LOOKING BACK AT IMO 2020

What was the actual impact of lowering sulfur in maritime bunker fuels?

By Keith Reid

Do you remember IMO 2020?

The International Maritime Organization’s 2020 sulfur reduction rule? If it slipped your mind, you’re not alone. What was once considered a potentially earth-shaking issue for the entire fuels market has since been easily eclipsed by other factors.

IMO 2020 was supposed to have a significant impact on distillate prices and availability and be generally disruptive to refined fuels in general. In 2012, the International Maritime Organization (IMO) lowered the maximum sulfur content in marine fuels to approximately 35,000 ppm, with the intent to get sulfur content down to 5,000 ppm between 2020 and 2025. While the regulation was not universal, the IMO is made up of nearly 200 member countries that represent the most active shipping markets and ports throughout the world.

Maritime bunker fuel oil is a distillate comparable to diesel, heating oil or jet fuel. There has been a steady process of reducing sulfur levels in diesel, heating oil and gasoline, yet certain markets, such as maritime and aviation, had been able to absorb the remaining high-sulfur fuels. This made high-sulfur fuels cost-effective while simultaneously reducing strain on the refining sector and making sour crude more viable. IMO 2020 impacts this balance and was seen as potentially creating significant disruptions to refining and shipping and ultimately increasing the price of most refined fuels and the products that are shipped using this fuel. It was also seen as potentially disrupting global supply chain logistics.

The Fuels Institute commissioned a literature review on the subject in 2019, titled “IMO 2020,” that reviewed over 30 reports, blogs, columns, presentations, email updates and other literature covering the projected impact. The primary theme was uncertainty. Both the maritime and refining industries had several ways in which they could react to the challenge, the specifics of which could potentially lead to varying degrees of impact on fuel markets.

The report noted that many media sources were indicating a virtual apocalypse from the switch to low-sulfur bunker fuels. It cited such projections as “one of the most disruptive changes to ever affect the refining and shipping industries— global impacts totaling in excess of $1 trillion over 5 years” and “consumers could be hit by $240 billion by 2020.” These projections not only included the direct impact on the fuel product but also the carryover impact on the supply chain. Some combination of the following was seen as meeting the challenge:

• Shipping companies switching to lower-sulfur fuel. The cost of the fuel would be higher but there would be no significant capital outlays for the shippers. The refining industry would have to make major moves (which had not occurred at the time and would likely take at least four years to implement) to upgrade refineries to “full conversion” capabilities where high-sulfur fuel could be desulfured. This approach is capital intensive to the refining sector.

• Adding scrubber technology to ships. Technology exists to remove the sulfur at the vessel itself, in the same way power plants can remove high-sulfur content from coal or oil. This would require a significant capital outlay on the part of shippers, yet the fuel cost would be lower and there would also likely be more international availability in lessdeveloped regions.

Other possibilities, such as changing over to marine gas oil, which is typically very expensive, or liquefied natural gas (LNG), which requires new vessel construction or significant modifications, were considered marginal alternatives.

How It Played Out

Going on three years since the implementation date, what exactly has happened? Detailed, authoritative data is hard to come by, but according to an Offshore Energy article by Jasmina Ovcina Mandra published in September 2022, IMO 2020 has successfully dropped sulfur oxide emissions by 77%.

While the article does not provide nuance on the extent to which compliance or shipping disruptions from COVID-19 created the 77% drop, other data suggest that very low sulfur fuel oil (VLSFO) was the primary route initially taken by shipping companies. S&P Global Commodity Insights from March 2021 indicated that about 78% of the fuels tested globally met the IMO 2020 sulfur standard.

There was some movement to LNG and marine oil gas and scrubbers. The ROI for scrubber adoption hinges on the price differential between the low- and high-sulfur fuels. Scrubbers need a differential of about $100 per metric ton of bunker fuel to provide a solid ROI, according to longtime maritime fuels journalist and editor Sam Chambers, writing in Splash247.

