JUST HOW DISRUPTIVE WILL IMO 2020 BE? - By Jamie Webster, Buddy Myers, Maurice Berns, Clint Follette, and Jaime Ruiz-Cabrero - Boston Consulting ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
JUST HOW DISRUPTIVE
WILL IMO 2020 BE?
By Jamie Webster, Buddy Myers, Maurice Berns, Clint Follette, and Jaime Ruiz-Cabrero
E ffective January 1, 2020, in accor-
dance with a mandate from the Inter-
national Maritime Organization (IMO), the
Risks notwithstanding, most stakeholders,
including oil refiners and shipping compa-
nies, have opportunities to make smart
allowable percentage of sulfur in marine moves and improve how they fare individu-
fuel will fall substantially, from 3.5% to ally. Understanding the nature of the
0.5%. This looming change, known infor- disruption, and what signposts to look for
mally as IMO 2020, could pose a major to gauge its potential length and progres-
disruption to the markets and business sion, can help. (See the sidebar “Defining
practices of oil refiners, shipping compa- Disruption.”)
nies, and other stakeholders.
Precisely how great the disruption proves The IMO and the Mandate
to be—and, critically, how long it lasts— The IMO is the United Nations body re-
will be influenced by several factors, in- sponsible for regulating the shipping indus-
cluding the speed at which refiners can try. As part of its charter, it is tasked with
produce compliant fuel and the specific curbing pollution from ships—and sulfur
strategies that shippers employ to meet the emissions are particularly polluting. Hence,
challenge. We have modeled a wide variety the IMO made the decision in 2016 to im-
of scenarios and can imagine a disruption pose a markedly lower global standard for
lasting anywhere from one year to more the permissible proportion of sulfur (by
than five years, generating significant costs weight) in marine fuel, with the ruling to
for many businesses. (Our analysis is un- become effective in 2020. The IMO had
derpinned by the BCG IMO 2020 Model, a embarked on a series of regional sulfur re-
tool that enables us to project how the dis- duction efforts starting at the turn of the
ruption will impact markets and that will century by instituting so-called emission
allow us to analyze markets in real time as control areas, in which the allowable level
2020 unfolds.) of sulfur would be much lower than else-DEFINING THE DISRUPTION
Our primary metric is the price spread case, we assume that about 700,000
between high-sulfur fuel oil (HSFO) and barrels per day of incremental HSFO will
marine gasoil (MGO). In recent history, be sold for purposes of power genera-
this spread has usually been less than tion) should clear the market.
$20 per barrel. As disruption begins and
the effects of IMO 2020 become more But if demand from power producers is
strongly felt, shipping companies will still insufficient, or the demand for MGO
start to aggressively seek out relatively from shipping companies is higher than
scarce low-sulfur fuels composed of anticipated, then the spread may enter
very-low-sulfur fuel oil (VLSFO) and what we call the coal power generation
middle distillates, and refiners will seek tranche, where HSFO prices reach parity
to destroy excess HSFO. At this point, the with coal prices. Even if they do reach
price spread between HSFO and MGO this point, however, they are unlikely to
will begin to widen. First, it will reach a stay there long. As more VLSFO is
level that incentivizes refiners to maxi- brought to market and HSFO is de-
mize coking capacity and, in some cases, stroyed, the disruption will begin to
bypass some fluid catalytic cracker moderate, bringing the spread back
capacity. In this refinery optimization down through the tranches in reverse
tranche, as we call it, the spread will order. The end of the disruption will not
likely range from $30 to $45 per barrel. be marked by a return to the historic
price relationship between HSFO and
At the height of disruption, however, MGO; instead, the spread will remain
such a spread will be insufficient to clear elevated for an extended period, reflect-
the market. The spread will likely then ing ongoing heightened production (we
rise to what we term the gas power assume an additional 500,000 barrels
generation tranche, where HSFO is per day in our base case) of marine
priced competitively with natural gas in diesel fuel by refiners. When this point is
some power generation markets. The reached, the disruption will be over and
additional demand that this generates a new normal will have been established.
among power producers (in our base (See the exhibit below.)
