................................................... 7
Who should pay? Shipowners, refineries or charterers? ...................... 8
Who should pay? Shipowners, refineries or charterers? ............................... 8
Catch 22 ....................................................................................................................... 8
Investing in a scrubber .............................................................................. 9
The need for switching fuel .................................................................... 10
3.2 m bl/d of out of today’s 4 m bl/d of HSFO to disappear to 2020 ...... 10
What can refineries do to 2020? ............................................................ 12
Surplus of bitumen, asphalt and sulphur .............................................. 13
Historical prices & spreads for HSFO 3.5%, Gasoil 0.1% and Brent . 13
Historical prices and spreads for ULSFO 0.5% and Gasoil 0.1% ....... 17
The HSFO to Gasoil Coker link ................................................................ 19
Compliant fuel to be Gasoil 0.1%, or ULSFO 0.5%?............................. 22
Recent price developments .................................................................... 23
Down the scrubber route unless they are forbidden .......................... 24
Summing up............................................................................................... 27
The road ahead ......................................................................................... 28Macro research : IMO2020 Report Wednesday 21 March 2018 3
Executive summary
The IMO 2020 Sulphur deadline is a done deal.
The IMO 2020 deadline is a done deal. Legally it is now impossible for the IMO to change its decision before January 2020. Nor,
It may be softened peripherally by since its decision in October 2016, have there been any requests from IMO member
transitional measures but strong price states for any alteration.
signals are needed and wanted by the
Strong price signals in the form of a wider ULSFO 0.5% to HSFO or Gasoil product price
IMO to facilitate change.
spread are needed to drive the desired shift to lower sulphur emissions. The IMO will
likely favour a wider spread and support such an outcome. They will however also
probably ease the impact of worst possible scenarios, by softening transitional measures
to avoid unnecessary transitional havoc and disruption.
Likely less than 2000 ships with scrubbers in 2020.
Global shipowners do not want to We expect that fewer than 2000 ships will have a scrubber in 2020. Consequently,
install scrubbers. They wish to be fuel demand for HSFO will decrease dramatically in 2020, likely to less than 0.8 m bl/d and
compliant. Demand for HSFO is likely probably as low as 0.3 – 0.4 m bl/d, representing barely 10% of today’s marine HSFO
to drop from 4 m bl/d to as little as 0.3 consumption of 4 m bl/d. Demand will instead switch to compliant fuel with less than
– 0.4 m bl/d in 2020 0.5% sulphur content, i.e. either ULSFO 0.5% or Gasoil 0.5%.
This will push the global refining system’s upgrading capacity to the limit as 3-3.7 m bl/d
of HSFO suddenly need to be upgraded to ULSFO/Gasoil. Ripple effects of this
development will likely be felt across the whole oil product sector and further impact
pricing of different crude slates. There is a real risk of a repetition of events in 2008
when strong Gasoil demand and limited and fully utilized refinery upgrading capacity led
to an upward spiralling price dynamic between higher and higher Gasoil prices and
higher and higher light sweet crude oil prices. HSFO was then also priced at a deep
discount to crude.
2020 HSFO to Gasoil spread to rise above $450/ton
We expect global refinery upgrading The 2020 HSFO to Gasoil price spread traded at only $220/ton on a forward basis in the
capacity utilization to be pushed to its early autumn of 2017. Since then it has blown out to as much as $350/bl at the start of
limit in 2020 and that the Gasoil to 2018 while currently trading at $320/ton. The spread is typically and historically
HSFO price spread will in response proportional to the Brent crude oil price. It averaged $308/ton between 2011 and 2014
widen to more than $450/ton when Brent crude averaged $108/bl, and $447/ton in 2008 when Brent crude averaged
$98/bl.
Compared to the current forward 2020 Brent crude oil price of $57/bl, the 2020 HSFO
to Gasoil price spread is today trading expensively certainly from an historical
perspective, but is still more then $100/ton below an historical spread extreme of
$420/ton observed at a crude oil price of around $57/bl. In 2008 the spot spread blew
out to an extreme of $700/bl for a short period.
We expect worldwide refinery upgrading capacity utilization to be pushed to its limit in
2020 causing the Gasoil to HSFO price spread to widen to over $450/ton.
Paper scrubber, competitive hedge or plain bet
Our main view is that the HSFO to Gasoil price spread is likely to blow out to more than
$450/ton. Buying the forward 2020 Gasoil to HSFO product spread can be utilized as a
virtual scrubber for shipping fleets without scrubbers. This will provide such shipowners
with an extra source of income proportional to the incremental income advantage (due
to a higher spread) for scrubber ships and as such offer a competitive hedge for non-
scrubber ships compared to scrubber ships. A long Gasoil vs. short HSFO position for
2020 delivery may also be taken as a plain bet for a wider spread under the new
regulatory regime.Macro research : IMO2020 Report Wednesday 21 March 2018 4
Foreword
This report reflects our involvement in the IMO 2020 sulphur emission
issue following meetings with more than 100 shipping clients and
refineries over the past 12 months.
It summarises what we have learned over the past year and our views and reflections on
the situation. It is not an in-depth technical study trying to pin-point global refinery
capacities vs. product needs in 2020.
A little more than a year ago the IMO decided that from January 2020 it will not be
allowed to run ships globally with HSFO fuel unless an exhaust scrubber has been
installed. Otherwise, a ship will have to use a fuel with maximum 0.5% sulphur content.
Today’s HSFO typically has a 3.5% standard product specification. The actual volume
weighted sulphur content in the 4 m bl/d HSFO consumed for marine propulsion today
does however contain closer to 2.5% sulphur on average.
Two detailed studies have been made concerning the projected balance between marine
fuel demand in 2020 under the new rules vs. global refinery product capacities.
The IMO’s Delft study concluded that there would be sufficient compliant fuel available
in 2020 to satisfy the new regulations. As a result, they decided in October 2016 that
the new regulations would take effect in January 2020. The Ensys Energy study
however came to a completely opposite conclusion. It determined that the world’s
refinery system would be put under extreme stress to such an extent that it would send
shock waves through all product markets as well as crude oil prices and grades.
Meeting with clients in Europe, Singapore and Hong Kong
To understand more clearly how the IMO’s decision will impact fuel markets and the
shipping industry in 2020, we decided to meet with market participants to hear what
they thought and were planning to do. Over the past year, we have travelled throughout
both northern and southern Europe, to Singapore and Hong Kong, to meet more than 100
shipping companies, refineries and technical experts, to learn how shipowners,
charterers and the refining industry are preparing for the IMO 2020 deadline.
