European refiners see life after IMO 2020, but it costs

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As the 2020 deadline for the International Maritime Organisation’s (IMO) global sulphur cap on bunker fuels draws closer, Europe’s refiners are now starting to respond.

Confirmed as 2020 in October last year, the IMO cap — requiring ship owners to use fuel with a maximum 0.5pc sulphur content or install scrubbing technology to clean exhaust fumes — was seen by some as a bridge too far for Europe’s ailing refiners. Environmental regulations, high energy costs, a widely expected fall in European road fuel demand and the constant stream of new capacity coming online in the Middle East and Asia already had the industry under pressure. Speakers at industry conferences lined up to give capacity closure estimates for European plants unable to take the heat.

From a refiner’s perspective, the IMO regulation strongly incentivises cutting high-sulphur fuel oil production and ramping up middle distillate and low-sulphur fuel oil output, either to create compliant bunker fuel or to sell as low-sulphur blending components. Exact figures cannot be forecast, but there is a consensus that the price differential between low- and high-sulphur fuel oil will widen significantly post-2020 and that middle distillates will become more valuable.

For the refiners currently producing major volumes of high-sulphur fuel oil, there is a myriad of potential strategies for handling the IMO regulation. One option is to simply do nothing, trusting that scrubber uptake among shipowners, non-compliance (sanctioned or not) and demand from other fuel oil consumers — such as power generators — will allow them to keep producing high-sulphur product at a relatively small loss. At the other end of the spectrum, refiners could invest billions in high-tech deep conversion facilities that upgrade residual feedstocks into light and middle distillates.

In the immediate aftermath of the IMO announcement, Europe’s refiners were reluctant to take a firm stance. Unanswered questions over scrubber uptake, potential non-compliance and future fuel oil price spreads made choosing a strategy difficult. Refiners also had to ask whether it was really worth investing hundreds of millions, if not billions of dollars, in new upgrading equipment in a structurally disadvantaged sector, with no real guarantees of returns.

But as the reality of the new regulation has started to sink in, the mood among Europe’s refiners has shifted: fresh investment is back on the cards.

Take Spain’s Cepsa, a major player in the Mediterranean bunkers market. Last week at the International Downstream Technology and Strategy conference in Dubrovnik, Cepsa confirmed that it is in the basic engineering phase for a potential residual hydrocracker that will cost close to $2bn — a massive investment project for a mid-sized refiner. The following day at the International Bottom of the Barrel Technology conference, also in Dubrovnik, Poland’s PKN Orlen said it is considering investing in a similar unit at its 263,000 b/d Mazeikiai plant in Lithuania, having already decided to upgrade the H-oil unit at its 325,000 b/d Plock plant to produce a low-sulphur fuel oil blending component as well as install a new visbreaker in time for 2020. Croatia’s Ina, another Mediterranean bunker supplier, confirmed that it will complete a new delayed coking unit at the 90,000 b/d Rijeka plant by 2020. Amec Foster Wheeler, speaking to Argus on the conference sidelines, said it had just sold a new coking unit to a refiner in northwest Europe, though the buyer remains confidential.

A number of IMO-relevant projects are already underway. ExxonMobil’s 310,000 b/d Antwerp plant, Lotos’s 210,000 b/d Gdansk refinery and NIS’s 110,000 b/d Pancevo facility are all building delayed coking units. Total is due to start up a solvent deasphalting (SDA) unit at its 308,000 b/d Antwerp refinery, while Neste’s SDA began production in April at the 197,000 b/d Porvoo plant. Preem has commissioned a new vacuum distillation unit (VDU) and is considering building a residual hydrocracker at its 220,000 b/d Lysekil plant, while its 106,000 b/d Gothenburg plant has commissioned a new hydrogen production unit enabling further desulphurisation, due for completion by the end of 2018.

Refiners looking to cut down on high-sulphur fuel oil output must decide whether they will target the expected post 2020 low-sulphur fuel oil market or try to get out of fuel oil all together, focusing on middle distillate and light ends output. Timing is, perhaps, the most crucial element for decision making. A wide spread between high and low-sulphur fuel oil is likely to open up in the immediate aftermath of the regulation, but in the longer term, rising scrubber uptake as ship owners look to capitalise on cheap high-sulphur fuel oil could see it narrow significantly. Refiners with upgrading facilities already in place by 2020 will be able to capitalise on this wide spread. But those with projects coming online in the mid-late 2020s will be exposed to the immediate drop in high-sulphur fuel oil values and then, by the time any new units are up and running, only stand to benefit from a small premium for any low-sulphur product.

The lead time for a delayed coking unit is around five years. For residual cracking units it is around the same. SDA lead times are shorter — around three years — and were plugged by Honeywell UOP and KBR at the Dubrovnik conference, both major engineering firms. Converting vacuum residue into deasphalted oil (DAO) that can be used as either cracker feedstock or, following hydrotreatment, low-sulphur fuel oil, gives a flexibility that is particularly attractive for refiners wishing to hedge their bets about which products will be most profitable in the long term.

For those unwilling to invest in new units, smaller tweaks are a possibility. Refiners can debottleneck, increasing throughput on existing conversion units such as hydrocrackers and VDUs — a senior Shell engineer said on the sidelines of he Dubrovnik conference that the firm is seeing interest in such projects. High-sulphur fuel oil production can also be cut by running lighter, sweeter crudes, though prices are likely to ramp up following the cap and too much variance from a traditional crude diet can cause technical problems for refiners.

The IMO has presented a major challenge to Europe’s refiners and further rationalisation is likely in coming years — Cepsa estimated at the Dubrovnik conference that 2mn b/d of capacity was at risk. But clear strategies for handling the 2020 sulphur cap are starting to emerge. So far as Europe’s refiners are concerned, there is life in the old dog yet.

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