Defining the Disruption
HSFO-MGO PRICE SPREAD
Recent Disruption New normal
80
Payoff period for
a scrubber retrofit
Coal power generation tranche
Price per barrel ($)
60 2 years
Gas power generation tranche
40
Refinery optimization tranche
3 years
20 4 years
5 years
0
2017 2018 2019 2020 2021 2022 2023 2024 2025
BCG’s base case scenario
Source: BCG analysis.
Note: The gray area represents the range of spreads in BCG’s four disruption scenarios. The calculation
of the payoff period for a scrubber retrofit assumes a $7 million installation cost (including the cost of
lost trading time) for an open-loop scrubber on a very-large crude carrier. HSFO = high-sulfur fuel oil;
MGO = marine gasoil.
Boston Consulting Group | Just How Disruptive Will IMO 2020 Be? 2where in the world. IMO 2020 transforms tion of noncompliant fuel by ships that
that aggressive sulfur reduction effort, lack scrubbers (technology that removes
which had been regional, into a global polluting sulfur emissions from ship ex-
campaign. haust). This regulation, which is scheduled
to take effect in March 2020, reduces the
Initially, compliance with IMO 2020 among likelihood of ships switching fuels at sea.
shippers was forecast to be low: some ship-
ping companies delayed taking the neces-
sary actions because of doubts about the Disruption and Its Effects
actual launch date and whether, or how ag- IMO 2020 stands to sharply decrease de-
gressively, regulations would be enforced. mand for high-sulfur fuel oil (HSFO), which
(Note that the IMO itself does not have an has 3.5% sulfur content and represents the
enforcement mechanism. Responsibility for vast majority of marine fuel currently sold,
compliance instead rests with the individu- at a rate of nearly 4 million barrels per day.
al governments of the IMO’s member Simultaneously, IMO 2020 will raise de-
states, which guarantee compliance by mand for very-low-sulfur fuel oil (VLSFO),
shipping companies domiciled in their which has 0.5% sulfur content. (See Exhibit
countries and establish penalties for non- 1.) This dynamic will result in a substantial
compliance in their waters.) widening of the price spreads between
HSFO and VLSFO, which will have major
Now, however, the degree of compliance implications for stakeholders.
among shippers seems likely to be high.
Shippers will certainly have incentive to Shippers. Choosing to fuel vessels with
comply. Major ports, as well as insurers, increasingly expensive VLSFO would cost
will demand that ships use compliant fuel. the shipping industry dearly—an addition-
The shipping industry is also relatively con- al $60 billion in 2020 over current fuel
solidated, which limits the number and costs, according to one estimate. There
percentage of ships in the global fleet might also be logistical hurdles associated
owned by rogue operators that might be with this strategy. The availability of
inclined to ignore the mandate. Finally, in VLSFO will be limited relative to expected
late 2018, the IMO approved a so-called demand, at least initially, as refiners work
carriage ban that prohibits the transporta- to boost supply by increasing yields and
Exhibit 1 | Low-Sulfur Fuel Oil and Blends Will Likely Be Shippers’ Near-Term Choice
Global marine fuel demand (%)
Other distillates
LNG
8 Low-sulfur blends
10
28 VLSFO
25
33
61
25 30 HSFO
21
10
2015 2020 2025 2030
Source: BCG analysis.
Note: HSFO = high-sulfur fuel oil, which has a sulfur content of 3.5%; LNG = liquefied natural gas; VLSFO = very-low-sulfur fuel oil. VLSFO and
low-sulfur blends have a sulfur content of 0.5%.