This report summarises what we have learned over the past year and our present
reflections and conclusions.
We are grateful to all those clients who have taken time to meet with us, who have
helped us understand the issues at stake. Our increasing expertise enabled us to
contribute more to these discussions as we progressed.Macro research : IMO2020 Report Wednesday 21 March 2018 5
Background
The graveyard of dirty oil
The global shipping fleet has been running on heavy fuel oil with high sulphur content
since the early 1970’s. Today this fuel is typically labelled HSFO or HSFO 3.5% (3.5%
sulphur). It is the bottom of the oil barrel, the residue of simple refining. It is the dirtiest
and heaviest product produced by refineries worldwide. Basically, it is a waste product
with little use outside the shipping market except (and less and less in recent years) in
power production. For this reason, the world’s shipping fleet has been dubbed “the
graveyard of dirty oil”.
Generally, it is the old oil refineries in Europe, Africa and Latin America who produce
HSFO. These are simple refineries with mostly straight through processing. Therefore,
crude oil used is basically just split into its different hydrocarbon components through
simple distillation and/or vacuum distillation. There is very little modification or after-
treatment of the molecules in the crude oil used. Conversely, the world’s most modern
refineries today are highly complex, using many after treatment stages that modify
molecules at high temperatures and pressure. Consequently, they produce very little
heavy residuum [“residue”]. Instead, long, heavy molecules are cracked apart and
converted to much more valuable middle distillate products.
For the world’s old refineries, the residuum [“residue”?] (the heaviest products from
simple refining) is basically a waste product which is sold at a discount to Brent crude
and consumed by the global shipping fleet. This symbiosis, which has lasted since the
early 1970’s, is now set to change or end. Unless the global shipping fleet installs
scrubbers, they will no longer be able to handle waste products from old refineries after
January 2020, at least not in its current form.
New refineries are in general built with after treatment modules so that they hardly
produce any heavy residue. It is mostly all cracked away and instead converted to higher
value middle distillate products. Thus as today’s old refineries
IMO ending high sulphur emissions from global freight
In October 2016, the IMO decided that from January 1, 2020 ships will be forbidden to
use fuel with more than 0.5% sulphur worldwide unless they are equipped with a
scrubber that cleans out the sulphur in the exhaust. However, the IMO did not announce
any other fuel guidelines, so generally fuel can be very dirty and of low quality provided
it contains no more than 0.5% sulphur.
The decision was long overdue and had been in the pipeline for since 2005. The end of
HSFO (without scrubber) in global shipping had been decided a long time ago. As of
October 2016, the only thing left to decide was whether the deadline would be January
2020 or 2025. It was all down to the fuel availability study, the Delft study which the
IMO had ordered and had received in the autumn of 2016. This study concluded that to
the best knowledge of various experts there would be sufficient fuel in required qualities
to implement the new regulations from January 2020. So, armed with the Delft report,
the IMO finally decided that the new regulations would be enforced from January 2020.
The Delft study has however been strongly contested by many who argue that the
transition will not be easy at all. A comparable in-depth report prepared by Ensys Energy
concludes in total opposition to the Delft study that an abrupt and complete switchover
from one day to the next will place the global refining industry under extreme duress
with consequences rippling throughout both oil products and crude markets. Further that
it will result in a large expansion in the Gasoil to HSFO product price spread as well as in
the price spread between high quality crude slates versus lower quality crude slates.
The Ensys study is not the only study or report arguing that this will be problematic.
Indeed, most reports we have studied agree with its authors to a greater or lesser
extent. We also concur much more with the Ensys study than its Delft counterpart. As
such, we expect a large and significant impact on global fuel and crude markets in 2020.Macro research : IMO2020 Report Wednesday 21 March 2018 6
Scrubbers? No thank you! We want
fuel compliance!
One thing which became very clear to us as we travelled around the world was that
hardly any shipowners we met really wanted or planned to install scrubbers on their
ships. The list of “why nots” was almost endless. The almost unanimous response was:
“We want to be fuel compliant. We don’t want to install scrubbers on our ships”.
Shipowners do not want scrubbers. The idea of installing scrubbers on board every ship in the world very clearly did not
They want to be fuel compliant. come from the shipowners. They for sure don’t want scrubbers. They want to be fuel
compliant.
Their greatest concern is sunk cost The key reason for this view is that generally it is the charterer who indirectly pays for
capex on scrubbers which limits their the fuel as a pass through cost. It is much easier to pass on the specific fuel cost to
ability to pass on such expenses to charterers than to demand compensation for capex spending on scrubbers. For
charterers. shipowners a scrubber means capital expenditure, less free space on a ship, more
maintenance, greater crew competence, higher fuel consumption and uncertain sludge
Following several tough trading years,
disposal costs. It also means new legal obligations for exhaust pipe sulphur emissions. If
many shipowners have little cash to
shipowners run fuel compliant vessels without a scrubber, the fuel supplier is legally
spend on scrubbers.
obliged to ensure proper fuel quality and sulphur content. If a ship on the other hand runs
with a scrubber it is instead the shipowner who is legally responsible for the sulphur
content in the exhaust gases and thus that the scrubber works properly the ship-owner
may be fined.
In other words, almost unanimously shipowners do not wish to use scrubbers.
Competitive concerns - What do
others do?
No one needs to act so long as no one Also clear from our many meetings was that most shipowners were not very concerned
acts. A level playing field remains about higher fuel costs during the 2020 transition. What they really bothered about was
intact as most shipowners do not what other shipowners were doing. Fuel cost is mostly passed on to charterers, so long
install scrubbers. Charterers will bear as everyone else is doing the same thing within the shipowner community they will all be
most of the fuel costs. in the same boat - so to speak. Internal competition within the shipping market will be on
a level playing field with everyone just as well or badly off. What shipowners were and
Shipowners look at each other. What
still are concerned about is that a significant share of the global fleet is embarking on
matters is what other shipowners do.
installing scrubbers, placing others at a considerable competitive disadvantage.
Whether fuel costs are high or low is
less important. Risk-reward deemed far from good enough
Generally, shipowners we met thought the risk-reward for installing a scrubber was well
short of justifying capex on them. Such devices are still regarded as technically
immature, still at the test stage. Shipowners expect scrubber costs will continue to
decrease over time. They were not confident about the firmness of IMO’s 2020 deadline.