During the COVID-19 disruptions, Ship & Bunker data showed a differential drop to $45 per ton at the lowest point. Since the Ukraine war, VLSFO peaked at over $1,000 with differentials reaching over $500 according to Chambers. In February 2022 the differential had dropped to $160 per ton.

Pandemic And Ukraine War Disruptions

The literature review concluded that the price impacts to gasoline and diesel would range from 25 cents to 75 cents per gallon and would likely be limited to a window of two to three years. That may or may not have been the case. The apocalyptic price predictions largely materialized, though IMO 2020 was virtually unacknowledged in the market analysis. The double whammy of the pandemic and the Russia-Ukraine War that the fuels world has been reeling under since 2019 more than muddied the waters.

“IMO 2020 definitely was a big point of the supply and demand conversation around two to three years ago, but how things change once a pandemic floors a global economic engine,” said Joe Butler, business unit leader at Pilot Company and a Fuels Institute board member. “I don’t think I’ve heard anything about how the IMO sulfur specs are contributing to fundamental global shortages in a while.”

He noted that the current discussion is focused on a range of other issues, including the supply and demand rebalance from lingering COVID-19 impacts, ESG impacts to capital expenditure in traditional hydrocarbon, a supply rebalance with the war, lingering demand impacts from Chinese COVID issues, the current economic slowdown in Europe, potential recession impacts domestically and conversion of units to renewable diesel/ sustainable aviation fuel to meet anticipated demand.

That doesn’t mean it didn’t have an impact or change the distillate production stream going forward.

“IMO 2020 is definitely competing with desulfurization capacity. It’s just that it seems like it is being drowned out by the cacophony of other louder issues,” Butler said.

Stephen Jones, an oil market strategist and a board member for the Fuels Institute, concurred. “Although hard to substantiate, and perhaps being overshadowed by larger factors, I do think the sulfur limit is a contributing factor among many that add up to some of the price strength and general market tightness.”

Vgo Impact

Troy Vincent, senior market analyst at DTN, has extensive experience analyzing maritime fuels. He noted that vacuum gas oil (VGO) is one area where IMO 2020 has made a significant impact.

“Many ships switched over to this VLSFO, and ultimately what that does is it cuts a good portion of refinery inputs for distillate output, namely VGO,” Vincent said. “It put that in the bunker fuel stream. So you went from taking that VGO and splitting it into diesel molecules that would be used for on-road diesel and diverting that in a post-IMO 2020 world into producing VLSFO bunker fuel. As a result, middle distillate refinery yields have dropped as VGO gets utilized for bunker fuel.”

Vincent sees the VGO impact as an indefinite component of the market that will push prices higher, and IMO 2020 as a market driver, but not one that will right-size the market and keep prices elevated forever. That is especially the case if the global economy continues to weaken.

Vincent noted another impact on the diesel market that ties in IMO 2020 and other desulfurization efforts. “The desulfurization process at the refinery level is very energy intensive,” said Vincent. “With natural gas prices at record highs all around the world, this incentivized running lighter, sweeter crudes with lower diesel yields. That’s one reason that crack spreads for diesel have been as high as they are.”

The disruptions of the past several years seem to have masked, and perhaps eased, the anticipated impact of IMO 2020. Desulfurization is now baked into the market. According to Vincent, it’s most likely to be a more notable factor when disruptions occur moving forward.

“When something does go wrong from a supply perspective, IMO 2020 is always going to be pulling that VGO toward the [bunker] fuel market,” he said. “Anytime you have a supply shortage or outage or a refinery problem, it’s just going to exacerbate things. This did change the game. At the time it wasn’t all that important because of COVID and everything else, but as we look forward—particularly in the Atlantic Basin and Europe—this is going to continue to keep that part of the market tighter than you would otherwise have expected.”

Keith Reid is editor-in-chief of Fuels Market News. He can be reached at kreid@fmnweb.com

JOHN EICHBERGER EXECUTIVE DIRECTOR THE FUELS INSTITUTE

The Fuels Institute is a non-advocacy research organization dedicated to studying transportation energy. It was founded by NACS in 2013 as a 501(c)(4) nonprofit social welfare organization. It publishes fact-based research projects designed to answer relevant market questions. The organization celebrates its 10 th anniversary this year. In The Lead looks at the accomplishments of the Fuels Institute over the past decade by interviewing its director, John Eichberger.

