High-sulphur fuel oil (HSFO) availability in the Middle East looks set to rise in 2022, but the ability of Iran to promptly restore abundant exports of the fuel will be one of the key factors weighing on regional margins and differentials.
The lifting of export barriers will depend on the outcome of slow-moving, indirect negotiations between Iran and the US over a return to the 2015 Iran nuclear deal, known formally as the Joint Comprehensive Plan of Action (JCPOA).
Iran is a major HSFO producer and was a large exporter of the fuel before the administration of US President Donald Trump abandoned the nuclear deal in 2018 and reimposed sanctions on Tehran.
Exports have fallen by an estimated 83pc from pre-sanction levels of 240,000 b/d, according to analytics firm Vortexa.
These figures are based on estimates and vessel-tracking, because assessments of the rate of Iranian exports are complicated by some shipments not being visible. But they give an indication of how much fuel oil Iran could openly bring back to the market, if and when the sanctions are eased or lifted.
If the talks in Vienna lead to an agreement, Iran would be able to ramp up exports into the Middle East and Asia-Pacific, putting pressure on refining margins and premiums in those regions.
But a swift and positive outcome of the nuclear talks is by no means a given, and the possibility of the negotiations dragging on for months cannot be excluded. Any breakthrough in the negotiations will have to include guarantees that Tehran will be able to sell its oil and repatriate its revenues freely, Iran's foreign minister Hossein Amir-Abdollahian said as the talks resumed on 27 December.
Al-Zour on the horizon
A more certain HSFO stream is poised to emerge from Kuwait, where state-owned KNPC's long-delayed 615,000 b/d al-Zour refinery is due to start up in 2022, adding as much as 215,000 b/d of the product to the regional pool.
The project is at the initial commissioning stage, with the first of three trains scheduled to begin full operations by February 2022.
The project is likely to be fully operational in the second half of 2022 at the earliest, according to market participants.
Kuwait had to rely on imports to bridge a gap between HSFO demand and production while completing its ambitious Clean Fuels Project (CFP), which involved integrating the 454,000 b/d Mina Abdullah and the 346,000 b/d Mina al-Ahmadi refineries.
Al-Zour's gradually rising HSFO output will enable Kuwait to regain its position as a major fuel oil exporter in 2022.
The country will be able to reduce imports, which averaged around 27,000 b/d in January-August 2021. Demand stood at 103,000 b/d and production was just under 89,000 b/d in the same period, according to the Joint Organisations Data Initiative (Jodi).
Scrubber fleet expands
The rising regional HSFO availability will arrive just in time to meet burgeoning bunker demand from newbuild scrubber-equipped vessels.
Scrubbers allow ships to keep burning 3.5pc sulphur fuel oil (HSFO) to conform with the International Maritime Organisation's (IMO) 0.5pc sulphur cap, which took effect in January 2020.
The strong interest for scrubber installations on newbuilds is a result of comparatively better economics. HSFO is cheaper than IMO-compliant 0.5pc marine fuel oil, encouraging shipping firms to maximise their profits by ordering scrubbers on large vessels. For example, 98 of the 131 vessels in clean tanker owner Scorpio Tanker's fleet are fitted with scrubbers.
The expansion of the scrubber-fitted fleet is on course to continue, as orders for newbuild scrubber-fitted vessels have risen during 2021. Canada's Seaspan recently ordered 10 newbuild container ships for delivery in 2024. German shipping firm Hapag-Lloyd took on an order for 10 scrubber-fitted container ships, which are due for delivery in 2023 and will expand the company's scrubber-fitted tonnage.