Boston Consulting Group | Just How Disruptive Will IMO 2020 Be? 3initiating new projects. (See Exhibit 2.) shortages of skilled craftsmen and neces-
Fuel compatibility issues may arise as well, sary raw materials, such as high-quality
with potentially critical inconsistencies steel and chrome alloys. In addition, the
emerging among fuels produced by differ- open-loop scrubbers now being installed
ent suppliers. could prove to be a short-lived option, giv-
en environmental concerns about putting
Some shipping companies might turn to sulfur directly into the water.
marine diesel, an established fuel that pos-
es no compatibility risk, for their fuel Regardless of what path shippers ultimate-
needs. But marine diesel will be the most ly choose, they will try to pass along their
expensive option among the oil-derived costs to customers. How successfully they
products. Liquefied natural gas (LNG) is yet will be able to do so remains to be seen.
another alternative for shippers. But the
high cost of engine and infrastructure con- Refiners. Meanwhile, refiners will strive to
version and the logistics of onboard storage keep up with soaring demand for VLSFO.
(LNG tanks take up considerable space) Complex refineries that can convert high
will likely dissuade a critical mass of ship- sulfur (or sour) crudes to low sulfur (or
ping companies from pursuing it, at least sweet) products, including VLSFO, and
in the near term. (Over the longer term, as maximize their production of distillates—
the global fleet of vessels turns over, LNG which can be used to make compliant fuel,
could become increasingly popular as a such as marine gasoil (MGO), a fuel that
fuel, especially if pressure to reduce emis- could rise sharply in demand—could see
sions intensifies.) their margins surge. Simple refineries that
mostly produce HSFO and have relatively
Scrubbers could be yet another viable low distillate yields will have greater
choice for some shippers. But scrubbers are difficulty maintaining their margins.
expensive—retrofitting a vessel requires an
investment of $2 million to $3 million— Simultaneously, refiners will struggle to
and installation can take up to six months. work through falling demand for, and a re-
Scrubber installation is also hindered by sulting oversupply of, HSFO. Ultimately,
Exhibit 2 | Refiners Will Need to Invest to Meet Demand in 2020
REFINERS WILL NEED TO INCREASE PRODUCTION OF …NECESSITATING INVESTMENTS IN
VLSFO AND DIESEL TO PRODUCE A SUFFICIENT DIFFERENT CAPABILITIES
AMOUNT OF COMPLIANT BLENDS IN 2020…
(mbpd) 0.3 1.5
(mbpd)
0.4
3.6 0.1 0.3 0.6
0.3
0.0 3.0 1.5
0.2
Residue Low-sulfur Low-sulfur Segregation Additional
1.5 desulfurization crude VGO VLSFO
topping units
(mbpd) 0.4 1.5
HSFO 2019 Decrease in Change in VLSFO 0.5
demand demand due to demand due
noncompliance to change in
LNG usage
0.6
Demand Decrease in Compliant Diesel
growth demand due to fuel
use of scrubbers Yield shift Utilization New Additional
growth facilities diesel
Source: BCG analysis.
Note: Projections are based on BCG’s base case scenario. HSFO = high-sulfur fuel oil; LNG = liquefied natural gas; mbpd = million barrels per
day; VGO = vacuum gasoil; VLSFO = very-low-sulfur fuel oil. Because of rounding, not all numbers add up to the totals shown.
Boston Consulting Group | Just How Disruptive Will IMO 2020 Be? 4they will have to lower prices on HSFO un- tion’s credibility regarding the launch of
til it reaches the point where it can com- future regulation. But several governments
pete on price with natural gas as a fuel for of IMO member states, including the US,
power generation. These price reductions have indicated that they might be in favor
will diminish refining margins. But the ef- of a delayed launch if shipping prices were
fects will be more than made up for by to spike, harming consumers, as the launch
higher market prices for VLSFO and mid- approaches. Shipping companies have also
dle distillates, leaving most refiners, partic- lobbied for a delayed launch as they seek to
ularly complex refiners on the US Gulf secure approval for their plan to pass along
Coast, with substantially higher margins costs to consumers. And the World Bank has
than they had before the disruption. announced that global economic growth is
losing momentum, increasing the odds of an
Suppliers of crude oil. A further widening outcry against any new measure that seems
of price spreads between sweet and sour likely to accentuate the trend. Taken
crudes is likely to occur. Oil derived from together, these facts raise the specter of a
US shale fields will be regarded as increas- delayed launch. The chances of a delay are
ingly attractive, and thus command a rising dwindling quickly as 2020 approaches,
price premium, due to a sulfur concentra- however. Acknowledging this, some ship-
tion that is lower than that of oil from ping companies have indicated that they
other sources. Logistics bottlenecks that plan to comply with the mandate as early as
may emerge as markets adjust to the the beginning of the fourth quarter in 2019.
changing demand picture, however, could
reduce this premium. Additional Investment from Refiners. If
refiners were to bring enough suitable
capacity online before 2020, bottlenecks
Variables That Could Influence would be eliminated or reduced, and fuel
Disruption pricing would be unlikely to change much.
