Opportunity or disaster? Traders see choppy waters due to shipping sulfur cap
LONDON (Reuters) — The world's top trading houses, among the most nimble entities in oil, say even they aren't sure how to stay a step ahead of a coming cut in shipping fuel sulfur.
The new rules come into force in just over two years, and threaten to upend markets from heating fuel to crude oil.
But uncertainty around them casts a shadow over how smoothly the transition can go; industry experts say investments in refining, tank storage or vessel upgrades need to happen now in order to be ready in time.
"I don't know if it's going to provide opportunity or disaster at the moment, to be honest," Vitol boss Ian Taylor told the Reuters Global Commodity Summit.
Nearly a year after the International Maritime Organization finalized rules that will cap ships' sulfur emissions at 0.5% of fuel content in 2020, from 3.5% now, Taylor and the heads of trading firms Gunvor, Glencore and Mercuria said there were still too many unanswered questions.
The lack of clarity could create immense volatility in fuel prices if the bulk of vessels turn to low-sulfur gasoil.
Shippers have several ways to comply—including investing in costly "scrubbers" to allow them to keep burning high-sulfur fuel oil, or shifting the roughly 4 MMbpd of fuel they burn to more expensive low-sulfur gasoil.
Each path requires years of planning and millions in investment, either for vessel owners to add scrubbers or for refineries to produce cleaner fuel. Scrubbers cost $5 MM–$10 MM per vessel, while fitting clean-fuel-producing hydrocrackers or delayed cokers to a refinery can exceed $1 B.
But if shippers opt for scrubbers, it could nullify returns on expensive refinery upgrades or low-sulfur fuel storage tanks and blending facilities. Analysts at JBC warn that less than 5% of the global fleet will add scrubbers.
"The big question is, obviously, if shipowners are going to equip their ships with scrubbers," said Torbjorn Tornqvist, chief executive of Gunvor Group. "If everyone would equip their ships with scrubbers, there is absolutely no impact on refining."
"These are questions to which we just don't have the answers at this point," he added.
Some refineries, including those operated by ExxonMobil, Total and Shell, have announced upgrades to cut high-sulfur fuel output. But consultancy KBC has warned that 40% of Middle Eastern and European refineries are not prepared for the change.
None of the traders said they would invest in scrubbers, including Gunvor, which is bulking up its shipping division. Much of the shipping industry has been similarly reticent; Maersk Oil, which operates 161 tankers, told a refining summit this year that it planned to rely on low-sulfur distillates.
So trading houses are looking for the most cost-effective way to manage the change—even, potentially, in smaller, lower-cost refining units.
"We're looking for opportunities ... to trade, to blend, to produce some of those fuels," said Glencore's global head of oil, Alex Beard.
"Whether that's in storage tankage, or in small refining units, topping units to enable us to produce some of that fuel, those are opportunities that we're looking at."
Still, while Vitol and Gunvor operate refineries in Europe, and thus have more to lose from a shift away from fuel oil, others say they have no problem waiting.
"Trading companies are among the most flexible companies globally to adapt themselves to change," Mercuria chief Marco Dunand said, adding that from now to the 2020 start date is "a very long horizon to a trader. It's like a lifetime."
Reporting by Libby George and Ahmad Ghaddar; Editing by Dale Hudson
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