Washington weighs new IMO tack

President Donald Trump's administration surprised the shipping and US refining sectors last week by supporting a gradual phasing in of marine fuel pollution regulations expected to buoy jet fuel, heating oil and transportation fuel oil prices.

Rising prices prompted White House support this week for an "experience building phase", which the International Maritime Organization (IMO) committee members rejected in London at the end of last week. Shipping and refining industries say the administration should not seek to address higher distillate prices through procedural changes to the IMO regulations.

Signatories representing more than 96pc of global shipping must ensure that marine fuel meets a new 0.5pc sulphur limit from 1 January 2020, down from today's 3.5pc. Vessels can achieve this cap by installing exhaust scrubbers to reduce their sulphur emissions from the fuel they currently use or by switching to alternative fuels such as LNG or low-sulphur distillate blends. Ships failing to meet the standards face fines and may put their insurance coverage at risk.

Shipowners expect the rules to initially increase costs and create reliability issues for their vessels. A winter shift to low-sulphur blends will compete for components with the heating oil, diesel, jet fuel and industrial distillates sectors. High-sulphur fuel oil's (HSFO) use as a marine fuel will meanwhile plummet, as will its price, enabling it to compete with heavier sour crudes for space in complex refiners, until scrubbers or new technologies enable its consumption.

The top three flag states by tonnage — Panama, the Marshall Islands and Liberia —joined three major shipping industry groups in August to recommend an "experience building phase" that eases enforcement for vessels that make efforts to comply but fail. The IMO has approved similar phase-ins for other rules. But the proposal seeks no change to the overall requirements or their deadlines.

The IMO flatly rejected any idea that the mandates would move. "It is too late now to amend the date and for any revised date to enter into force before 1 January 2020," IMO says.

Fathoming the change

The US helms a large diplomatic presence and enforcement role as a port state, but only a tiny portion of the affected global fleet. US refiners meanwhile expect a commanding share of the supply of additional distillate demand.

US bank Goldman Sachs estimates HSFO demand would fall by two-thirds from the 3.3mn b/d last year, with 1.35mn b/d of low-sulphur fuel oil (LSFO) blends filling some of this demand. UK-based peer Barclays expects 1.9mn b/d of marine fuel demand to shift to LSFO. US oil industry groups API and AFPM have warned of any changes to the program. "Moving the goalposts now undermines the planning and investments refiners and other stakeholders have been making over the last two years," the API says.

The industry is now detailing for the White House the billions of dollars in investments made over the past decade and beyond to deliver compliant marine fuels. Executives expect the substantial US coking capacity will make the country's refineries the logical destination for distressed HSFO bereft of a home. This competition will further drive discounts for medium and heavy sour crudes and lift prices for light sweet ones. It should also pressure less complex Atlantic basin refineries that rely on marine fuels as an outlet for lower-quality products.

Refining executives encouraged by the IMO's rejection of a regulation phase-in or delays think Washington could be persuaded to support the measure.

"They do not have a firm position yet," US refiner Valero's vice-president of strategy Jason Fraser says. "They are just trying to understand the situation."