Josh: Hello, everyone, and welcome to a podcast from Argus Media. I'm Josh Michalowski. I'm the diesel reporter for Argus' "European Products" report. And I have with me my colleague, Bob Wigan, who covers fuel oil for the "European Products" report.
Bob: Hi, Josh. Great to be with you today.
Josh: Hi, Bob. So, today, we're gonna be discussing the scrubber spread in Europe and how dynamics have changed, particularly for very low Sulphur fuel oil. That is fuel oil with a Sulphur content of 0.5%. We'll refer to that as VLSFO from here on. And we'll also refer to high Sulphur fuel oil, which has a Sulphur content of 3.5%, as HSFO from here on.
So VLSFO sales in Rotterdam have dropped dramatically this year. And that's not just because of the wider geopolitical conflicts that you've seen going on in the Middle East and with conflicts in Russia and Ukraine. It's also due to European legislation. And I think, Bob, it'd be great if you could just give us an overview of the legislation that's come through and why that has dampened VLSFO sales in Rotterdam so far this year.
Bob: Yeah. Sure thing. So, at the start of 2026, this year, the Netherlands transposed the European Union's renewable energy directive rules into national law, they're known as RED III. This included the maritime sector. And, of course, the port of Rotterdam is the Europe's biggest port.
What this meant was that producers in Rotterdam had to either sell more bio-marine fuels in order to avoid paying for new ZREG renewable tickets as per the new RED III rules, or they would just have to be buying these tickets on the market in order to comply with the rules and the mandates.
What this meant was that producers then passed this cost onto ships looking to refuel in the Netherlands and their customers. And the result of that was a really big drop in demand for marine fuels in Rotterdam and the Netherlands more widely.
What you saw at the beginning of the year was a large shift away from the Netherlands towards alternative European countries with sizeable ports like Belgium and Germany, where sales have picked up. So, yeah, in the second quarter of this year, the total VLSFO sales in Rotterdam were the lowest on record, pretty much as a direct result of this European legislation, which the Netherlands has implemented into its national law.
Josh: I mean, it really is dramatic. I've read from one of your stories that sales of VLSFO Antwerp have exceeded sales at Rotterdam by 50% in the second quarter. I mean, that's because the Rotterdam sales are so low, like you said. Has that impacted the VLSFO producers in the Netherlands in any way? Have they changed their output?
Bob: So the interesting thing is that had this happened another time, it may have been worse for business, for producers, but this being the year when the U.S.-Iran war has kicked off, business is still actually pretty good for producers in the Netherlands because they have been able to export a lot more, really, to customers in the Asia Pacific region.
So Singapore and the wider Asia Pacific area is quite heavily reliant on output from Kuwait's Al-Zuhr refinery for VLSFO. Of course, those ships which would be making their way through the Mideast Gulf are held up because of the blockade in the Strait of Hormuz. And Singapore and the Asia Pacific region have been really undersupplied with 0.5% marine fuel. And that has really allowed producers in, not only the Netherlands, but the wider northern European region to step in and increase production and exports, basically.
Josh: Sure. So they've been able to take advantage of these higher export margins to kind of offset the lower margins they might face in local markets.
Bob: Exactly. Exactly. Yeah.
Josh: Yeah. I guess, the question that comes to mind for me next is we've seen a shift towards Antwerp because they haven't imposed the same regulations, the RED III regulations as the Netherlands, but this is a EU-wide legislation, and we're going to have to see what you'd expect to see countries implement RED III on their own time schedule. I mean, where do you see sales numbers going as RED III gets implemented? And do you have any kind of timescale for when it will be implemented in certain countries?
Bob: Well, this is, you know, country by country, from what I understand... I'm not the most informed person when it comes to each country's timeline for implementing these rules. But, for example, Belgium missed the transposition deadline for the RED III rules in 2025. So that was the original deadline from the European Union. But as a result, it proposed to implement them at the beginning of 2027.
