The Energy market is in doldrums over the outcome of the International Maritime Organization (IMO) standards to reduce the high-sulfur based propellant used to fuel shipping transportation. The global shipping fuel market made up about 3% of the total oil market and got the attention of the energy investors and speculators over the emission standards known as IMO 2020.
The consortium of 171-members of United Nations that sets the standards of marine fuel, ruled out in October 2016 to proceed with a plan to reduce the maximum allowable levels of sulfur and other pollutants in marine fuels. The IMO decided to reduce the use of sulfur-based propellent from 3.5% by weight to 0.5% by weight by 2020. As the deadline approaches, market participants are now turning their eyes on the development in the market, and the view of market participants is divided in two.
The one view suggests that to reduce the sulfur-based fuel in the shipping industry, the industry will shift towards a diesel-based fuel, which derives its path through the crude oil and another view suggests that the IMO set of regulations are now in place for some time, and the industry has already shifted towards the adoption of measures to meet the emission guidance.
The bunker oil (a mixture of petroleum-based oil) makes up a significant chunk of the shipping fuel and is majorly residual oil (oil which is left after short chain hydrocarbons such as gasoline and diesel is removed from crude oil). As per the U.S. Department of Energy Information (EIA), the demand for high-sulfur based residual oil could fall by 60 percent and the demand of low-sulfur diesel-like product could double to 2 million barrels per day.
A question now arises that will the major oil refineries will be able to meet this new-found source of demand for cleaner diesel fuels that will mark a shift from high-sulfur based cheap fuel to provide energy in the shipping industry towards high diesel variant that would weigh on the cost of the industry.
The challenges that lie ahead for the refiners includes the supply of lower sulfur based blendstocks to the bunker fuel market, which can be resolved by either diverting more low-sulfur distillates into the bunker fuel market or by using low-sulfur intermediate refinery feedstocks in bunker blends. The supply of the light sulfur product is not a significant challenge, but the challenges which lie ahead after separating the small hydrocarbons is the usage of heavy hydrocarbons left after from the separation.
To use that high sulfur blend, refiners need to convert those long chain hydrocarbons to small chain hydrocarbons for which an expansion of refinery is required, and a significant amount of investment is needed in the refinery industry. The flow of investment in the industry will depend upon the outlook of the maritime fuel market and the presence of technology in the vessel industry.
The investors are reluctant to enter the maritime fuel industry as the vessel industry has numbers of ways to meet the IMO emission regulation. One way is to install the scrubbers into the vessels that remove pollutant from ships exhaust. The removal of pollutants through exhaust allows vessel operators to operate on the high-sulfur fuel without shifting towards the light sulfur propellent.
The other option of the vessel operators is to use the LPG in the vessel, which is currently limited and not viable. However, any advancement in technology can support the vessel for LPG rather than petroleum-based products.
The further development in the market will be reviewed by the energy investors time to time to decide on which side of the weighing balance they want to keep more weight.
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