IMO 2020 LSFO Complications – Potential Long Term Positive for Heavy Differentials

Multiple complications reported globally related to VLSFO

Following the implementation of IMO 2020, there is evidence of multiple complications globally related to very low sulfur fuel oils (VLSFO). Recently, red alerts have been issued from VLCC owners specifically flagging the sediment, high catalyst fines, high calcium content, and wax formation as significant risks with VLSFO currently on the market. These quality complications coupled with a growing price differential could push market participants that have the option to use high-sulfur fuel oil (HSFO) with scrubbers in the future. As a result, we expect global heavy differentials to improve, driven by VLSFO developments and continued market disruptions to global heavy supplies.

Incompatibility is leading to unreliable VLSFO 

As suppliers and consumers look to meet the increased demand for VLSFO, product reliability will continue to be a key concern. Instability in fuel oil can be introduced as a result of commingling incompatible bunker fuels onboard vessels or on land. Two incompatible bunker fuels may lead to the precipitation of asphaltenes (ie. sludge formation) inside key infrastructure, even when they have the same sulphur content.1 Blended fuels with lower sulphur have fewer heavy aromatics making them poorer solvents. This causes the asphaltenes to fall out creating a sludge that can cause serious damage. Furthermore, many of the blended fuels have a high pour point and need to remain heated to avoid wax formation on engines. In the worst case, both of these situations can lead to loss of propulsion and auxiliary power in the ship. The result of this is likely that VLSFO from single refiners, and certain global locations, will command a significant premium compared to many of the blended VLSFOs produced through blending feedstocks.

Scrubbers could provide an economic solution to high VLSFO prices and unreliabilty

As expected, the price differential between VLSFO and HSFO continues to widen, with HSFO currently trading at a significant discount.2 As the spread continues to grow, consumers will look for reliable ways to meet their energy needs and the installation of scrubbers above the current order book may provide an economic solution. Despite upfront installation costs, scrubbers would allow shippers to take advantage of low HSFO prices and ensure the reliability of the fuel. The Energy Information Administration (EIA) foresees a global resurgence in the demand for HSFO by 2022 where they believe HSFO will rebound to 24% of international marine consumption.3 Warsila Director Sigurd Jenssen, an industry-leading scrubber technology company, estimates that only 10% of 40,000 heavier vessels worldwide have scrubbers installed, including  3,000 – 4,000 scrubbers on order at the moment.4 Clarkson’s Research supports this, outlining that only 12% of the global fleet (by tonnage) are installed with scrubbers with that number expected to grow to 19% by the end of 2020.5

Upside For Heavy Pricing Beyond Estimates Prior to LSFO Complications 

The discounted price of HSFO, OPEC output cuts, and trade sanctions, position heavy producers for a number of tailwinds. The increase unreliability of LSFO is expected to further increase the pricing drivers as LSFOs that can be trusted will be bid up by companies that can’t risk the complications (which is hopefully everyone).

 

  1. International Chamber of Shipping: Compliance with the 2020 ‘Global Sulphur Cap’ for Ships’ Fuel Oil in Accordance with MARPOL Annex VI
  2. Asia Pacific: BIMCO tracks strong VILSFO price growth in Singapore 
  3. EIA: The Effects of Changes to Marine Fuel Sulfur Limits in 2020 on Energy Markets
  4. S&P Global Platts: Scrubber installation waiting list ‘very long’ as IMO 2020 kicks in: Wartsila
  5. Ship & Bunker: Clarksons Research Sees 12 of Global Tonnage Equipped with Scrubbers

Mark Le Dain

Mark Le Dain currently runs strategy for Validere and previously worked as an energy investment banker. Mark has significant experience advising energy and infrastructure companies, successfully completing over $18 billion of M&A transactions and $5 billion of capital markets transactions.
Mark Le Dain