The extent and duration of the disruption The needed investment would emphasize
will hinge on the following factors. desulfurization of high-sulfur crude, produc-
tion of middle distillates, and the destruc-
The Degree and Speed of Scrubber Adop- tion or disposal of HSFO. This would entail
tion. This factor will be the most influential bringing new hydrotreaters, hydrocrackers,
of all. Widespread adoption of scrubbers and cokers online, as well as small projects
would allow shippers to continue to burn aimed at improving molecule management
HSFO, thereby curbing the price spreads to better segregate VLSFO. The question
with VLSFO. But few ships are currently remains, however, whether refiners, which
equipped with scrubbers and, as discussed, have already invested substantially in
there are limits to how quickly the industry recent years—adding 1.7 million barrels per
could install them: BCG projects that fewer day of conversion capacity since 2017—are
than roughly 2,000 ships (about 3% of the likely to make additional investments of
global fleet of 60,000 ships) are likely to major scale in the near term and, if so, how
have scrubbers by 2020. And that number quickly they would be able to bring those
will climb only gradually, rising to about investments online.
11,000 at most by 2025.
Fuel Compatibility Issues. Optimal marine
The Rollout of the Mandate. As of this engine operation hinges not just on sulfur
writing, IMO 2020 is scheduled to become content but on secondary fuel characteris-
operant on January 1, 2020, and the IMO tics (such as viscosity and stability), and the
has not indicated that there might be a comingling of fuels from different provid-
delay. The organization undoubtedly ers on vessels is inevitable. If sufficient
recognizes that a delay would raise the consistency of these characteristics cannot
potential for disruption in the short term, be ensured across refiners, and shippers
affect the scale and duration of such a have associated engine problems, the
disruption, and undermine the organiza- length of the period of disruption will
Boston Consulting Group | Just How Disruptive Will IMO 2020 Be? 5grow. There are positive developments on sweeter crude in the global crude pool over
this front, although not all questions have the next few years means that, all else
been resolved. Refiners and regional being equal, the complexity of producing
marketers have begun to offer new blends IMO 2020–compliant fuel, along with its
that meet the IMO’s requirements—but associated costs, should fall.
there is no explicit coordination among
these efforts. Oil majors have declared
their intention of making compliant fuels Scenarios for Length of the
available by 2020—but the ultimate degree Disruption
of compatibility across the companies’ How might these factors play out in combi-
offerings is still unknown. (Indeed, several nation and influence the length of the dis-
blend types have already been patented, ruption period? Leveraging BCG’s propri-
which limits choices and raises costs.) The etary IMO 2020 Model and focusing on
International Standards Organization is such critical variables as scrubber-adoption
preparing a specific standard for IMO 2020 rates, fuel compatibility, refinery projects
fuels—but until that standard materializes, and optimization efforts, and production
the potential for compatibility-related rates of sweet crude, we have defined four
problems remains. scenarios. Note that, in the descriptions,
“very high” spreads are differences in the
Lighter, Less Sulfurous Crude. This trend in prices of HSFO and MGO wide enough to
the world’s crude supply, driven in large result in surplus HSFO being sold into the
part by the growing production and repre- power generation market; “high” price
sentation of US shale oil, could also influ- spreads are wide enough to incentivize re-
ence the disruption, though to a lesser finers to maximize coking capacity and, in
degree than those discussed above. API some cases, bypass some fluid catalytic
gravity (a measure of crude weight) is cracker capacity. (See Exhibit 3.)
