IRPC EurAsia '19: Margins boost from IMO specs won't last forever, warns WoodMac VP
Adrienne Blume, Executive Editor, Hydrocarbon Processing
HELSINKI—Alan Gelder, Vice President of Refining, Chemicals and Oil Markets—EMARC for Wood Mackenzie discussed the impacts of IMO regulations in a keynote address on Day 2 of the International Refining and Petrochemical Conference (IRPC) EurAsia.
Gelder explained how European refining margins have been weak since the start of 2018 due to higher crude oil prices and a global gasoline surplus. Oil products demand growth in 2019 is predicted to be slow, but it is forecast to pick up again in 2020, supporting margins.
International Maritime Organization (IMO) regulations requiring reduced sulfur content of 0.5% in marine fuels from January 1, 2020 will bring about a predicted surge in gasoline and diesel demand of 1.3 MMbpd in 2020, with Asia as the key driver.
IMO to support margins through distillates demand. IMO-driven changes to middle distillates spreads, high-sulfur fuel oil (HSFO) demand and crude differentials are expected to drive a strong refining margins outlook for 2020. The IMO specification change will support European refiners, especially high-conversion plants with high distillate yields.
"We are not expecting full global compliance [with IMO] in 2020," Gelder noted. Rather, approximately 85% of the global marine fuel market is expected to be compliant in that year, with higher rates of compliance in North America and Europe of 95%. Full compliance is anticipated in 2025.
As 2020 approaches, 2,500 confirmed orders for sulfur scrubbers have been recorded ahead of the technology uptake. Most of these vessels are dry bulk vessels, although container ships are the largest consumers of HSFO. A little more than 10% of marine fuel is anticipated to be scrubbed in 2020; this is expected to rise to 25% by 2025.
Inadequate low-sulfur fuel oil (LFSO) supply will complicate the situation. Refineries will need to boost crude throughput to produce sufficient distillate fuel for the bunker sector. Very-LSFO supply is estimated to be 1.4 MMbpd in 2020, with a predicted rise to 1.7 MMbpd by 2024.
Product balances shifting; Euro margins under threat. Diesel demand has peaked in Europe. More drivers are switching to gasoline-fueled passenger cars, but fuel efficiency regulations will lead to declines in demand for both diesel and gasoline in Europe, Gelder said. These regulations will also support the faster deployment of electric vehicles.
Gasoline crack spreads are expected to weaken in 2020 as production increases beyond demand. Furthermore, new mega-refinery investments in Africa and the Middle East will reduce Europe's options for gasoline exports. Gasoline shipments from Russia and the Middle East to Europe will continue to grow.
Global refining capacity additions will outpace global demand, causing average global refinery utilization rates to fall, with European utilization and margins declining markedly from 2020. A predicted decline in European margins could introduce the threat of plant and unit closures in 2024, Gelder said.
IRPC EurAsia is taking place in Helsinki from 5–6 June.