They feared that they would not be able to pass the capex over to the charterers, that
the Gasoil to HSFO price spread would not be wide enough to make the scrubber
installation profitable, that it could become very expensive to dispose of sludge from the
scrubber and that new environmental regulations governing CO2, PM and NOx in a few
years would mean that a scrubber installation today would be useless in a few years. All
in all that it was better to wait and see has been and probably still is the general view
within shipping.Macro research : IMO2020 Report Wednesday 21 March 2018 7
IMO – will they or won’t they?
IMO’s 2020 sulphur regulation A year ago, there was huge uncertainty whether the 2020 deadline would be pushed
deadline appears immoveable unless forward or not. The shipping industry’s experience with the ballast water treatment
someone can prove that the market system regulations made it easy to assume that there would be endless delays, and that
will run into insufficient fuel sulphur regulation deadlines would also be repeatedly postponed. At that stage most
availability in 2020. companies we met felt uncertain about the 2020 deadline. Clearly, this view changed in
the summer of 2017. Going forward, the discussion switched from “if” to “how”.
A key factor for the IMO concerning the 2020 deadline decision involved the fuel
availability study. How the 2020 deadline would impact costs and fuel prices per se was
not at the heart of what was decided. Instead, the most important question was whether
physically there would be sufficient fuel available to enable the global shipping fleet to
operate from 2020. If it was to run solely on expensive Gasoil then that was probably
fine in the eyes of the IMO provided there was physically enough Gasoil for the fleet to
run on. So, if it was shown there would not be physically enough compliant fuels in 2020
on which to run the global shipping fleet then the IMO might possibly have shifted the
deadline to 2025. This is however very difficult to prove and as such the 2020 deadline
is today fixed.
Legally, it would take a minimum of By IMO’s own laws there is no longer any way that the January 2020 deadline can be
22 months to change the 2020 pushed back in time. To change that date will require an amendment to the MARPOL
deadline. It is therefore too late to Annex VI treaty. First, this would involve a proposal for such an amendment. Next, the
alter the deadline now consistent with proposal would have to circulate for six months before adoption. Afterwards, it could not
IMO rules. So far, the IMO has not yet come into force before at the earliest 16 months after adoption, i.e. the amendment
received proposals from any of its could not take effect until 22 months had passed. No such proposal by the IMO’s
members to change the deadline. members has been received since the 2020 deadline decision was announced in October
2016.
The IMO’s sulphur regulation is very different from the BWT
regulation
A key difference between the IMO’s sulphur regulation and the ballast water treatment
system regulations is that the sulphur regulations do not require any capex installations
onboard a ship. The IMO does not state that a scrubber is needed but that it can be used
if desired; otherwise compliant fuel should be utilized. The explicit need to install capex
on ships to comply with the ballast water treatment regulations was one of several key
reasons for extensions. Unless lack of fuel availability can be proved such excuses are
hard to use in the case of sulphur regulations. As far as we can see, the 2020 sulphur
regulation deadline is near rock solid absent “proof of lack of fuel availability”.
Focus shifts from IF to HOW
As the market began to accept fully the 2020 sulphur deadline, its focus shifted from IF
to HOW. How is it going to play out? What will happen to fuel prices? What can refineries
do and at what price? Will compliant ULSFO 0.5% be of acceptable quality and quantity
and will it be available worldwide? Will it be possible to buy HSFO globally for those few
ships that are running with scrubbers? Will there be a lot of cheating? How will the
regulations be monitored and how will they be enforced? Will there be waiver options
unless there are no available fuels to be bought etc. Many such questions remain
unanswered today.
IMO wants change, not havoc and disruption
Effecting change It is important to remember that the IMO’s decision is a regulatory decision on emissions.
The IMO wants change. It wants it so strongly that it may be willing to accept some
1) IMO’s 2020 deadline decision
disruption to get there. It has of course no desire for disruption if it can avoid it. As such
2) Forward 2020 pricing reaction
there is always the risk that the IMO looks kindly at softening measures which help to
3) Spot price reaction in 2020
avoid disruptions so long as they do not prevent changes. This could come in the form of
4) Capex spending
different exceptions and waivers for 2020 if fuel is not available. The process of driving
Shipping/Refineries
change is sequenced as follows: 1) IMO’s 2020 decision, 2) Forward based price
Strong product price signals in terms reaction 3) Fuel spot price reaction once we get to 2020 and lastly 4) Market participant
of a wide Gasoil to HSFO product reaction in terms of capex spending on either scrubbers or refinery upgrades. Neither
spread needed in order for capex shipping nor refineries are willing to make necessary investments before the market
spending to be undertaken sends the sufficient price signals. Today, these are beginning to emerge on a forward
basis.Macro research : IMO2020 Report Wednesday 21 March 2018 8
Who should pay? Shipowners,
refineries or charterers?
Who should pay? Shipowners, refineries or charterers?
If the market solution is a refinery and It has been clear for several years that eventually the day would come when HSFO could
fuel compliant solution, then no longer be used without restriction in global seaborne transportation. Transport by sea
charterers will be handed the bill for will certainly become more expensive under the new regulations. The big question is -
higher costs for the new regulations who should pay for it? Shipowners, refineries or charterers? Clearly, in the long term,
directly or indirectly through increased shipowners will always have to pay higher environmental regulatory costs.
fuel prices passed on to them.
If the market solution for the global shipping market under the new regulations is fuel
compliance, then charterers will almost directly and immediately pay for the new
regulations through higher fuel costs which normally are directly passed on to them. The
higher fuel costs for ULSFO or Gasoil will in time become a payment to the refineries for
key investments they need to convert HSFO into compliant fuels.
If scrubbers are the market solution If the future solution mainly involves the use of scrubbers, then the world’s shipowners
then shipowners are unlikely to be will need to pay for the scrubbers and both their maintenance and operating
able to recover all of their scrubber expenditure. In a retrofitting of today’s shipping fleet, it is unlikely shipowners would be
capex. Over the longer term however able to recover all capex on scrubbers. Over time however it is clear that charterers will
the charterers will of course have to implicitly have to accept a freight rate high enough to pay for the building of new ships
pay sufficiently high freight rates to including a scrubber. Otherwise, new ships will not be built, at least not sensible,
incentivise the building of new ships economically viable vessels.
equipped with a scrubber.
