07OCT2019 - NEWS - What is IMO 2020 and how does it impact refiners?

There has been a lot of chatter as to how the PSU refiners will benefit and see an increase in gross refining margins (GRMs) once the IMO 2020 rules kick in with effect from January 01, 2020. IMO (International Maritime Organisation) has ruled that come January 01, the marine sector will have to reduce sulfur emissions by 80 percent by switching to lower sulfur fuels. Higher sulfur content in fuel is major contributor to air pollution. Sulfur content in marine fuels will have to be reduced to 0.5 percent vs 3.5 percent allowed earlier.

How does it impact refiners?

From January 2020, as HSFO (high sulfur fuel oil) goes out, alternatives could be very low sulfur fuel oil (VLSFO), diesel oil, LNG or HSFO, with a scrubber installed on the carrier.

Reports suggest that the best alternative to high sulfur fuel oil is diesel and this will increase diesel demand. Consumption of diesel as a marine fuel is likely to increase from 0.75mnbpd to 3.3mnpd in 2020. This will result in an additional demand of 2.6mnpd of diesel, which is almost 6X the average annual incremental demand since 2000. Since refineries will not be able to completely meet this demand, it will lead to a spike in diesel cracks and ultimately will improve overall refining margins. Some calculations suggest that diesel cracks due to this could be improved to $25-$30/bbl (vs $15/bbl currently). Considering that diesel typically forms ~40 percent of the output for a complex refinery in Asia (~45 percent for RIL and OMC owned refineries such as Paradip, Bina and Bhatinda), GRMs at such plants could improve by US$ 4-6/bbl from 2020.