So, come January next year, what we might see is a kind of levelling of the playing field between Belgium and the Netherlands when it comes to the need to be blending bio-marine fuels and selling it onto the market in a way that it isn't at the moment. But then countries like Germany, for example, has explicitly left out the maritime sector, I believe, from its interpretation of the RED III rules within its own laws. So I'm not sure whether eventually that Germany will bring in a maritime sector under its interpretation of RED III rules. But for the time being, you know, all things being equal, it's leaving them out.
Josh: Sure. I mean, in Germany, we've seen they have implemented RED III for road fuels, and we've seen, you know, higher blending requirements, the end of double counting for diesel. It's interesting, I always find, that, you know, each country can implement these rules on their own timeline. I guess that's the way the EU works. I think we should talk about the Middle East and the kind of wider implications of that, given that it's the big story in oil markets at the moment. Is that the main factor impacting stock levels in Europe, or are there other things influencing stocks as well?
Bob: So, yeah, more broadly, within all grades of fuel oil, I would say that, yes, the situation in the Middle East is certainly the biggest factor when it comes to supply of fuel oil. Another big change that occurred this year, along with the thinning of volumes coming from the Middle East, was the increase in exports from the U.S. and South America, including Venezuela, of course, which has kind of opened up its exports to Europe and the U.S., rather than where it was previously shipping to countries like China.
So, although we're seeing less, for example, Iraqi fuel oil coming to the wider market because it can't get through the Gulf, we're seeing more Venezuelan fuel entering into Europe, which is kind of counteracting, in a little way, the lack of supply coming from those Middle Eastern countries, like Iraq and Saudi Arabia, for example.
Josh: Sure. I mean, we've seen that independent fuel oil stocks, ARA, rose to their highest level since mid-June this week. So I guess that's, you know, those flows across the Atlantic. I think there have also been some interesting, not towards Europe, but there's some interesting truck flows through Syria, right, to get around that blockage of Hormuz.
So the last point that we're going to touch on today is the other very big thing going on in oil markets at the moment, which is the ongoing Russia-Ukraine conflict and the huge impact that's had on Russia's energy infrastructure. The headline story has, of course, been diesel. We've seen a diesel export ban in place since July, but there's also been a pretty large effect on vacuum gas, also known as BGO.
BGO is generally used as a feedstock in hydrocrackers and FCCs. But there's also an interaction with the fuel oil market. BGO exports from Russia have dropped dramatically. So only around 65,000 tonnes of BGO loaded from Russian ports in July, which was down about 3/4 on the month. Bob, how does BGO interact with the fuel oil, and how is the lack of BGO tight at the fuel oil market if it has tightened it at all?
Bob: Yeah. So BGO, vacuum gas oil, can be used as a blending component to adjust the Sulphur content of blended marine fuels. What this means is that without the flows coming from Russia of BGO, which would often end up in major bunkering hubs like Singapore, this has tightened the overall level of, on specification, marine fuels. Basically, because that key ingredient is so thin on the ground, it has had the knock-on effect for marine fuel producers that they are able to effectively produce less.
Because, like you said, there have been so many strikes on Russian refineries, the total refining capacity of the country has fallen, and they are having to run more of this BGO as a feedstock. So, although it can be used as a blendstock for marine fuel producers, refineries can also use it as a feedstock, run it through secondary units. And that's what they're choosing to do with that because they have less capability to run crude oil because of the attacks.
Josh: Yeah, for sure. I mean, I guess, domestically, in Russia, it's because they're tight on diesel and gasoline, but globally as well for non-Russian BGO, you probably see a lot of that going towards hydrocrackers just to take advantage of these incredibly high diesel markets that we see at the moment.
Bob: Yeah. Exactly.
Josh: All right. Well, that's about it from us today. I think that was really informative. If you wanna find anything else out...more about European refined products, please check out the European Products report. And if you want to find more about the biofuels side to the RED III legislation, the Argus biofuels report will have much more detail on that. Thanks very much, Bob.
Bob: Thanks, Josh.
Josh: Bye, everyone.