There are however significant skews in the two solutions. It takes many years for a
refinery to upgrade their physical equipment by adding cokers or hydro-crackers.
Generally, it only takes a couple of weeks to retrofit a ship with a scrubber. Therefore, if
the market sends positive investment signals to both refineries and shipowners, the
latter have the capacity to react very quickly. Therefore, we think both action and
reaction may be taken by shipowners rather than by refineries.
Catch 22
Shipowners and refineries both fear When the IMO opened up to allowing both fuel compliance and scrubbers it created a
that the other part will invest so to stale-mate situation. The refinery sector is unlikely to undertake multi-billion-dollar
render their own possible investment investment decisions if it turns out that shipowners will end up installing scrubbers
unprofitable. across the fleet and therefore consume all HSFO anyhow. Then, there would be no need
for refineries to invest heavily to upgrade units. Amongst a myriad of issues, shipowners
are reluctant to install scrubbers because there is a chance that the refinery sector may
be able to produce a compliant ULSFO 0.5% product at only a small mark-up to the HSFO
price making it unprofitable to install a scrubber. Consequently, both shipowners and
refineries are afraid that the other party will render their investments unprofitable and
are therefore reluctant to undertake necessary investments for the upcoming transition.Macro research : IMO2020 Report Wednesday 21 March 2018 9
Investing in a scrubber
The economics of a scrubber investment are straightforward: we assume an investment
of USD 3.5m for the scrubber and 200 days of sea time per year.
Payback in years for scrubber investment at various price spreads
Type - Handysize VLCC VLCC Container Container Container
Tonnes 25 50 75 100 200 300
Fuel spreads
Probable long term average with ref 25 28.0 14.0 9.3 7.0 3.5 2.3
Brent $50-80/bl 50 14.0 7.0 4.7 3.5 1.8 1.2
Synthetic ULSFO to HSFO 75 9.3 4.7 3.1 2.3 1.2 0.8
Historical average (ref Brent $50- 100 7.0 3.5 2.3 1.8 0.9 0.6
80/bl) 125 5.6 2.8 1.9 1.4 0.7 0.5
Synthetic ULSFO to HSFO 150 4.7 2.3 1.6 1.2 0.6 0.4
175 4.0 2.0 1.3 1.0 0.5 0.3
200 3.5 1.8 1.2 0.9 0.4 0.3
2020 Synthetic ULSFO to HSFO 225 3.1 1.6 1.0 0.8 0.4 0.3
250 2.8 1.4 0.9 0.7 0.4 0.2
275 2.5 1.3 0.8 0.6 0.3 0.2
2020 Gasoil to HSFO spread 300 2.3 1.2 0.8 0.6 0.3 0.2
325 2.2 1.1 0.7 0.5 0.3 0.2
350 2.0 1.0 0.7 0.5 0.3 0.2
375 1.9 0.9 0.6 0.5 0.2 0.2
400 1.8 0.9 0.6 0.4 0.2 0.1
SEB 2020 forecast
425 1.6 0.8 0.5 0.4 0.2 0.1
2020 Gasoil to HSFO spread 450 1.6 0.8 0.5 0.4 0.2 0.1
The 2008 intra year high
Gasoil to HSFO spread 700 1.0 0.6 0.4 0.4 0.2 0.1
Source: SEB
Our assumptions are probably unrealistically simple as the scrubber investment cost
probably scales with the size of the ship with fuel consumption ranging from 25-300
tonnes per day.
There are in addition a lot of other uncertain costs associated with a scrubber installation
like: higher fuel consumption, sludge disposal costs, more maintenance, loss of space,…
Installing scrubbers on the world’s shipping fleet. Many ships are not suited for a
scrubber. The sum of crude tankers, Bulkers and Container ships is close to 18,000 and
accounts for 76% of the world’s DWT. So installing scrubbers on these 18,000 ships
would cover much of today’s consumption of HSFO. Possible feasible scrubber
installations could however amount to close to 40,000 ships
World Shipping Fleet
Category Number mDWT Average DWT Estimated need Number of ships
of ships per ship for scrubber suited for scrubber
Crude tankers 2,017 387.6 192167 100% 2,017
Product tankers 8,403 173.5 20647 70% 5,882
Chemical tankers 3,686 43.7 11856 50% 1,843
Other tankers 405 0.9 2222 100% 405
Bulkers 11,113 817.2 73535 70% 7,779
Combos 12 1.4 116667 100% 12
LPG carriers 1,452 24.3 16736 70% 1,016
LNG carriers 504 40 79365 0% 0
Containerships 5,164 252.8 48954 80% 4,131
Multi-purpose 3,183 29.3 9205 30% 955
General cargo 15,068 37.5 2489 30% 4,520
Ro-Ro 1,662 7.7 4633 100% 1,662
Car carriers 782 12.4 15857 100% 782
Reefers 1,458 4.8 3292 100% 1,458Macro research : IMO2020 Report Wednesday 21 March 2018 10
Category Number mDWT Average DWT Estimated need Number of ships
of ships per ship for scrubber suited for scrubber
Offshore AHTS 4,680 9.6 2051 30% 1,404
World cargo fleet 59,589 1842.7 30923
Others 34,582 82 2371 15% 5,187
World Fleet 94,171 1,925 20,438 41% 39,054
Source: Clarksons
The need for switching fuel
Global demand for HSFO in 2012 was estimated at 228 m ton/year. Since then the global
shipping fleet has grown significantly. However, it has also moved into slow steaming
mode meaning ships consume 20% less fuel than when they were fast steaming.
Data on current global shipping fleet consumption of HSFO is hard to come by. This
makes it very difficult to project total demand for marine fuels in 2020. Consequently,
there is a very wide spread in projections for total marine fuel consumption and
composition in 2020. Our best guestimate is that current marine consumption of HSFO
largely the same as in 2012 since the increased fleet size is countered by its slow
steaming.
Demand for HSFO in 2020 will We believe few ships will run with scrubbers on January 1, 2020. The base case in the
collapse to as low as 0.3 m bl/d vs. IMO’s Delft Energy study was that by 2020 there would be 3,800 ships with scrubbers,
today’s estimated demand of 4.0 m and that these would consume 36 m tons of HSFO per year or 0.62 m bl/d. We expect
bl/d. Average forecasts project 2020 there will be less than half that number, i.e. below 2,000 ships out of a global shipping
HSFO demand of 0.8 m bl/d. Demand fleet of 94,000 ships. As such it looks more like demand for HSFO could fall to as low as
will switch to ULSFO 0.5% and Gasoil. 0.3 m bl/d in 2020.