What was behind the creation of the Fuels Institute?

Around 2011, the NACS Executive Committee expressed frustration that the industry sells 85% of the fuel in the United States, yet fuel policies are being developed in a dysfunctional way. Everybody’s in their silos—refiners, biofuel producers, auto manufacturers, oil companies. They’re not working on a coordinated strategy, whether it be a business or a policy. The idea was that NACS should take a leadership role and try to bring these groups together to have a more cohesive outcome.

A second factor was to understand better where the market’s heading. A lot of the research we were accessing was conducted to support a desired outcome. The executive committee really wanted objective insight into where the market was heading.

We realized the need for a separate organization, since we would not have had the diversity of participation if we were under the NACS umbrella. Then, over the course of a year, NACS

President and CEO Henry Armour and I started putting something together, talking to people, coming up with new ideas and building a structure. We had several organizations willing to support it, an economic model, the objectives and the structure. The executive committee approved it, and we launched it in February 2013. I left my position as a NACS lobbyist to be the director of the organization.

How is it funded?

NACS provides a grant every year from operating capital, but the primary funding comes from individual companies that want to be part of this group. We’re not a membership organization, even though we call them “members.” Each participant contributes a certain amount of money, and they get certain benefits in terms of insight, the ability to work on research projects, the eligibility to serve on our board of advisors and such. Then we get research grants from the NACS Foundation, from the SIGMA Fuel Foundation and other entities to support our research. They contribute because they believe in a collaborative, objective voice, and they want to have a say.

The Fuels Institute is not an advocacy organization, so describe the collaborative process and what that accomplishes.

We have a board right now of more than 60 companies, and that board reviews every publication. So, if anybody on the board thinks something is biased or factually incorrect, they’re going to flag it. And they’re not going to let us publish it until we resolve the bias. So, when you think about that, our board has oil companies; retailers; distributors; equipment manufacturers; ethanol, biodiesel and renewable diesel producers; electric vehicle charging companies; engine manufacturers; vehicle manufacturers; national laboratories—they’re going to be watching for anything that may be tainted. Also, most of our grant money comes from 501(c)(3) foundations, so the research must be in the public’s interest, otherwise we can’t use the money.

You produce a lot of research. What have been some of the key papers and reports that the Fuels Institute brought to the industry?

One of the first ones we did was called“Tomorrow’s Vehicles.” It was a statistical forecast of vehicle sales and operations through 2023. And we’re getting ready to do a reflective paper on that one, because the forecast in 2013 for this year is not consistent with where the market is. That report generated a lot of attention and gave us an opportunity to have conversations about market scenarios and directions.

Another one was an analysis of how the U.S. infrastructure for fuels distribution works. The motivation behind that was having lobbied for so long on fuels policy, I know policymakers don’t understand it. They don’t understand fungibility—that products from different refineries go in the same pipeline to the same terminal and then they’re blended with ethanol or biodiesel—any of that stuff. So we put that paper together to explain that when a hurricane hits the Gulf Coast, it is going to affect supplies in New England and the Pacific Northwest, and here’s why. And that was extremely helpful when we had supply disruptions.

More recently we did a huge paper on octane. There’s a big push to go to a 95-octane national standard, which would be today’s premium. We commissioned the study because higher octane fuel in an optimized engine can improve fuel efficiency by up to 8%. How do you do that? Let’s look at how the refining industry can produce a higher-octane fuel. How long would it take to convert the refining production? And then, ultimately, how do you get it to the customer? While the initiative has stalled, it was a 200-page report that is instrumental to our understanding of what’s required for significant fuel transitions.

