South Africa’s three coastal refineries – as well as a significant majority of coastal refineries globally – will definitely miss the International Maritime Organisation’s (IMO’s) January 1, 2020, deadline to reduce the sulphur specification in bunker fuel oil (BFO) from 3.5% to 0.5%, says Wright Consulting MD Dave Wright.
He explains that the BFO decision has been “on the cards for a while”, with the IMO implementing plans to reduce sulphur emissions as far back as 2005, when the regulator introduced “emission control areas” in high-traffic areas such as the Baltic Sea.
Wright adds that the IMO started looking into the feasibility of reducing the BFO sulphur content in 2008. The proposed 2020 date was subject to a review to determine the availability of the required fuel oil. The IMO noted that the date could be deferred to January 1, 2025, depending on the review’s outcome.
At its Marine Environment Protection Committee (MEPC 70) meeting in October 2016, the IMO – basing its decision on the review conducted by a research consortium headed by environmental consultancy CE Delft – committed to the 2020 deadline.
Despite a contradictory study, at the 2017 MEPC 71 meeting, the decision was reaffirmed.
“The issue is that all the local coastal refiners produce and sell 3.5%S BFO and none of them are installing any form of upgrading equipment to be able to produce 0.5%S BFO. Even if they were to start now, there just isn’t enough time for this type of project – which could cost in the region of $2-billion to $4-billion – to be completed before 2020,” Wright comments. The price of the better-quality BFO will need to increase to a level that provides refiners who make this investment a positive return.
He notes that, because of the uncertainty surrounding the deadline, many shippers and refiners took a ‘wait and see’ approach, putting off capital-intensive upgrades because they assumed that the IMO would defer the deadline.
“The consequence of this lack of response will be interesting,” says Wright, noting that, while shippers only have three options (buying the new-specification fuel oil, noncompliance or installing gas scrubbers), refiners have several options to consider.
The first and simplest option is to shut down. Wright explains that, because of the manner in which crude is processed, “refineries that cannot dispose of the fuel oil – produced at the same time as all the other crude-based products – cannot continue to run”.
Wright notes that one way to get around this is to produce more bitumen, as the refinery could use the molecules that would report to BFO for bitumen production. This would result in a surplus of bitumen for a vast majority of refineries, driving down the price (which is already comparatively low for crude-based products), thereby reducing the profitability of the refineries.
Another option is to change the crude diet to a lighter crude that produces less BFO and/or BFO with a lower sulphur specification. However lighter crudes are more expensive, significantly impacting on profitability. Moreover, South African coastal refineries are designed to process heavier crudes; using lighter crudes will not use the refinery capacity adequately or require hardware modifications, both of which would also impact negatively on profitability.
Wright notes that refineries could try selling a blend of diesel and fuel oil, but adds that this is not economically viable, given the price, as well as the quantities, of diesel needed to produce the required BFO specification.
The third option is to simply continue high-sulphur BFO production. This option can play out in several ways. Wright explains that local refiners could export high-sulphur BFO to offshore processors, who would convert it into the 0.5%S specification.
“[However], BFO already sells at a price below that of crude and so has a negative impact on the overall refining margin.” Further, as the 3.5%S BFO will be seen as a distressed product from 2020 onwards, its price “must drop”.
This price dip, combined with the additional shipping costs for transporting the high sulphur BFO, impacts on the refinery’s economics tremendously, and is unsustainable – even in the short term.
Wright points out that refineries could decide to sell high-sulphur BFO to ships equipped with stack gas scrubbers, but comments that there “aren’t enough ships with scrubbers to sustain the local refineries”.
Similarly, the refineries could continue to sell high sulphur BFO to shippers prepared to buy it. “[However], this would be breaking international law”.
He explains that the IMO has stated that any ships found using high-sulphur BFO after the 2020 deadline will be declared unseaworthy, a “very punitive sanction that makes it a criminal offence to continue sailing the ship in question”.
Wright suspects that the IMO will implement a “light” monitoring approach for the first few years to allow for a transition phase. He also notes that it is notoriously difficult to monitor compliance on the high seas.
However, he points out that it is unlikely that ships would try to evade the IMO indefinitely, and, as compliance increased, demand for high-sulphur BFO would fall.
Wright suggests that local refineries need to determine the best possible solution for their continued survival. Further, he notes that, while government has insisted that refineries are necessary to ensuring fuel security, it has not offered any comment on the current predicament.