If we consider the various forecasts by different companies such as BP and Shell as well
as projections made by agencies and independent research, we can deduce the
following: On average they expect HSFO demand of 0.8 m bl/d, Gasoil 0.5% demand of
1.4 m bl/d, and non-scrubber compliant ULSFO 0.5% demand of 2.8 m bl/d. There is
however a very wide projection for total marine fuel consumption in 2020. On average
the different forecasts projects a total marine fuel demand of 5 m bl/d.
Fuel demand projections for 2020 (m bl/d)
4.5
4.0
3.5
3.0 2.8
Million barrels per Day
2.5
2.0
1.5 1.4
1.0 0.8
0.5
0.0
HFO LSFO/Blends Gas Oil
IMO 2012 CE Delft BP Shell PIRA IEA 2020 RobinMeech Average
Source: SEB, Delft, Ensys, BP, PIRA, IEA, Shell, Robin Meech
3.2 m bl/d of out of today’s 4 m bl/d of HSFO to disappear to 2020
Today we estimate global marine consumption of HSFO at 228 m ton/year and marine
gasoil consumption of 64 m ton/year. This is equal to the IMO’s Delft study assumption
for marine fuel demand in 2012 of 4 m bl/d of HSFO production and consumption and 1.3
m bl/d of MGO consumption. The average market forecast we have seen expects 3.2 m
bl/d of today’s 4.0 m bl/d HSFO demand to disappear overnight to 2020.Macro research : IMO2020 Report Wednesday 21 March 2018 11
That is a massive hit to demand to a marine oil product which only constitutes 4% of
global oil products.
Very little demand for HSFO in 2020 This means that in an already very small oil product market there will hardly be any
demand left for the product in 2020. If it is possible to convert the projected 3.2 m bl/d
of surplus HSFO in 2020 then of course it would not be all that problematic. That is
however the thing, it is not all that easy to convert 3.2 m bl/d of HSFO to a non-scrubber
compliant ULSFO 0.5% fuel.
In order to better be able to compare the different 2020 forecasts we have normalized
them all to a total 2020 marine fuel consumption of 5.5 m bl/d.
Fuel demand projections 2020 normalized to 5.5 m bl/d
6.0
0.8
0.9
5.0
1.5
1.3
1.7
1.8
1.9
4.0
Million barrels per Day
0
3.4
3.0
3.4
4.1
2.6
3.3
3.0
2.7
2.0
4.0
1.7
1.0
1.2
1.0
0.9
0.8
0.6
0.6
0.3
-
Delft 2012 Shell 2020 BP PIRA 2020 Average IEA 2020 RobinMeech Delft Base
2020 2020 2020
HFO 3.5% ULSFO 0.5% (Blends) Gas Oil 0.5% or lower
Source: Source: SEB, IEA, BP, Delft, PIRA, Robin Meech
In this normalized picture we have that the most extreme is Shell’s projection which
projects demand of only 0.3 m bl/d of HSFO and only 1.7 m bl/d of ULSFO in 2020. I.e. it
projects that two out of four m bl/d of today’s HSFO demand will shift all over to Gasoil in
2020. In terms of demand for HSFO in 2020 Shell’s projection is consistent with the
assumption that less than 2,000 ships will have scrubbers by 2020 which equally
implies HSFO demand of only 0.3 m bl/d.
SEB’s projection that less than 2000 ships will have a scrubber is actually consistent
with Shell’s very low projection of only 0.3 m bl/d HSFO demand in 2020.
Demand shifting from HSFO 3.5% to What stands out very clearly is a general projection that there will be a large shift to non-
ULSFO 0.5% scrubber compliant ULSFO 0.5% fuel. This fuel is still on a test-bed stage and very few
participants have been able to test it. The general view of the coming ULSFO 0.5% is that
it will be a hybrid, blended fuel and not a straight through refined product. As such it
cannot be easily mixed between different suppliers of the fuel and it is also assumed to
be quite unstable so that it can be difficult to use for ships running tramp trading.
If there really will be demand for 3 m bl/d of ULSFO or if refineries really will be able to
supply 3 m bl/d of ULSFO we do not know. Both sides of the equation could be restrained.
What is clear is that there will not be a lot of HSFO demand in 2020 and that demand
instead will shift to non-scrubber compliant ULSFO 0.5% or Gasoil 0.5% marine fuel.Macro research : IMO2020 Report Wednesday 21 March 2018 12
What can refineries do to 2020?
There is no time for the world’s One of the major unknowns in the IMO maze is the question of what refineries really can
refineries to install additional do by the 2020 crossover deadline. What can they do with their current refinery
upgrading units by 2020 in response equipment, and additional equipment to be installed between now and 2020? The
to the IMO’s 2020 decision, at least refinery industry has been very tight-lipped about what it can or cannot do. Generally, it
not above what they have already has said that to install a new major installation such as a coker or deep conversion unit
planned to install. needed to convert HSFO to middle distillates, it will take five years to progress from
planning to completion. So, what will be installed by 2020 will have very little to do with
the IMO’s 2020 deadline decision in October 2016. New refinery upgrading capacity
from now to 2020 will basically be due to plans and investments taken ahead of the
IMO’s 2020 decision in October 2016.
The complexity of the world’s refinery One problem with the refining industry is that the huge refinery “machines” located
industry makes it very difficult to worldwide are not especially homogenous. It is possible to create general refineries that
estimate and predict what it is really can do everything, but this is not economical. It is much better to tailor each refinery to
able to do in 2020. what it is specifically required to do, i.e. the crude oils it is required to convert and
products to make.
There are more than 300 different qualities of crude oil worldwide and a myriad of
different products and needs. Consequently, there is also a very wide range of different
refineries. This is also why there is little general literature on the global refinery system
because it is so difficult to generalize. Even refineries themselves find it hard to maintain
a strong, clairvoyant view on their business outlook. What will refinery margins look like
one year from now? Based on communications with several refineries over the past 10
years, most, as far as we can see, do not hold especially strong views on forward cracks
and product spreads.
