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February 11, 2019 12:30 PM, EST

Analyst Says Fuel Supply Inadequate for Ocean Shippers to Comply With New Rule

Ship Akio Kon/Bloomberg News

Not enough low-sulfur fuel oil is available to replace the fuels used by marine shippers ahead of a fast-approaching regulation, according to analysis by Wood Mackenzie.

An rule imposed by the International Maritime Organization will limit the amount of sulfur allowable in fuels used by marine shippers. The goal is to reduce sulfur emissions, which cause acid rain. The regulation is set to take effect in less than one year, but analysts at Wood Mackenzie, an energy research and consultancy firm, forecast that there is not enough of the low-sulfur fuel available to replace the dirtier fuels.

By separate estimates, the shipping industry needs to replace up to 3 million barrels per day of marine fuel. The global supply of ultra-low-sulfur fuel, however is estimated to increase to 1.4 million barrels per day in 2020 and to 1.7 million barrels per day in 2024, Wood Mackenzie analysts said.

In 2017, refineries capable of supplying the shipping market produced about 1 million barrels per day of the less than 0.5% sulfur fuel oil, the regulatory cutoff. Refineries, particularly on the Gulf Coast, stand to gain from the regulation because they are capable of processing very dirty crude into fuel that will meet emissions will be in high demand.

Many of those complex refineries are located in the United States and on the Gulf. Refineries could see their profit margins for diesel jump 35% in 2020 due to the rule, according to the U.S. Energy Department.

Since demand for heavier crudes will drop as the shipping industry makes the switch, lighter and sweeter crudes will rise in value, analysts write. This is good news for Texas, which producers lighter grades of crude in the Permian Basin of West Texas and other shale plays.

Lighter crudes are likely to rise in value on the regulation. Booming production in the United States is likely to reduce the supply strain on the global market for lighter grades, analysts write.

As demand for low-sulfur fuel oil jumps, shippers are preparing to take other measures to comply, such as converting their fuel use to liquefied natural gas or equipping ships with scrubbers, a technology that cleans dirty fuel aboard the ship.

Use of LNG for shipping will rise due to the regulation, analysts write, jumping up 70% between 2019 and 2020. However, this will only displace less than 100,000 barrels per day of marine fuels in 2020.

So far, shippers have confirmed more than 2,000 orders for scrubbers, technology that cleans high-sulfur fuel on the ship to meet standards. Wood Mackenzie sees orders for scrubbers steadily increasing each year, exceeding 4,000 by 2025. Analysts anticipate that just more than 10% of the world’s fleet will have scrubbers installed by 2020.

Wood Mackenzie anticipates 85% of the world’s fleet to be in compliance with the regulation in 2020 and predicts full compliance to be achieved by 2025.