It can be sobering to discover how others see us, but an email I received in response to some of our recent coverage of scrubbers and low sulphur fuels prompted a consultant to the oil refining industry to get in touch and tell me some home truths. He is Melvin Larson, principal consultant at UK-based KBC Advanced Technologies, which serves the chemical and energy sectors.
How’s this for starters? “The sad truth is, the shipping industry is myopic, with too many players [and] lacks a cohesive single sovereign ruling entity. It is struggling to fully appreciate the impact of IMO’s sulphur cap.” But at least we are honest and ethical, aren’t we? Er … no. “Shippers have made billions and thus greed and skirting corners are part of the business model. [They are] not the upstanding citizens of the world.”
He compared shipowners with refiners who “have to adhere to local labour, emissions and permitting rules in a very transparent manner.” The shipping industry is quite different: if its goal is to match the levels of compliance and transparency required on land – where reports go direct to regulatory bodies – “why would sniffers be needed to see if a ship was in compliance?” he said.
Shipping has had an easy ride for decades, he believes. “The shipping industry has been living in the past for 30 years” while refiners “have [had] to deal with emissions issues that are far more strict and stringent than marine.” For example, refining – being land-based – “has not been allowed the amount of pollution in SOx, NOx, particulates or any fugitive hydrocarbon that marine has been allowed.”
Shipping, of course, relies on the refining sector for its fuel and for years has been able to burn cheap residual fuel, which has effectively been a waste product once refiners have taken the more valuable fractions out of the crude feedstock. But will it continue to be available? Many think it will be: I attended a seminar in June organised by the UK Chamber of Shipping at which one speaker presented a graph predicting that use of HFO will recover to a similar level as today. And I spoke to a scrubber manufacturer during Nor-Shipping who was sure that if large shipowners demand HFO, their bunker suppliers will oblige.
But Mr Larson poured cold water on that idea. “The argument that high-sulphur bunker [oil] will return is spoken by someone who doesn’t understanding refining and margin,” he said. And he underlined his point: “Fact 1. Refiners are not in business to make fuel for the marine world.” That is just a small portion of a refiner’s business model and many of them, particularly inland refiners, do not even make it, he said. Their business model is to make the biggest margin from converting crude to a number of products and (‘Fact 2’) “maximum value is defined by maximising clean fuels production.” Yet marine fuels have historically sold for less than the crude from which they are made while refiners’ infrastructure investments are driven towards upgrading the oil at the bottom of a barrel, not to create more of it.
Petrol, jet fuel, gasoil, marine diesel: “these all sell above crude price” and, at present, high-sulphur bunkers are trading at a discount of US$140-200/tonne to IMO-compliant fuel, according to price reporting services Argus and Platts, he pointed out.
And then there are plastics. Despite the current drives in many parts of the world to reduce plastic use, at the moment “plastics demand is outpacing all transportation fuels.” That is another reason why refiners will prefer to “make high value olefins for plastics than supply a cheap fuel to the marine market.”
Look at the refineries now being built in India, the Middle East and Asia, he urged me. “They are all being fitted with the ability to utterly destroy the bottom of the barrel and are not looking to supply the marine market with a high-sulphur bunker fuel. Most are not producing any bunkers in their economic models.”
And it is not just new refineries that are taking this approach. Any refiner that raises capital to invest in its facilities “automatically recovers all the high value diluent as product” which will give it about US$40-60/bbl more compared with letting it remain as residual fuel. “That is a massive benefit,” Mr Larson told me. With the emergence of lower-sulphur ‘sweet’ crudes from shale deposits, refineries with the right asset mix, such as those in the USA, can gain another US$4-5/bbl in margin capture.
He made it clear that he is not taking sides in the debate about whether scrubber technology is good or bad, but he is worried that “people who make the investment in the belief this fuel will be around for 20 years are sorely mistaken.”
However, he made an interesting suggestion: There are specific refining technologies being built now to capture the margin between high-sulphur bunkers and IMO-compliant fuel, he said. These projects look to repay their investment in two-three years and then supply compliant fuel long into the future. So he posed this question: “as a shipowner, why not co-invest to secure a ready supply for the next 15 to 20 years?”
His are sobering words. Most debate I have heard about scrubbers has been based on its technology and on its impact on the environment. Remarks about the ongoing availability of HFO have been made confidently by some and less confidently by others but Mr Larson has presented a cogent argument from the supply side that the fuel has no future.
In short, demand created by shipowners who fit scrubbers will not be sufficient reason for a refiner to deliver high-sulphur fuel, because they can now extract more profitable products from it.
This is an important and vital development in the debate about scrubbers and I would welcome feedback from ShipInsight readers who can assure me – based on more than hope and expectation – that there will be adequate supplies of high-sulphur fuel. Email me with your reactions now.