The IMO has only imposed a A clear message from one complex refinery we met with was that one good thing about
requirement on sulphur content to be bout the IMO regulation was that it was solely a regulation on sulphur content and not on
less than 0.5%. The many other the many other quality aspects of the marine fuel. In other words, compliant marine fuel
quality requirement aspects of the fuel in 2020 can be quite dirty and heavy in many respects. What matters is that it does not
are unchanged. This gives refiners a contain more than 0.5% sulphur. If there had also been a regulation on the many other
lot of freedom to make “dirty” ULSFO quality aspects of the fuel itself and not just sulphur, then it surely would have presented
0.5%. If IMO requirements had also a serious challenge for the global refining industry. Then they would have had no choice
been imposed on other quality other than to convert 4 m bl/d of HSFO into cleaner middle distillates using deep
aspects, they would have had to conversion units like cokers.
upgrade HSFO to Gasoil instead.
However, the IMO has only set a new standard for sulphur content for shipping fuel and
not many other quality aspects of the fuel. According to refiners we have met with, this
confers considerable freedom on global refineries on how they can modify the HSFO to
fuels that can be used under the new regulations. It is not so difficult to get down to
0.5% sulphur provided there are no guidelines and requirements governing the many
other aspects of fuel quality measures was the response we got from one complex
refinery. They had however no estimate of the aggregated global refinery capacity to
produce ULSFO 0.5%.
Sulphur is tied much deeper in the A key problem with HSFO is that it is very difficult and expensive to de-sulphur the fuel
molecular structure of HSFO directly. Running the fuel through existing de-sulphuring units quickly clogs up the
hydrocarbons. This reason, as well as catalysts and halt the process, partly due to the high level of impurities in the dirty fuel. It
its possessing a range of impurities, is however also attributable to sulphur molecules being tied much deeper into fuel
makes it difficult and expensive to molecules in heavy fuel oil than they are in Gasoil making them harder to remove.
remove sulphur from HSFO.
Therefore, existing de-sulphur units are unsuitable to de-sulphur HSFO. While it is
possible to build de-sulphur units to treat HSFO, they are however as expensive as deep
conversion units. So, it is much better to build deep conversion units in order to convert
low-quality fuel oil to high quality middle distillates than to convert low-quality HSFO
3.5% to ULSFO 0.5%, which is still a low-quality fuel.
If you “cut” the barrel differently However, according to the complex refineries we spoke with, there are other routes to
during the vacuum distillation stage to create ULSFO 0.5%. This involves different kinds of after-treatments and blending. One
obtain slightly less sulphur and heavy issue highlighted was that if you “cut” the barrel differently in the vacuum distillation
molecules and impurities, then that cut stage so that the cut contains somewhat less of very heavy elements and somewhat
can be run through existing de- more of lighter elements, the cut may then be run through a normal desulphurisation unit
sulphuring units. This helps to create to lower the sulphur content. What emerges is still a fairly heavy, dirty fuel but with
ULSFO 0.5%. much less sulphur.Macro research : IMO2020 Report Wednesday 21 March 2018 13
Subsequently, a significant amount of blending of different fuels takes place, to produce
an acceptable fuel lately dubbed ULSFO 0.5%. So far, there has not been a unified fuel
quality description of this new fuel, adding to market unease.
ULSFO 0.5% is predicted to be fairly Another very unclear issue is the stability of new ULSFO 0.5% qualities. Since typically
unstable and best suited for steady they will be blended fuels rather than straight through processing products, they will
freight activity between two ports likely be more unstable. Arguably, these ULSFO 0.5% fuels will be better suited for fixed
routes link container liners. They can burn off the fuel continuously. They rarely risk
sitting in one harbour for long with the possibility of fall-outs in blended fuels. Freight
activity on fixed routes like this will also be able to source a stable quality of ULSFO
0.5% from a few suppliers, as they typically only trade between two locations.
Maersk has stated that they plan to Container company Maersk has clearly stated they plan to target fuel compliance with
run on fuel compliance, most likely by ULSFO 0.5% and not with scrubbers. Their argument is very clear: Scrubbers occupy
operating on hybrid ULSFO 0.5% space, add complexity requiring skilled on-board operatives, generate waste that must
products. be processed or disposed off at a cost, and give rise to higher fuel consumption.
Bulk carriers that run tramp trade could have issues with the new ULSFO 0.5% fuels.
They will trade from location to location and are subject to the risk they may receive very
different qualities of the ULSFO 0.5% they need. We understand these cannot be mixed.
Therefore, fuel tanks will need to be cleaned before they can be re-filled with ULSFO
0.5% from a different supplier. Bulk carriers also typically risk being land-locked for
periods with the risk of a fall-out in unstable ULSFO 0.5% fuel. How unstable the ULSFO
0.5% will turn out to be remains to be seen. It is hard to gauge at this stage with little of
these fuels on the market yet.
There is very low visibility on how It is very unclear what volume of ULSFO 0.5% the world’s refineries can actually
much ULSFO 0.5% the world’s produce. Those we have spoken with have said they have no clear views on global
refineries will in fact be able to capacity and magnitude, emphasising once again the highly complex and variable nature
produce in 2020. of the global refining business.
Surplus of bitumen, asphalt and
sulphur
Sulphur removal from HSFO by the The new maritime sulphur limit means that sulphur needs to be removed from HSFO
world’s refineries is likely to create the either before it is burned or after. Assume that sulphur must be removed from 3.2 m bl/d
need to dispose of 3.6 m ton of sulphur of HSFO before it is burned, this is equal to a reduction of sulphur in 182 m ton of HSFO
from average 2.5% sulphur to 0.5%. This is equivalent to sulphur production of 3.6
million ton of sulphur annually. To our understanding the global sulphur market is already
saturated. It may therefore be problematic for the world’s refineries to get rid of the
sulphur in 2020. The refineries may thus get a sulphur disposal problem in 2020.
A 2020 surplus of HSFO/residue also Bitumen which is used in asphalt is basically a variant of the old refineries’ residue
means a surplus in the production. i.e. it is part of the HSFO complex. Therefore, a 2020 market overflowing
bitumen/asphalt market. The with HSFO also means a surplus of bitumen. The European bitumen market is already in
European bitumen market is already in surplus with prices heading downwards, partly due to the increasing tendency to build
surplus. We expect more downside roads using concrete. The IMO 2020 event is likely going to lead to yet higher bitumen
pressure. surplus and thus even lower bitumen prices.