We did a life-cycle comparison analysis last year between combustion engines and battery electric vehicles, which clearly delineated that an EV is not as clean in a coal state as it is in a renewable-electricity state, for example. And that deploying EVs where it makes the most sense environmentally is a better strategy than putting them everywhere right now. I think that paper, and the one right before that called “Impact of Transportation-Related Environmental Initiatives,” which did a survey of carbon taxes and low-carbon fuel standards and electrification and internal combustion engine bans set the Fuels Institute on a new track. Rather than focusing on a specific fuel, we’re looking at global objectives with initiatives like decarbonization. The Fuels Institute doesn’t weigh in on what such objectives should be, but rather how we can address them.

What are some reports on the horizon?

We’ve got several new papers. Two are on electric vehicles. One covers demand charge mitigation. How do you basically accelerate profitability of a charger? Another one is a driver survey. We are also looking at how you decarbonize combustion engines. And then we’re working on putting together a program where we can evaluate the market readiness for more chargers and evaluate the profitability of charging stations and what consumers actually do while charging their vehicles.

The end goals for the Fuels Institute have recently become more focused on legislative bodies. What drove that?

We think the work we’re doing is high quality and helpful. We want the right people to understand it and utilize it so that we can have a better transportation market going forward. So, we brought on two new people last year to help build our communications and marketing capabilities. And we integrated a direct-to-policymaker outreach program where we’re using a database of legislative contacts in Washington, D.C., as well as in state capitals and with local government officials. When we publish a research paper, we are able to use that database and find individuals within government at all levels who are interested in that topic and send the paper to them.

You offer ESG Integrity, an ESG solution for the industry. Tell us about that.

It’s a joint venture outside of the Fuels Institute’s normal structure that is a for-profit enterprise that will then make contributions to a research fund in a legal, tax-free manner. We know environmental, social and governance reporting requirements are increasing, whether they be mandated by government, mandated by banking or information that your customers require. ESG reporting is growing in intensity in terms of who’s asking for it. What we created was a module for fuel retailers and distributors and fleet operators to simply collect their data and incorporate it into a platform that then produces a report. It is much less expensive than contracting with outside consultants.

The Fuels Institute also has an annual meeting. What are the main benefits for attendees?

We usually have a target attendance of 150 to 175 stakeholders, with representatives from vehicle manufacturers to every energy provider or resource you can think of. The diversity is huge. If you have any questions about the market, there’s going to be somebody in that room who can answer it. The experience, the breadth of perception, the knowledge is unparalleled. And because we’re not pushing an agenda and we don’t publish the transcripts, the conversations are much more honest and much more insightful. Our next meeting, Fuels’23, is scheduled for May 22-24 in St. Louis, Missouri.

You have been instrumental in driving the Fuels Institute forward, but it’s hardly a one-person job. Tell us about the Fuels Institute staff.

Jeff Hove is our vice president. He’s an ambassador for the brand, and he brings in some needed technical experience, especially on the environmental side. He also is a strong fundraiser, and his primary role is to help with the operational strategic growth of the organization and find new ways to continue bringing more resources to the institute so that we can do more research.

Amanda Appelbaum is our director of research. Amanda’s job is to make sure our research is processed properly. She brings together the task groups to help develop the scope of work. She manages RFPs and the vetting of proposals from outside research firms to do the work. Amanda helps coordinate the execution of the research throughout. And then she manages the peer-review process to make sure everybody has an opportunity to engage. She oversees the production all the way up to distribution. Also, because she’s been here the longest, she’s a key strategic advisor.

Marjorie Kass came on board in January of last year. She’s our marketing and communications director. Marjorie came in to help us get our message out. How do we get financial services analysts to pay attention to us? How do we get our research to be more tangible to more people? And that’s led us to a brand reevaluation.

And then we brought in Amanda Patterson in June last year. She’s our marketing and projects coordinator. Her job is to help keep the trains running. She’s been doing a lot of design work. She manages our social media. Amanda’s managing our direct communications to legislators and public policy officials. She’s really been kind of a jack-ofall-trades when you need a doer.

Keith Reid is editor-in-chief of Fuels Market News. He can be reached at kreid@fmnweb.com