Few consumers are willing to pay extra for their goods to reduce the amount of sulphur emissions they are personally responsible for - their own ‘Sulphur Shadow’. For example, in the USA, UK and Russia, over 35 per cent of consumers are unwilling to pay anything extra for a car to reduce their ‘Sulphur Shadow’.
This reluctance of consumers to bear the cost of the sulphur emissions regulation was uncovered by research from KBC, a business improvement company for the Energy and Chemical industry. KBC surveyed over 5,000 consumers across the USA, UK, China, India and Russia to discover to what extent consumers would be willing to pay to reduce their personal ‘Sulphur Shadow’ so refiners can determine their optimum investment strategies. This is following the news that the IMO (International Maritime Organization) has introduced regulations to cut the sulphur limits in marine fuel from 3.5 per cent to 0.5 per cent by 2020.
Importantly, the research revealed a difference in consumer sentiment between East and West. Globally, 16 per cent of consumers would be willing to accept an increase of more than 10 per cent in the cost of a mobile phone to reduce their ‘Sulphur Shadow’. In China and India, however, this rises to 24 per cent , while in the UK, USA and Russia it is only 9 per cent . This means that refiners producing for the US, European and Russian markets (assuming the UK largely reflects Europe) must be much more sensitive to optimizing their operations and assets in response to the IMO 2020 regulations than those producing for Asia.
“International shipping accounts for up to 9 per cent of the world’s sulphur gas emissions (mainly sulphur dioxide) and up to 30 per cent of sulphur concentrations in coastal regions as a result of burning fuel oil in their engines. Each consumer’s ‘Sulphur Shadow’ therefore partially reflects the goods they buy from other countries which are shipped across the seas”, explains Simon Wright, EVP of Marketing at KBC.
Enforcement of the new regulation from the IMO will have a massive impact on the economics of shipping. Shippers already operate on razor thin margins. Faced with the enormous cost of scrubbing clean the emissions themselves, shippers are preferring to rely on oil refineries to produce a cleaner fuel that does not require clean-up. This comes at enormous cost to refiners who need to assess if and how they will recover their investments.
Shippers will inevitably have to pass on the higher cost of compliant bunker fuel to their customers which will trickle down to consumers in the form of costlier goods.
But with consumers not willing to pay more for their goods (particularly consumers in Europe, the USA and Russia), those who are responsible for producing the fuel - the oil refiners - need to ensure that they find the lowest cost investment to achieve the newly regulated sulphur level in their marine oil fuel production that will keep consumer prices down.
“The IMO’s cap on ships’ sulphur emissions means that the burden of compliance has fallen to the oil refiners. Many have already started their investments but some are yet to decide on the best course of action. Oil refineries are facing two main choices – both of which could potentially hit the consumer with price rises. Refiners can choose to produce marine fuel oil that contains less sulphur, or they can seek new markets for the high sulphur fuel oil they currently produce. With the new regulations set to have a significant impact on the demand and price of the fuel oil mix, oil refiners need to act now to make their investment decisions,” Wright continues. “As we have uncovered, in some regions of the world consumers are willing to absorb some of these costs; in others the refiners are on their own.”
The higher willingness of Asian consumers to pay more for goods could be due to the fact that their consumers are more aware of the effects of sulphur dioxide, on their health. 90 per cent of consumers in China and India are aware that sulphur dioxide is harmful to their health, whereas only 67 per cent were aware in the USA, UK and Russia. This might be explained by the severity of pollution already being experienced in Asia.
“As awareness rises this is something that will challenge the oil industry,” adds Stephen George, Chief Economist at KBC. “Refineries need to find the optimum strategy to achieve the required sulphur level in their marine fuel oil production. Such an approach will enable refiners to produce compliant fuel at the lowest cost. With refineries suffering in recent years from overcapacity and oversupply, the marine fuel transition is a perfect time to implement new margin-boosting technology and optimally reconfigure assets and operations. But there is no one-size-fits-all solution, so refiners will need support from experts in making their decisions.”
“Implementing such technology for the reduction of sulphur emissions appropriately, and meeting other regulatory requirements at the same time, may help to future-proof refineries while boosting margins and delivering the cleaner fuels that the shipping industry will continue to require, helping consumers reduce their ‘Sulphur Shadow’ at reasonable cost,” Wright concludes.
An in-depth report, titled: 'IMO 2020 Sulphur Cap: Oil Refiners Step up to the Plate' further explores the issue and can be downloaded here.