Historical prices & spreads for HSFO
3.5%, Gasoil 0.1% and Brent
Shipowners holding back on scrubber Much of the current market discussion is centred on the HSFO to ULSFO/Gasoil spread.
investments as they don’t know what The value of a scrubber investment will be much lower if the spread is low rather than
the fuel spreads will be in the future high. This is one of many reasons why many ship-owners have held back in terms of
investing in scrubbers because they are uncertain whether the spread will be wide or
narrow. They can see what it is today and what it has been in the past, but what will it
really be in the future? And, if the spread turns out to be wide in 2020 then how long will
it stay that way? One year, two years or longer?
So what is the correct spread to look at and to study? The HSFO to Gasoil spread or the
HSFO to ULSFO spread? In the previous section it is clear that the general market
expectation is that there will be a large shift from HSFO to ULSFO with ULSFO accounting
for 3 m bl/d of supply and demand in 2020. I.e. the expectation is that there will be a
refinery fuel compliant solution and that this solution will primarily be ULSFO. As such theMacro research : IMO2020 Report Wednesday 21 March 2018 14
most important thing would be to investigate the HSFO to ULSFO spread. However,
historically and also currently there is no such thing as a ULSFO product, price or
contract.
Market looking at Gasoil to HSFO The lack of an historical ULSFO price is probably why most focus has centred on the
spread as there are no historical index HSFO to Gasoil price spread instead. As an alternative we have created a synthetic
for ULSFO 0.5% prices ULSFO 0.5% index constituted by 44% LSFO 1.0% + 56% Gasoil 0.1% which we will
get back to in the next section.
Gasoil typically has a larger multiplier relationship to Brent crude oil than HSFO 3.5%
HSFO 3.5% and Gasoil 0.1% prices versus Dated Brent crude oil
HSFO 3.5% Gasoil 0.1% Linear (HSFO 3.5%) Linear (Gasoil 0.1%)
1400
y = 8.3x + 25.2
1200
Gasoil 0.1% and HSFO 3.5% in USD/ton
1000
800
600
y = 5.6x - 33.5
400
200
0
10 30 50 70 90 110 130 150
Brent crude oil in USD/bl
Source: SEB, Bloomberg
This of course naturally means that the historical relationship between the Dated Brent
crude oil price and the Gasoil 0.1% to HSFO 3.5% spread has a multiplier of 2.7 times
the Brent crude oil price:
Gasoil 0.1% to HSFO 3.5% spread in USD/ton vs Dated Brent crude oil in USD/bl
Gasoil 0.1% to HSFO 3.5% spread in USD/ton Linear (Gasoil 0.1% to HSFO 3.5% spread in USD/ton)
800
700
Gasoil 0.1% to HSFO 3.5% spread in USD/ton
600
500
400
y = 2.7x + 58.7
300
200
100
0
0 20 40 60 80 100 120 140 160
Dated Brent crude oil in USD/bl
Source: SEB, Bloomberg
More clearly sorted as averages for each 10-dollar price slot of Dated Brent crude oil
prices we have the following:Macro research : IMO2020 Report Wednesday 21 March 2018 15
Gasoil 0.1% to HSFO 3.5% spread in USD/ton vs Dated Brent crude oil in USD/bl
700
Gasoil 0.1% to HSFO 3.5% spread in USD/ton
607
600 581
500
408
400
USD/ton
335
316 319
300 264 271
253
237
213
200
153
100 87
58
-
10 20 30 40 50 60 70 80 90 100 110 120 130 140
Dated Brent crude in USD/bl
Source: SEB, Bloomberg
The Gasoil to HSFO 3.5% has What we see is that historically when the Brent crude oil price has traded in the range of
historically averaged $256/ton when $50/bl to $80/bl then the Gasoil 0.1% to HSFO 3.5% has averaged $256/bl. However,
Brent has been in the range of $50- what we see in the daily dots is that the price product price spread has traded all the
80/bl way up to $450/ton on individual days even when the Dated Brent crude oil price has
traded in the range of $60/bl.
If we instead sort average prices and spreads by year back to 2001 we get the
following:
Yearly averages for Gasoil 0.1%, HSFO 3.5% and the spread in USD/ton
1,000
900
800
700
600
USD/ton
500
447
400
300
313
311
310
307
300
293
292
283
277
275
275
258
200
232
225
224
214
197
182
182
100
100
89
68
-
Gasoil - HSFO spread in USD/ton HSFO 3.5% in USD/ton Gasoil 0.1% In USD/ton
Source: SEB, Bloomberg
The Gasoil to HSFO spread has rarely What we see is that the spread has rarely been much higher than about $310/ton for a
been above $300/ton for a full year full year. This happened from 2011 to 2014 when Brent crude oil average $100-110/bl
except in 2008 when it averaged and the spread was close to that as well also in 2006 and 2007. The real stand-out year
$447/ton was 2008 for which the spread averaged $447/ton. That was a year with strong middle
distillate demand and a very tight gasoil market. Gasoil prices and Brent crude oil prices
then spiraled higher and higher until Brent crude oil reached $148/bl.
In an historical perspective the current forward pricing of the 2020 Gasoil to HSFO
spread at $314/ton is basically above all historical normal years. It is just trading lower
than the extreme year 2008. If we also take into consideration that forward crude oilMacro research : IMO2020 Report Wednesday 21 March 2018 16
prices are only trading in the range of $56-57/bl for 2020 and 2021 it looks on the face
of it expensive.
Yearly average Gasoil mark-up to Brent and HSFO discount to Brent in USD/ton
200
172
150
100
118
115
114
112
95
94
94
94
92
86
85
85
84
82
77
73
50
67
60
58
31
23
-
-57 11
USD/ton
-66
-69
-50
-109
-122
-124
-100
-136
-138
-149
-157
-158
-162
-164
-169
-150
-181
-198
-206
-208
-213
-218
-227
-228
-200
-275
-250
-300
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Gasoil mark-up over Dted Brent crude oil in USD/ton HSFO disscount to Dted Brent crude oil in USD/ton
Source: SEB, Bloomberg
Firstly however we think that 2020 is really going to be an extreme year in terms of the
product spread in question. As such the relevant comparison in our view is the year
2008. We are not necessarily forecasting a Brent crude oil price spike towards $150/bl
even though that is very possible.