expected to rise 0.1 degree, while sulfur
content is expected to fall 0.1%, from 2020 •• Base Case. This scenario assumes that
to 2025. A rising percentage of lighter, the mandate goes into effect on January
Exhibit 3 | IMO 2020 Disruption Scenarios
BASE CASE DELAY QUICK SHIFT SLOW BURN
Assumptions Assumptions Assumptions Assumptions
• Regulations are put in force • Political and economic • Regulations are put in force • Regulations are put in force
in 2020 as scheduled concerns over price delay in 2020 as scheduled in 2020 as scheduled
• Scrubber-installation pace implementation launch • Strong economic growth • The global economy goes
increases but is limited by a • There is roughly a two-year continues into recession
shortage of skilled personnel delay before implementation • Large spreads drive action • Lower HSFO-MGO price
• Refiners make step changes – Refiners rapidly make spreads slow investment
in their capabilities over time Implication additional investments in among refiners and shippers
• High HSFO-MGO price A disruption period of about capabilities
spreads for about 18 months one year, during which – Shippers increase their Implication
fuel-price volatility among rate of scrubber adoption A disruption of about five
Implication relevant fuels increases years
A disruption of about three Implication
years A disruption of about 18
months, with HSFO-MGO
price spreads remaining very
high throughout
Source: BCG analysis.
Note: HSFO = high-sulfur fuel oil; MGO = marine gasoil.
Boston Consulting Group | Just How Disruptive Will IMO 2020 Be? 61, 2020, as scheduled; 2,000 ships have point at which it is at parity with the
installed scrubbers by 2020 and 8,000 price of natural gas when used as fuel
have done so by 2025; refiners make for power generation) due to unexpect-
step changes to their capabilities edly high levels of noncompliance
(including major upgrades in residue among shippers; and the narrow price
desulfurization, fuel segregation, and spreads reduce the perceived urgency
throughput volume) over time; and high for remedial measures and slow the
price spreads between HSFO and MGO rate of investment among shippers and
occur for approximately 18 months. In refiners. Under these circumstances,
this scenario, we would expect the disruption would likely last about five
disruption to last about three years. years.
•• Delay. Here we assume that political
and economic concerns about price What Companies Can Do
increases for shippers and, ultimately, Disruption will significantly affect specific
consumers delay the mandate’s launch energy companies, particularly simple
by two years (although we can imagine refiners and producers of sour crude, which
materially longer or shorter delays), and will have limited options for creating
that uncertainty about policy imple- higher-value fuels. Companies that could
mentation increases the price volatility suffer substantially from higher fuel prices
of relevant fuels, such as marine diesel. include heavy users of transportation fuel,
In this scenario, the two-year delay is such as shipping companies, airlines,
followed by lingering uncertainty railway companies that use diesel-powered
among stakeholders and wide spreads trains, and freight-transportation
between MGO and VLSFO; this lasts businesses.
about a year, giving the IMO and
stakeholders additional time to prepare But disruption will also create winners, de-
for the mandate’s eventual launch. pending on which of the four scenarios we
(Additional refinery projects will be describe comes to pass. The list of poten-
brought online; the rate of scrubber tial winners includes complex refiners,
adoption will increase as well.) ships with scrubbers (especially ships that
installed scrubbers early on), sweet-crude
•• Quick Shift. This scenario assumes that producers that have strong ties to demand
IMO 2020 goes into effect as currently centers, companies that store oil and petro-
scheduled, and that extremely high and leum products, traders, and power produc-
sustained (that is, for approximately 18 ers able to burn fuel oil.
months) price spreads between HFSO
and MGO, underpinned by strong Key stakeholders can take a number of
economic growth, prompt rapid action steps to mitigate the potential negative
by both shippers (through aggressive effects of disruption on their businesses.
adoption of scrubbers) and refiners For shipping companies, the most
(through an increased rate of invest- important steps include determining a plan
ment in conversion capacity). In this for fuel use during the disruption and
scenario, the total disruption would putting contingency plans in place.
likely last about 18 months. Another critical action is to identify and
test different ways of passing on higher
•• Slow Burn. In this scenario, we assume fuel costs to customers to ensure that
that the mandate becomes operant as revenues are not negatively impacted by
currently scheduled; the global econo- higher fuel costs or customer migration.