Refinery upgrading capacities will be What we do feel confident about is that the global refinery’ upgrading capacity will be
stretched to their limits. Product price stretched to its limit. To all our understanding of the product price spread dynamics this
spreads will widen out means a significant widening in the product price spread. Historically such events have
also implied a rippling effect into the pricing of the different crude oil slates. If the market
is in need for more middle distillates and refinery upgrading and and conversion units
have been maxed out then the next solution is to use more light sweet crude oil. Thus the
spiraling price between Gasoil prices and Brent crude oil prices in such historical events.
The market is already pricing in an What really stands out in the last graph is the mark-up in Gasoil prices over Brent crude
unusually tight Gasoil market in 2020. oil prices on a forward basis from 2020 to 2023. This mark-up is trading above all the
historical yearly averages except for 2008. This forward mark-up for Gasoil over Brent
Historically such situations have led to
is signaling a real market concern that the Gasoil market will be tight for this period. And
a spike in Brent crude oil prices
this is exactly the recipe for a spike in the light sweet crude oil prices as well.
Thus implicitly the forward market prices are implying a fairly deep concern for a
significantly tight Gasoil market in 2020 to 2023. This is also visible when we look at
Gasoil and HSFO prices in percentage terms versus Dated Brent crude oil prices:Macro research : IMO2020 Report Wednesday 21 March 2018 17
Gasoil 0.1% and HSFO 3.5% mark-up and discount to Dated Brent crude oil in percent
40%
Percent disscount and mark-up versus Dated Brent crude
30%
28%
27%
27%
26%
20%
24%
23%
23%
21%
21%
20%
18%
18%
18%
16%
15%
14%
10%
13%
11%
11%
11%
10%
10%
6%
0%
-10%
-25%
-26%
-26%
-27%
-20%
-27%
-28%
-29%
-30%
-30%
-32%
-35%
-36%
-37%
-30%
-37%
-37%
-38%
-38%
-38%
-40%
-42%
-44%
-45%
-40%
-47%
-50%
-60%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
HSFO 3.5% disscount in % to Dtd Brent crude Gasoil 0.1% mark-up in % to Dtd Brent crude
Source: SEB, Bloomberg
In this perspective we see that the forward market price for Gasoil for 2020 to 2023 in
percent versus Dated Brent crude oil prices is trading at levels above all historical years.
There is very little middle distillate In addition to the IMO 2020 event there is also another reason to be concerned about the
content in new ultra-light US shale oil. supply of middle distillates in 2020 onwards. On the face of it the current oil market
situation here and now looks fine. Global oil demand is growing strongly on the one hand
A tight Gasoil market could be the
while US shale oil production is growing comparably strongly on the other hand. This
result
looks balanced and good. This may however not be the case. The reason is that crude
slate produced by US shale oil contains hardly any middle distillates. It is ultra-light and
almost only contains light end products like gasoline and naphtha.
Thus we may get a situation towards 2020 and the following years where the high level
overall balance in the global hydrocarbon liquids market is balanced while there is
actually could emerge a growing deficit in middle distillate products.
Historical prices and spreads for
ULSFO 0.5% and Gasoil 0.1%
There are no historical prices for Though not proven at all in terms of feasibility the average forecasts are projecting that
ULSFO 0.5% the lion’ share of today’s 4 m bl/d HSFO demand shifts to ULSFO 0.5%. No such product
exists today and no such historical benchmark exists either. As such it is a little bit
difficult to review and analyse. The general expectation is though that the ULSFO fuel
will trade quite tightly towards Gasoil 0.5% prices in 2020 as it will be priced relative to
the alternative compliant fuel.
A synthetic ULSFO 0.5% given by From historical LSFO 1.0% prices and Gasoil 0.1% prices we have created a synthetic
44% LSFO 1.0% + 56% Gasoil 0.1% ULSFO 0.5% index price given as a mix of 44% LSFO 1.0% and 56% Gasoil 0.1%. The
historical price picture for this ULSFO index may give some indication of where the future
ULSFO 0.5% price will trade in the longer term while it may be far away from the prices
we’ll see in the first years from 2020 onwards.Macro research : IMO2020 Report Wednesday 21 March 2018 18
Average Gasoil to HSFO and synthetic ULSFO 0.5% to HSFO spreads in USD/ton
Gasoil to HSFO 3.5% spread in USD/ton ULSFO 0.5% to HSFO 3.5% spread in USD/ton
700
607
600 581
500
Product spreads in USD/ton
408
400
335
316 319
369 365
300 263 271
253
237
213
251
200 153
190 202
185
86 152 147 159
100 58 126 141
92
- 50
33
10 20 30 40 50 60 70 80 90 100 110 120 130 140
Average Brent crude oil in USD/bl
Source: SEB, Bloomberg
The synthetic ULSFO 0.5% has What we see is that when Brent crude oil prices have ranged from $50/bl to $80/bl the
averaged $150/ton above HSFO in a synthetic ULSFO 0.5% mark-up over HSFO 3.5% prices has averaged $150/ton. In
Brent crude reference of $50-80/bl comparison the comparable spread between Gasoil 0.1% and HSFO 3.5% averaged
$256/ton for the same Brent crude oil prices.
So in a historical perspective the synthetic ULSFO 0.5% index has been $150/ton more
expensive than HSFO 3.5% while Gasoil 0.1% has been $256/ton more expensive when
Brent crude oil prices have averaged $50/bl to $80/bl.
Assume that the product market and refinery system is not stressed in 2020 onwards
and that product price spreads trade according to normal historical patterns and that a
freight market segment is set by non-scrubber ships running on ULSFO. Then the few
scrubber-ships running on HSFO would only fetch a freight premium equal to $150/ton
times the number of tonnes per day of fuel consumption.
A synthetic ULSFO is now priced at On a forward basis the current market pricing is for Gasoil to average $289/ton above
more than $200/ton above HSFO for HSFO from 2020 to 2023 while the our synthetic forward ULSFO 0.5% is priced
2020 delivery and beyond $216/ton above the HSFO prices. It looks like this:
Yearly averages for synthetic ULSFO 0.5%, HSFO 3.5% and the spread in USD/ton
900
800
700
600
500
USD/ton
400
300
281
200
223
204
202
201
200
199
196
190
174
173
171
169
100
141
137
136
131
119
118
116
52
42
65
-
Synthetic ULSFO 0.5% mark-up over HSFO 3.5% in USD/ton
HSFO 3.5% in USD/ton
Synthetic ULSFO 0.5% USD/ton
Source: SEB, BloombergYou can also read