my goes into recession, blunting the
mandate’s economic and environmen- Refiners can—and should—take a host of
tal impact; price spreads between HSFO steps, all of which may positively impact
and MGO remain relatively small (that revenues in all cases except for our delay
is, the price of HSFO does not fall to the scenario. They should do what is necessary
Boston Consulting Group | Just How Disruptive Will IMO 2020 Be? 7to ensure that they can operate efficiently Traders, particularly those with physical as-
and without interruption through 2021. Ap- sets across the value chain, are in an excel-
propriate measures include inspecting lent position to translate the changes in the
equipment and making sure that spare market surrounding IMO 2020 into addi-
parts for critical equipment are secured or tional physical assets and potentially lucra-
readily available. Refiners should also take tive financial positions. Some traders have
steps to prepare for the oversupply of already installed scrubbers on their fuel
HSFO—such as developing a plan to blend, ships; traders should also consider engag-
store, and trade products to exploit arbi- ing in swaps and in offsetting positions on
trage opportunities; identifying power- the forward curve. Traders that combine
generation facilities that represent HSFO such moves with the ability to store crude
demand; and, in the case of simple refiners, could find that IMO 2020 and the associat-
identifying complex refiners that are po- ed disruption could more than offset any
tential HSFO buyers. To facilitate produc- lost or reduced revenue caused by lower
tion of marine diesel fuel and distillates, re- volatility and prices in the market in recent
finers should identify and work to remove years.
bottlenecks and capacity constraints. To
lock in sources of demand, they should
partner with ship owners.
Crude producers should take steps to facili-
I MO 2020 will affect multiple stakehold-
ers, but it could weigh particularly heavi-
ly on refiners and shipping companies.
tate maximum production of sweet Most refiners and shipping companies can
crude—including, for instance, performing take steps to increase their chances of
maintenance and conducting equipment emerging in relatively good shape. Though
inspections before the disruption hits. the time for taking many of these actions is
Crude producers should also take steps to limited because the disruption is nearly at
secure takeaway capacity and facilitate hand, many investments, even if made late,
takeaway—by, for example, examining and will still likely prove profitable, given the
working to address import and export bot- disruption’s potential length.
tlenecks. And they should work to secure
takeaway of heavy and sour crudes specifi-
cally through advance planning and by
conducting scenario analyses.
About the Authors
Jamie Webster is a senior director of Boston Consulting Group’s Center for Energy Impact. You may con-
tact him by email at webster.jamie@bcg.com.
Buddy Myers is a knowledge expert and global manager of BCG’s downstream oil and gas knowledge
team. He is located in the firm’s Houston office. You may contact him by email at myers.buddy@bcg.com.
Maurice Berns is a senior partner and managing director and the leader of the firm’s oil and gas sector.
You may contact him by email at berns.maurice@bcg.com.
Clint Follette is a partner and managing director in BCG’s Houston office. You may contact him by email
at follette.clint@bcg.com.
Jaime Ruiz-Cabrero is a partner and managing director and the regional leader of BCG’s Energy practice
in Asia-Pacific. You may contact him by email at ruiz-cabrero.jaime@bcg.com.
Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor
on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all re-
gions to identify their highest-value opportunities, address their most critical challenges, and transform
their enterprises. Our customized approach combines deep insight into the dynamics of companies and
Boston Consulting Group | Just How Disruptive Will IMO 2020 Be? 8markets with close collaboration at all levels of the client organization. This ensures that our clients
achieve sustainable competitive advantage, build more capable organizations, and secure lasting results.
Founded in 1963, BCG is a private company with offices in more than 90 cities in 50 countries. For more
information, please visit bcg.com.
© Boston Consulting Group 2019. All rights reserved. 5/19
For information or permission to reprint, please contact BCG at permissions@bcg.com. To find the latest
BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston
Consulting Group on Facebook and Twitter.
Boston Consulting Group | Just How Disruptive Will IMO 2020 Be? 9You can also read
